2019 CFA level 3 qbank r 1 2 CFA ins code of ethics and standards of prof conduct standards I–VII 2 answers

10/11/2018 Learning Management System Question #1 of 199 Wes Smith, CFA, works for Advisors, Inc In order to remain in compliance with Standard V(A), Diligence and Reasonable Basis, Smith may recommend a security in which of the following situations? A) For either of the reasons listed here B) Smith reads a favorable review of the security in a widely read periodical C) Advisors' research department recommends a stock .in Explanation (Study Session 1, Module 2.7, LOS 2-V.(A)) SchweserNotes - Book m Question #2 of 199 bo ok c Related Material en tre Smith will be in violation if he acts solely on the basis of what he read in the periodical Use of information within the rm can be relied upon unless the Smith has reason to believe the source lacks a sound basis .o Which of the following statements about a member's use of client brokerage commissions is w w NOT correct? Client brokerage commissions: A) should be commensurate with the value of the brokerage and research services w received B) may be directed to pay for the investment manager's operating expenses C) should be used by the member to ensure that fairness to the client is maintained Explanation Brokerage commissions are the property of the client and may only be used for client bene t (Study Session 1, Module 2, LOS 2.a) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 1/139 10/11/2018 Learning Management System Question #3 of 199 Dixie Miller, a Level II CFA candidate, heads the research department of a large brokerage rm The rm has many analysts, some of whom are subject to the CFA Institute Code of Ethics and Standards of Professional Conduct If Miller delegates some of her supervisory duties, which statement best describes her responsibilities under the CFA Institute Code and Standards? A) Miller retains supervisory responsibilities for those duties delegated to her subordinates B) Miller's supervisory responsibilities not apply to those subordinates who are not subject to the CFA Institute Code and Standards .in C) CFA Institute Standards prevent Miller from delegating supervisory duties to Explanation en tre subordinates Even though members may delegate supervisory duties, such delegation does not relieve members of the supervisory responsibility bo ok c (Study Session 1, Module 2.6, LOS 2-IV.(C)) Related Material m SchweserNotes - Book w w o Question #4 of 199 An analyst needs to inform his supervisor in writing of which of the following? w A) An annual bonus, sent to the analyst by a client, which varies with the performance of the client's portfolio that the analyst manages as an employee even though no b l i i b h b B) Both the lunch and the bonus mentioned in the other answers C) A client and the analyst alternate paying for lunch at a local sandwich shop Explanation Standard IV(B) requires that members disclose to their employer in writing all bene ts that they receive in addition to their regular compensation for services they perform on behalf of their employer Since the bonus varies with the performance of the client's portfolio, there is a clear link to the services of the analyst The analyst is not required to report the lunch since it is not linked to performance (Study Session 1, Module 2.6, LOS 2-IV.(B)) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 2/139 10/11/2018 Learning Management System Related Material SchweserNotes - Book Question #5 of 199 While trading on behalf of a pension account, an analyst receives special research reports from the brokerage rm with whom she is doing the trades Such an activity is: A) a violation of both Standard III(A), Loyalty, Prudence, and Care, and the Code of in Ethics B) a violation of only The Code of Ethics en tre C) not in itself a violation of Standard III(A), Loyalty, Prudence, and Care, nor the Code of Ethics Explanation bo ok c An analyst can receive research from a brokerage rm with whom she is trading on behalf of a client The analyst should inform the client of the arrangement The analyst is more likely to violate Standard III(A) by obtaining non-research services or, worse yet, personal bene ts from the brokerage rm Related Material w w o SchweserNotes - Book m (Study Session 1, Module 2.4, LOS 2-III.(A)) w Question #6 of 199 Which of the following would be a violation of Standard III(B), Fair Dealing? A) Having well de ned guidelines for pre-dissemination B) Limiting the number of employees privy to recommendations and changes C) Trading for regular accounts before discretionary accounts Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 3/139 10/11/2018 Learning Management System Do not discriminate against a client when disseminating investment recommendations If the rm o ers di erent levels of service, this fact must be o ered and disclosed to all clients The other choices are necessary parts of the Standard The Standard actually says to have published personal guidelines for pre-dissemination, which implies that the guidelines be well-de ned (Study Session 1, Module 2.4, LOS 2-III.