tomate 00:06:01 vestone set page| 1 ¥ Tost 1 ‘Question 1 (ID: 20658) | Feedback | Notes Which of the following is least likely required under the code of ethics? Members and candidates must: A. promote the integrity of and uphold the rules governing capital markets. B. deal fairly and objectively with all clients when providing investment analysis, making investment recommendations or taking investment actions. C. maintain and improve professional competence and strive to maintain and improve the competence of other investment professionals. Both options A and C are code of ethics while option B is Standard Ill (C)-Fair dealing. Stuy Session |, Reading | Question 2 (ID: 20690] Feedback | NotesA CFA Institute's professional conduct staff member received evidence of misconduct by a member through a media article. Can he initiate enquiry by such source? A. No, because professional conduct staff cannot rely on public sources to initiate an inquiry B. Yes, inquiry can be conducted, initiated by such source C. No, only self-disclosure or written complaints about a member or candidate can prompt an inquiry Professional conduct staff, under the direction of CFA Institute designated officers, can conduct professional conduct inquiries. Several circumstances can prompt an inquiry such as: * Self-disclosure by member/candidate + Written complaints against member/candidates received by professional conduct staff * Evidence of misconduct received through public sources * Report by CFA exam proctor Study Session J, Reading I Reason for not answering it correct [= 9 ‘Question 3 (ID:20702) | Feedback | NotesIf member/candidate has reasonable grounds to believe that employer's activities are illegal, member/candidate must: A. dissociate from the activity. B. promptly leave his job. C. report violations to CFA Institute. Standard 1-(A) Knowledge of Law requires that if member/candidate has reasonable grounds to believe that employer's activities are illegal, member/candidate must dissociate from the activity. Dissociation may include: * bringing it to the attention of supervisor or firm's compliance department, * dissociation from the activity or * in extreme case, he should leave the job. Study Session 1, Reading‘Question 4 {ID:20703) | Feedback | Notes When members/candidates are responsible for managing the portfolio to a specific mandate, they must: A. judge the suitability of investments in the context of client's total portfolio. B. make a reasonable inquiry into a client's investment experience, risk/return objectives and constraints prior to making any investment recommendation or taking action. C. make only investment recommendations or taking actions that are consistent with the stated objectives and constraints of the portfolio. +t Standard Ill(C)-Suitability states that: When members/candidates are responsible for managing the portfolio to a specific mandate, they must make only investment recommendations or taking actions that are consistent with the stated objectives and constraints of the portfolio. Study Session J, Reading | Reaton for not answering It correct [= ri‘Question § {1D:20732} | Feedback | Notes Helen Roswell works as a portfolio manager at Tiara Asset Management (TAM). Roswell is responsible for managing the equity portfolio of Judith Carolina, who has specified $&P 500 index as the benchmark for the portfolio. During the most recent quarter, her portfolio earned a 5% return greater than the return on the S&P S00 index. When Carolina heard the news, she offered Roswell a two-day, all-expense-paid trip to Hawaii. Roswell accepted her offer. Would Roswell most likely be in violation of the Code of Ethics and Standards of Professional Conduct? A. No, because a gift from the client is considered a supplementary compensation B. No, if she discloses to her employer the benefit offered by the client C. Yes, because she accepted the offer that influences her ability to act objectivelyReceiving a gift. benefit, or consideration from a client can be distinguished from gifts given by entities seeking to influence a member or candidate to the detriment of other clients. The gift can be considered as supplementary compensation because some type of compensation arrangement is already established with a client. However, members and candidates must disclose to their employers such benefits from clients. Study Session |, Reading | Reason for not answering it correct[= ’‘Question 6 {ID:20753) | Feedback | Notes When members and candidates are in an advisory relationship with clients, they must: A. judge the suitability of investments in the context of client's total portfolio. B. maintain a list of all clients and securities & investments they hold. C. encourage their firms to develop policies and procedures to test client's suitability. The Standards of Professional Conduct require members and candidates to make investment decisions and recommendations in light of the clients’ risk and return objectives. Furthermore when managing portfolios to a particular investment mandate or style, members and candidates are required to make investment decisions or recommendations which comply with the given mandate or style (Standard Ill (C) Suitability). Option A is the requirement of this standard and both options B & C are recommended procedures. Study Session 1, Reading I‘Question 7 (ID: 20762) | Feedback || Notes In the event of an above-average portfolio performance, Irving Zimmerman’s largest client has promised him a trip to Central Europe. Client promised him to fund accommodation, flight fare, and tourist activities. In context of the trip offered by his client, Zimmerman should most likely: A. decline the offer. B. disclose the offer to his compliance officer in writing. C. make an oral disclosure to his compliance officer.ta) The CFA Institute Standards of Professional Conduct permit members and candidates to accept gifts, benefits, or any form of consideration, from clients as long as the reward does not lead to the member or candidate favoring the client, providing the reward, over