(B)) Related Material SchweserNotes - Book in Question #7 of 199 en tre After a very successful quarter of high investment returns, Judy O'Berry, CFA, receives several gifts from grateful clients O'Berry considers the gifts to be of novelty or sentimental value only, but she hears rumors that several junior employees are jealous of the attention she received for the group's e orts She decides to consult the company's compliance rules on gifts and is bo ok c surprised to learn her rm has no established rules She consults the Standards of Practice Handbook, and then submits proposed rules on gifts to her company's compliance department These rules should contain all of the following EXCEPT: A) a requirement to disclose the gift m B) restrictions on all types business entertainment w w Explanation o C) a formal value limit based on local customs w The rules should contain a formal value limit based on local customs Not all types of business entertainment are forbidden Only business entertainment which is intended to in uence or reward members and candidates should be avoided (Study Session 1, Module 2, LOS 2.a) Related Material SchweserNotes - Book Question #8 of 199 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 4/139 10/11/2018 Learning Management System Janet Coleman, CFA, is preparing a research report on Union Power and Light Due to deregulation, utility companies face increased competition During the past year, three of the ve utility companies in her region have cut their dividends by 50%, on average, to provide more internal funds for investment purposes In a discussion with Union's chief executive o cer, Coleman learned that Union expects to have a record amount of capital expenditures during the next year Although Union subsequently issued a press release about its capital expenditure plans, it did not make any public statements about a change in dividend policy Coleman reasons that the management of Union will be under pressure to cut its dividends within the next year to remain competitive Coleman issues a research report in which she states: in "Union Power and Light will decrease its dividend from $2 to $1 a share by the second quarter We expect that Union will strengthen its competitive position by using more internally en tre generated funds to nance its investment opportunities If investors buy the stock now at around $50 a share, their total return could exceed 20% on the stock." Based on CFA Institute Standards of Professional Conduct, which of the following statements bo ok c about Coleman's actions is most accurate? A) Coleman violated the Standards because she failed to separate opinion from fact in her research report B) Coleman violated the Standards because she used material inside information .o Explanation m C) Coleman did not violate the Standards w w Coleman is required to distinguish between facts and opinions in her research reports Her statement that Union will decrease its dividend from $2 to $1 a share is a prediction, not a fact, and therefore should be distinguished clearly as an opinion w (Study Session 1, Module 2.7, LOS 2-V.(B)) Related Material SchweserNotes - Book Question #9 of 199 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 5/139 10/11/2018 Learning Management System An analyst nds a stock with historical returns that are not correlated with interest rate changes The analyst writes a report for his clients that have large allocations in xed-income instruments and emphasizes the observed lack of correlation He feels the stock would be of little value to investors whose portfolios are composed primarily of equities The clients with allocations of xed income instruments are the only clients to see the report According to Standard V(B), Communication with Clients and Prospective Clients, the analyst has: A) not violated the Standard B) violated the article in the Standard concerning facts and opinions C) violated the Standard concerning fair dealings with all clients .in Explanation bo ok c (Study Session 1, Module 2.7, LOS 2-V.(B)) en tre Recommending a stock whose return is uncorrelated with interest rate changes is appropriate for the clients described in the problem Emphasizing the lack of correlation is appropriate as long as the analyst makes no guarantees concerning the relationship in the future Reporting historical correlation is a presentation of fact, and is not in violation The analyst is free to show the report only to investors for whom the investment is appropriate Related Material m SchweserNotes - Book o Question #10 of 199 w w Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto He places trades for the fund with River City Brokerage River City provides Calaveccio with soft w dollars to purchase research River City also deals in municipal bonds, some of which Calaveccio holds in his personal portfolio He periodically uses the soft dollars to request research reports on various small cap stocks and also on the status of the municipal bond market and issues that he holds These actions are: A) not in violation of the Code and Standards B) in violation of his duciary duties regarding the municipal bond research but not so regarding the research on the small cap issues C) in violation of his duciary duties regarding both the small cap research and the municipal bond research Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 6/139 10/11/2018 Learning Management System The issue at hand is the member's duciary responsibilities in handling "soft dollars" which are technically the property of the client Standard III(A), Loyalty, Prudence, and Care, delineates the member's duciary responsibilities with regard to soft dollars Since municipal bond research is clearly not relevant to the Small Cap Fund holders, he is clearly using the soft dollars to obtain research for his personal bene t and is in violation of the Standard (Study Session 1, Module 2.4, LOS 2-III.(A)) Related Material SchweserNotes - Book in Question #11 of 199 en tre Randal Brooks is the chief economist for a large brokerage rm In the aftermath of a national tragedy, Brooks feels that it is very possible that the stock market will drop signi cantly and not recover for several years However, he does not believe that this is the most likely scenario but merely that the risk of investing in equities has increased He decides to write a market bo ok c commentary to the brokerage clients that discusses the reasons why the market will remain stable and talks about why he, as a private citizen, feels patriotic He does not mention the increase risk in equities Brooks has: A) violated the Standards by not including all of the relevant factors in the research m report and making patriotic statements .o B) not violated the Standards C) violated the Standards by not including all of the relevant factors in the research w w report, but not by making patriotic statements Explanation w By not mentioning the increased risk of the market, Brooks has violated the Standard on using reasonable judgment in a research report However, the patriotic statements not violate the Standards (Study Session 1, Module 2, LOS 2.a) Related Material SchweserNotes - Book Bella Brown is an experienced generalist securities analyst employed by Lang & Co., a major U.S brokerage rm whose clients have a high regard for her research and stock selection abilities She was visited recently by a Lang managing director who said, "Please take a look at https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 7/139 10/11/2018 Learning Management System SpecChem Inc., the specialty chemical producer They are going to need an investment banker soon and, because we make a market in their stock, we will be one of the rms considered for this business I had lunch with SpecChem's Treasurer today, who told me that their European problems are being resolved and that earnings results are de nitely looking good He likes us and is expecting you to call him for details." The managing director then left Brown's o ce, saying, "It would be great if you could rate the stock a 'Buy'." In a subsequent hour-long telephone discussion with the Treasurer, Brown obtained some useful information concerning recent company trends and developments as well as SpecChem's overall view of the outlook for sales and earnings during the next several quarters Brown began thinking quite positively about the company and its prospects She then reviewed in some general source material on the chemical industry and read the Standard & Poor's Stock Guide on SpecChem Inc That afternoon, she wrote a report recommending purchase of the en tre stock, shown below as Exhibit B In accordance with Lang's routine procedures for predissemination review of Research Department recommendations, the report has been sent to the rm's Director of Research, who is aware of the circumstances under which it was bo ok c prepared Exhibit B LANG & COMPANY Company Report o Rating: Buy m Industrial: Specialty Chemicals Equity Research w w SpecChem Inc (NYSE: SCM) We are initiating coverage of SpecChem Inc with this report Earnings, up to 51% in the rst quarter, are expected to be up again in the quarter w ending June 30 Higher sales, better margins, an improved geographic sales mix, and savings from reduced pension expense are all contributing to this year's gains Although European production is up only modestly year-over-year, successful cost reduction e orts are limiting the adverse e ects of weak volume and pricing A possible plant closure in September could improve plant utilization by 10%, accompanied by potentially dramatic margin improvement However, a $30 million after-tax special charge could be taken at the time of the closure We expect a moderate increase in second half 2014 sales Although management looks for European demand to remain slow, it feels that U.S sales could be above expectations if auto-related demand strengthens Management is also optimistic about receiving a sizable U.S government contract in the next few months https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 8/139 10/11/2018 Learning Management System Based on the factors noted above, our dence level concerning earnings levels over the balance of the year is high We think SpecChem stock is undervalued and believe it can easily reach the low 100s on the strength of continuing earnings momentum The downside is estimated to be in the mid-80s There is plenty of room for upside earnings surprises if volume and prices improve, which would take the stock up strongly Purchase is recommended Analyst: Bella Brown Research Department This report is based upon information which we consider reliable, but we not represent that in it is accurate, and it should not be relied upon as such We, or persons involved in the the securities of the company mentioned herein bo ok c Question #12 of 199 en tre preparation or issuance of this material, may, from time to time, have long or short positions in Under the CFA Institute Code and Standards, it is the responsibility of the Director of Research, a CFA Institute member to: A) exercise reasonable supervision over those subject to their supervision or authority m to prevent any violation of applicable statues, regulations or provisions of the Code o dS d d B) both of these w w C) not knowingly participate or assist in any violation of laws, rules, or regulations Explanation w The Director of Research, as a CFA Institute member, is bound by the Standards of Professional Conduct Accordingly, "members shall not knowingly participate or assist in any violation of such laws, rules or regulations" (Standard I(A): Knowledge of the Law) This responsibility is applicable under the circumstances As a supervisor, the director of research has a responsibility to exercise reasonable supervision over subordinates to prevent violations of laws, regulations, and the provisions of CFA Institute Standards of Professional Conduct (Standard IV(C): Responsibilities of Supervisors) (Study Session 1, Module 2, LOS 2.a) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 9/139 10/11/2018 Learning Management System Question #13 of 199 Under the current circumstances, the Director of Research should: A) allow the report to be distributed, as is B) require the report to be redone with a neutral or hold rating pending the outcome of the awarding of the investment banking business C) require the report to be redone to ensure compliance with CFA Institute Standards Explanation (Study Session 1, Module 2, LOS 2.a) Related Material Question #14 of 199 bo ok c SchweserNotes - Book en tre in Based on the current circumstances, the supervisor (Director of Research) must not allow the report to be distributed In this situation the overriding responsibility is to ensure that diligence, thoroughness, and independence be exercised in forming the investment judgment and in preparing the research report m The research report, as shown, has several aspects which violate CFA Institute Standards of w w Standards? o Professional Conduct Which of the following is NOT an apparent violation of CFA Institute A) The report does not adequately discuss the factors important to analysis, recommendations, or action w B) The report violates guidelines on investment performance presentation C) The report does not distinguish between fact and opinion Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 10/139 10/11/2018 Learning Management System A candidate or member is least likely violating the Standard regarding the dentiality of client information if he shares dential client information, when not required by law, with: A) the CFA Institute Professional Conduct Program B) the client’s attorney C) the co-owner of the client’s account Explanation in Standard III(E) Preservation of Con dentiality states that sharing information with the PCP when requested as part of an investigation is not a violation unless it is prohibited by law Disclosure to those outside the rm in other cases is a violation unless the client has given speci c permission or disclosure is required by law (Study Session 1, Module 2.5, LOS 2-III.(E)) en tre Related Material Question #178 of 199 bo ok c SchweserNotes - Book Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto He places trades for the fund with Canadian Brokerage Canadian provides Calaveccio with soft m dollars to purchase research He uses these soft dollars to get research reports from o Canadian's research department regarding the issues currently held in the small cap portfolio, and also for rms he is contemplating adding to the portfolio By using soft dollars in this w w manner, Calaveccio has: A) violated the Code and Standards by acquiring research on issues that the fund w already holds but not by acquiring research on issues contemplated for purchase B) violated the Code and Standards by acquiring research on issues contemplated for purchase but not by acquiring research on currently held issues C) not violated the Code and Standards Explanation "Soft dollars" are the property of the client (in this case the holders of the shares of the Small Cap Venture Fund) Standard III(A) Loyalty, Prudence, and Care delineates the member's responsibilities Since he is clearly using the soft dollars to obtain research that is directly applicable to his professional duties, there is no violation of the Standard (Study Session 1, Module 2.4, LOS 2-III.(A)) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 125/139 10/11/2018 Learning Management System Related Material SchweserNotes - Book Question #179 of 199 A money management rm has the following policy concerning new recommendations: When a new recommendation is made, each portfolio manager estimates the likely transaction size for each of their clients Clients are noti ed of the new recommendation in the order of their estimated transaction size—largest rst All clients have signed a form where they acknowledge en tre A) not a violation because the clients are aware of the policy .in and consent to this allocation procedure With respect to Standard III(B), Fair Dealing, this is: B) a violation of the standard C) not a violation because the clients have signed the consent form bo ok c Explanation Such a policy is a violation of the Standard and client acknowledgement and/or consent does not change that fact (Study Session 1, Module 2.4, LOS 2-III.(B)) w w o SchweserNotes - Book m Related Material w Question #180 of 199 Nicholas Brynne, CFA, develops a trading model while working for CE Jones, an investment management rm 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 loses his job in a company restructuring, and decides to start his own practice using the trading model Nicholas is most likely: A) not in violation of the Standards because the trading model was created using his home computer B) in violation of the Standards because he did not have permission to build the trading model using his home computer https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 126/139 10/11/2018 Learning Management System C) in violation of the Standards because he did not receive permission from his employer to keep or use the les after employment ended Explanation Brynne is in violation of Standard IV(A) "Loyalty." Employer records include items stored in any medium including home computers (Study Session 1, Module 2.6, LOS 2-IV.(A)) Related Material in SchweserNotes - Book en tre Question #181 of 199 Sharon West is a CFA charterholder and trust o cer for REO Trust Company Soon after beginning work for REO, West nds that REO has been conducting all its securities transactions through her brother who is a registered representative West's brother charges REO bo ok c commissions that are equal to the lowest available from another broker West's brother tells her that if she continues doing business with him, he will give her a substantial discount on all personal transactions she conducts through him West: A) does not need to inform her employer of the arrangement because the m commissions her brother charges the rm are the lowest possible .o B) must inform her employer of the arrangement because she is doing business with w w a member of her immediate family C) must inform her employer of the arrangement because it provides her with w additional compensation Explanation Members are required to disclose to their employer in writing all monetary compensation or other bene t they receive in addition to the employer's compensation The discounting of West's commissions is a bene t that must be disclosed (Study Session 1, Module 2.6, LOS 2-IV.(B)) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 127/139 10/11/2018 Learning Management System Question #182 of 199 The proper system for compliance with CFA Institute Standards and requirements: A) should incorporate the professional conduct evaluation of the employees into their performance review B) should incorporate professional conduct evaluation of the employees into their performance review only for those employees who are CFA charterholders C) cannot incorporate the professional conduct evaluation of the employees into their performance review, because not all of the employees are CFA charterholders .in Explanation Related Material SchweserNotes - Book m Question #183 of 199 bo ok c (Study Session 1, Module 2.6, LOS 2-IV.(C)) en tre Once a compliance system is established, it should prohibit all employees, including those who are not CFA charterholders, from violating CFA Institute Standards The incorporation of the professional conduct evaluation into the employee's performance review is one of the recommended features of the compliance system .o Carol Hull, CFA, is an investment advisor whose prospective client, Frank Peters, presents w w special requirements To construct an investment policy statement for Peters, Hull inquires about Peters' investment experience, risk and return objectives, and nancial constraints w Peters states that he has a great deal of investment experience in the capital markets and does not wish to answer questions about his tolerance for risk or his other holdings Under Standard III(C), Suitability, Hull: A) must decline to enter into an advisory relationship with Peters B) is permitted to manage Peters’ account without any knowledge of his risk preferences C) may accept Peters’ account but may only manage his portfolio to a benchmark or index Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 128/139 10/11/2018 Learning Management System Hull would not violate Standard III(C), Suitability, by managing Peters' account without knowledge of his risk preferences She made a reasonable inquiry into Peters' investment experience, risk and return objectives, and nancial constraints, as the Standard requires If a client chooses not to provide some of this information, the member or candidate can only be responsible for assessing the suitability of investments based on the information the client does provide (Study Session 1, Module 2.5, LOS 2-III.(C)) Related Material in SchweserNotes - Book en tre Question #184 of 199 An analyst receives a research report from a colleague The colleague's report has an elaborate table with performance data on publicly traded stocks The colleague says the data in the table consists of measures provided by Standard & Poor's The analyst nds the table a useful is potentially in violation of: bo ok c reference for a report she is writing She uses several pieces of data from the table The analyst A) Standard V(A), Diligence and Reasonable Basis, if she does not rst verify the data in the table is accurate m B) no particular standard because this is appropriate activity w w Explanation o C) Standard I(C), Misrepresentation, concerning the use of the work of others w Since the data in the table supposedly comes from Standard & Poor's, a recognized data source, the analyst does not have to cite the source of the data However, the analyst needs to use reasonable care and verify that the data is accurate by going back to the source Had the analyst printed the table prepared by her colleague without acknowledgement, the analyst would have violated Standard I(C), Misrepresentation (Study Session 1, Module 2.7, LOS 2-V.(A)) Related Material SchweserNotes - Book Question #185 of 199 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 129/139 10/11/2018 Learning Management System Lee Hurst, CFA, is an equity research analyst who has recently left a large rm to start independent practice He is able to re-create several of his previous recommendation reports, based on his clear recollection of supporting documentation he compiled at his previous employer He publishes the reports and obtains several new clients Hurst is most likely: A) in violation of Standard V(C) Record Retention B) not in violation of any Standard C) in violation of Standard V(A) "Diligent and Reasonable Basis." Explanation (Study Session 1, Module 2.7, LOS 2-V.(C)) SchweserNotes - Book m Question #186 of 199 bo ok c Related Material en tre in Hurst is most likely in violation of Standard V(C) Record Retention because the supporting documentation is unavailable He needs to recreate the supporting records based on information gathered through public sources or the covered company He may have a reasonable basis for his recommendations and have been diligent in his analysis, but must reconstruct the records of this analysis before issuing the reports .o Jill Marsh, CFA, works for Advisors where she manages various portfolios Marsh's godfather is an accountant and has done Marsh's tax returns every year as a birthday gift Marsh's w w godfather has recently become a client of Advisors and asked speci cally for Marsh to manage his account In order to comply Standard IV(B), Disclosure of Additional Compensation w Arrangements, she needs to: A) have her godfather cease doing her taxes B) liquidate from her personal portfolio any stocks her godfather owns and verbally tell her supervisor about the tax services C) neither of the actions listed here Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 130/139 10/11/2018 Learning Management System Standard IV(B) requires that members disclose to their employer in writing all bene ts that they receive in addition to their regular compensation for services they perform on behalf of their employer It is not unreasonable for an individual's godfather to give them a birthday gift Moreover, since the tax services were a regular birthday present before her godfather became a client, this implies that they are unrelated to any investment management services (Study Session 1, Module 2.6, LOS 2-IV.(B)) Related Material SchweserNotes - Book in Question #187 of 199 en tre Bob Hat eld, CFA, has his own money management rm with two clients The accounts of the two clients are equal in value It is Hat eld's opinion that interest rates will fall in the near future Based upon this, Hat eld begins increasing the bond allocation of each portfolio In order to comply with Standard V(B), Communication with Clients and Prospective Clients, the bo ok c analyst needs to: A) inform the clients of the change and tell them it is based upon an opinion and not a fact B) make sure that the change is identical for both clients .o Explanation m C) perform both of these functions w w According to Standard V(B), the analyst must inform the clients of the change and tell them it is based upon an opinion and not a fact Making an identical change in two portfolios may be a violation of this standard if the needs of the clients are not identical w (Study Session 1, Module 2.7, LOS 2-V.(B)) Related Material SchweserNotes - Book Question #188 of 199 According to CFA Institute Standards of Professional Conduct, members are least likely required to: https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 131/139 10/11/2018 Learning Management System A) analyze the investment's basic characteristics before recommending a speci c investment to a broad client group B) distribute a detailed research report to clients with any recommendation C) make diligent e orts to determine whether third party research relied on is sound Explanation Recommendations can be made in various contexts For example, an analyst's rm may issue a list of buy recommendations or a brief recommendation that does not contain all the relevant details of the analysis, but clients must be informed that a full analysis supporting the recommendation is available The other actions are required by the Standards .in (Study Session 1, Module 2.7, LOS 2-V.(C)) Related Material bo ok c Question #189 of 199 en tre SchweserNotes - Book A money manager is meeting with a prospect She gives the client a list of stocks and says, "These are the winners I picked this past year for my clients Their double-digit returns indicate the type of returns I can earn for you." The list includes stocks the manager had picked for her m clients, and each stock has listed with it an accurately measured return that exceeds 10% Is o this a violation of Standard III(D), Performance Presentation? A) Yes, unless the positions listed constitute a complete presentation (i.e., there were w w no stocks omitted that did not perform in the double digits) B) Yes, because the manager cannot reveal historical returns of recent stock picks w C) No, because the manager had the historical information in writing Explanation Standard III(D) requires fair representations concerning past and potential future performance Unless the list of the "winners" includes all the positions that the rm held, the manager is misrepresenting past performance The following statement is questionable: "Their double-digit returns indicate the type of returns I can earn for you," but the action of submitting a partial list is clearly a violation The manager should have information on past performance in writing (Study Session 1, Module 2.5, LOS 2-III.(D)) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 132/139 10/11/2018 Learning Management System Question #190 of 199 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) violated the Standard if he does not verify whether the investment is appropriate for all the clients .in B) violated the Standard by communicating the recommendation via e-mail en tre C) ful lled all obligations Explanation bo ok c 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 (Study Session 1, Module 2.7, LOS 2-V.(A)) Related Material o m SchweserNotes - Book w w Question #191 of 199 An independent analyst has only one client One of the client's largest holdings is a brokerage w rm Because of the large holding by his client, the brokerage rm recently began allowing the analyst to tap into the rm's computer network to use the rm's research facilities This is allowable as long as the analyst: A) uses the resources to help manage the client's account B) discloses the relationship to the client C) does both of the actions listed here Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 133/139 10/11/2018 Learning Management System According to Standard III(A), Loyalty, Prudence, and Care, the analyst must put the client rst and inform the client of any possible icts of interest The analyst must channel any bene ts derived from his service to the client, back to the client, and inform the client of the bene ts (Study Session 1, Module 2.4, LOS 2-III.(A)) Related Material SchweserNotes - Book in Question #192 of 199 Several years ago, Hilton and Ross, a full service investment rm, managed the initial public en tre o ering of eCom, Inc Now, eCom wants Hilton and Ross to underwrite its secondary public o ering A senior manager at Hilton and Ross asks Brent Whitman, CFA, one of its equity analysts, to write a favorable research report on eCom to help make the underwriting a success Whitman conducts a thorough analysis of eCom and concludes that the company has bo ok c serious problems that not suggest a favorable nancial outlook Nevertheless, Whitman writes a favorable report because he is fearful of losing his job Hilton and Ross publicly distribute a report that only contains a buy recommendation and a brief description of the basic characteristics of eCom Whitman has violated: o Reasonable Basis m A) Both Standard I(B) Independence and Objectivity and Standard V(A) Diligence and w w B) Standard I(B) Independence and Objectivity, only C) Standard V(A) Diligence and Reasonable Basis only w Explanation Whitman violated Standard V(A) Diligence and Reasonable Basis because he did not have a reasonable and adequate basis for issuing a favorable recommendation Whitman violated Standard I(B) Independence and Objectivity because he did not act independently in issuing his recommendation but instead was in uenced by senior management at Hilton and Ross (Study Session 1, Module 2.7, LOS 2-V.(A)) Related Material SchweserNotes - Book Question #193 of 199 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 134/139 10/11/2018 Learning Management System Preston Partners is an investment management rm that adopted the Code and Standards as part of its policy manual Gerald Smithson, CFA, has recently added the stock of Utah Biochemical Company and Norgood PLC to all his client's investment portfolios Shortly afterwards Utah Biochemical and Norgood announced a merger that increased the share price of both companies Smithson contends he saw the president of Utah Biochemical dining with the chairman of Norgood, but did not overhear their conversation Smithson researched both companies extensively and determined that each company was a good investment He put in a block trade for shares in each company Preston's policies were not clear in this area as he allocated the shares by starting with his largest client accounts and working down to the small accounts Some of Smithson's clients were very conservative personal trust accounts, others broken? en tre A) Standard IV(C) Responsibilities of Supervisors .in were pension funds who had aggressive investment objectives Which standard was NOT B) Standard III(C) Suitability C) Standard V(A) Diligence and Reasonable Basis bo ok c Explanation m Standard V(A)""Diligence and Reasonable Basis was not broken because Smithson conducted thorough and diligent research Standard III(C) Suitability, Smithson failed to consider the needs of his conservative and aggressive clients Standard IV(C) Responsibilities of Supervisors, Preston Partners didn't have policies explaining how to allocate shares among clients Related Material o (Study Session 1, Module 2, LOS 2.a) w w w SchweserNotes - Book Question #194 of 199 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 135/139 10/11/2018 Learning Management System The following information concerns two analysts at Mega Securities Company Mega recently hired Ron Anderson, CFA, who was previously an independent investment advisor Anderson wants to keep his existing clients for himself and obtains written consent from Mega to so He also informed and received consent from his existing clients in writing about his new position at Mega.  Brenda Ford, a CFA Institute member, has been a full-time analyst for Mega for 12 years She recently started providing investment services, which compete with Mega, to private clients on her own time Ford obtained written consent for this arrangement from her direct supervisor at Mega Ford has not disclosed to each of her clients her employment in at Mega.  Standard IV: Duties to Employers? en tre According to CFA Institute Standards of Professional Conduct, have Anderson and Ford violated A) Ford violated this Standard, but Anderson has not B) Neither Anderson nor Ford violated this Standard bo ok c C) Anderson violated this Standard, but Ford has not Explanation m Standard IV(A) requires consent to enter into independent practice Standard IV(B) Additional Compensation Arrangements states that no compensation may be accepted which may create a ict of interest without written consent from all parties Anderson received consent from all parties, Ford did not receive consent from her independent clients w w Related Material o (Study Session 1, Module 2.6, LOS 2-IV.(A)) w SchweserNotes - Book Question #195 of 199 Which of the following is least likely required of duciaries who are responsible for pension plans? A) Judging investments in the context of the total portfolio B) Acting solely in the interest of plan participants C) Supporting the sponsor's management during proxy ghts Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 136/139 10/11/2018 Learning Management System Under Standard III(A) Loyalty, Prudence, and Care, duciaries must evaluate management's proposals during proxy ghts to see if they are in the best interest of the plan participants If management's ideas are justi able and reasonably ensure plan participants' betterment, then duciaries can support them If management is only trying to further its own objectives, especially at the cost of plan participants, then duciaries must vote against management in proxy ghts (Study Session 1, Module 2.4, LOS 2-III.(A)) Related Material in SchweserNotes - Book en tre Question #196 of 199 Lance Tuipulotu, CFA, manages investments for 400 individuals and families and often nds his resources stretched When his largest investors petition him to include a 5% to 7% allocation of non-investment-grade bonds in their portfolios, he decides he needs additional help to meet bo ok c the request He considers various independent advisors to use as submanagers, but determines that the most quali ed advisors would be too expensive Reasoning that a lowercost provider would enable him to pass the savings along to his clients, he chooses that provider to invest the new bond allocation Tuipulotu has violated: A) Standard V(A) Diligence and Reasonable Basis by letting fee structure determine the m selection of the submanager .o B) Both Standard III(C) Suitability and Standard V(A) Diligence and Reasonable Basis w w C) Standard III(C) Suitability by failing to consider the appropriateness of the noninvestment-grade bonds w Explanation Both Standard III(C) Suitability and Standard V(A) Diligence and Reasonable Basis were violated Tuipulotu must perform a full IPS review to determine the appropriateness of the new portfolio allocations Submanagers should not be selected by cost structure alone, as the quality and appropriateness of the submanager is Tuipulotu's responsibility (Study Session 1, Module 2.5, LOS 2-III.(C)) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 137/139 10/11/2018 Learning Management System Question #197 of 199 Selma Brown, CFA, is a portfolio manager for Mainland Securities Rick Wood, one of her clients and owner of Wood Fitness Centers, o ers to permit Brown and her immediate family to use the facilities at his tness centers at no cost during 2003 To get this bene t, Brown must achieve on Wood's portfolio at least a 2-percentage point return above the total return on the S&P's 500 index during 2002 Brown orally informs her immediate supervisor of the nature and duration of the proposed arrangement Arnold Turley, a CFA Institute member, is a portfolio analyst at Mainland Securities He was just elected to the Board of Directors for Omega Services, which pays him $1,000 plus expenses for in attending each of its quarterly board meetings Turley e-mails Mainland's compliance o cer informing her of this arrangement with Omega and receives a reply informing him that the en tre agreement is acceptable Did Brown or Turley violate CFA Institute Standards of Professional Conduct? B) Brown: No, Turley: No C) Brown: Yes, Turley: No Explanation bo ok c A) Brown: Yes, Turley: Yes .o m Brown violated Standard IV(B), Additional Compensation Arrangements, because she must disclose in writing other bene ts to be received for services that are in addition to compensation conferred by her employer Turley did not violate Standard IV(B) because he received consent from his employer in writing, which includes e-mail w w (Study Session 1, Module 2.6, LOS 2-IV.(B)) Related Material w SchweserNotes - Book Question #198 of 199 While it would be customary to report both ve-year and ten-year performance data, Seminole Equity Partners has been in existence for only eight years Because of this, Kurt Dambach does not report ten-year data but reports for both ve years and since the inception of the fund This he notes in a footnote at the bottom of the information sheet This action is: A) a violation of the Standard concerning prohibition against misrepresentation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 138/139 10/11/2018 Learning Management System B) in accordance with the Code and Standards since he has indicated the basis in a footnote C) a violation of the Standard concerning performance presentation Explanation Members who communicate performance information must ensure that the information is fair, accurate, and complete Seminole Equity's presentation meets this standard (Study Session 1, Module 2.5, LOS 2-III.(D)) Related Material en tre in SchweserNotes - Book Question #199 of 199 Jess Green, CFA is the research director for Castle Investment, Inc., and has supervisory bo ok c responsibility over eight analysts, including three CFA charterholders Castle has a compliance program in place According to CFA Institute Standards of Professional Conduct, which of the following is least likely an action that Green should take to adhere to the compliance procedures involving responsibilities of supervisors? Green should: m A) disseminate the contents of the compliance program to the eight analysts .o B) issue periodic reminders of the procedures to all analysts under his supervision C) incorporate a professional conduct evaluation as part of the performance review w w only for the three CFA charterholders Explanation w Green should incorporate a professional conduct evaluation as part of his review of all eight analysts under his supervision, not just the three CFA charterholders (Study Session 1, Module 2.6, LOS 2-IV.(C)) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415243/print 139/139 ... https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495 925 615 029 a3fd/practice /qbank/ 24 038 518 /quiz/ 834 15 2 43/ print 9/ 13 9 10 /11 /2 018 Learning Management System Question # 13 of 19 9 Under the current circumstances, the Director of Research... https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495 925 615 029 a3fd/practice /qbank/ 24 038 518 /quiz/ 834 15 2 43/ print 33 / 13 9 10 /11 /2 018 Learning Management System Question #47 of 19 9 With respect to the report on ATX Corporation... https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495 925 615 029 a3fd/practice /qbank/ 24 038 518 /quiz/ 834 15 2 43/ print 12 / 13 9 10 /11 /2 018 Learning Management System Question #17 of 19 9 Brown submits her report to the Director of Research for review, as required by Lang''s procedures Although