others. Standards also require proper disclosure to be provided to the member's supervisor to comply with Standard | (8) Independence and Objectivity. Zimmerman may accept the offer if written disclosure is provided to his supervisor. Sludy Session 1, Reading |Question 8 {ID:20764) | Feedback | Notes The CFA Institute Code and Standards least likely require compliance procedures to: A. assign duties among supervisors. B. ensure that the designated compliance officer is equipped with the appropriate resources io implement the compliance program on a firm-wide scale. C. maintain restricted, watch, and rumor lists. Compliance procedures should, amongst other features: + describe the hierarchy of supervision and assign duties among supervisors; * designate a compliance officer whose authority and responsibility are clearly defined, and who has the necessary resources and authority to implement the firm's compliance procedures. Stuay Session 1, Reading I‘Question 9 (ID: 20820] | Feedback | Notes Sumatra Asset Management (SAM) is an investment management firm situated in Thailand. Presently, investment management firms are required to retain firm records for a minimum of three years. SAM's management retains records in both electronic and hard copy forms. Due to lack of storage space, records in hard copy form are disposed after three years. Electronic records are disposed after seven years. Is SAM's record retention policy in compliance with the Codes and Standards? A. Yes B. No, with respect to electronic records C. No, with respect to hard copy records In the absence of any laws and/or regulations, the CFA Institute requires firms to retain their records for a minimum. seven year period. Given that Sumatra’s laws are more lenient relative to the requirements of CFA Institute, the requirements of the Institute apply. Since SAM retains its electronic records for at least seven years, it is in compliance with the standards. This holds true despite the fact that hard copy records are destroyed after three years. Stuy Session J, Reading‘Question 19 (1D: 20826) | Feecback Notes With respect to proxy voting policies, Standard Ill (A) Loyalty, Prudence and Care requires members and candidates to: A. vote proxies only after conducting a cost-benefit analysis. B. avoid voting with management on non-routine governance issues. C. vote proxies in a manner which benefits clients but not the ultimate beneficiaries.Standard Ill (A) requires members and candidates to vote proxies in an informed and responsible manner. Management is not required to vote all proxies but should conduct a cost- benefit analysis to determine the issues on which proxy voting should be carried out. Furthermore, voting blindly with management on non-routine governance issues is a violation of this standard. However, this does not mean that the standard prohibits voting with management on such issues. Members and candidates must vote proxies keeping the ultimate beneficiaries in mind. Therefore, if a proxy vote benefits clients but is contrary to the interest of beneficiaries, members and candidates are in violation of this standard. Study Session J, Reading I‘Question 11 (ID: 20859} | Feecback Notes An exam proctor submitted a violation against a CFA Level! candidate. The designated officer upon reviewing the matter found that a violation of the Code and Standards had occurred and proposed a disciplinary sanction. Can the candidate reject the disciplinary sanction proposed by the designated officer? A. Yes the candidate has an option to accept or reject the disciplinary sanction. B. No, candidate has to accept the disciplinary sanction as the designated officer has the ultimate authority. C. No, because if the candidate does not accept the disciplinary sanction he will be suspended from further participation in the CFA program. The candidate can accept or reject the disciplinary sanction proposed by the designaied officer and if (s) he does not accept the proposed sanction, the matter is referred toa hearing panel composed of DRC members and CFA Institute member volunteers affiliated with the DRC. Study Session 1, Reading I‘Question 12 (1D: 20840} | Feecback Notes Which of the following is most likely a component of the CFA Institute Code of ethics? A. Place the integrity of the investment profession and interests of employer above their own interests. B. Use reasonable care and exercise collective professional judgment when conducting investment analysis, making investment recommendations or taking such actions. C. Practice and encourage others to practice in a professional and ethical manner that will reflect credits on themselves and the profession.+e The CFA Institute codes of ethics may include: 1. Place the integrity of investment profession and interests of elients above their own interests. 2. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations or taking such actions. 3. Practice and encourage others to practice ina professional and ethical manner that will reflect credits on themselves and the profession. Study Session J, Reading I‘Question 13 (1D: 20659} | Feecback Notes Jason Investments, a large money management firm offers three different levels of services to its clients. 1. Basic Level 2. Prime Level 3. Advanced Level Both Basic and Prime levels are available for everyone but Advanced level is only available for selected high net-worth clients. Has Jason Investments violated Code and Standards by offering such services? A. No, Jason Investments has not violated Code and Standards B. Yes because it offers Advanced level to selected clients only C. Yes, because it offers different level of services to clients and Advanced level to selected clients onlyJason Investments has violated Standard Ili(B)-Fair Dealing by offering Advance Package to selective clients only. Members/Candidates may differentiate their services to clients, but different level of services must not disadvantage or negatively affect clients. Different service levels should be available to everyone and should not be offered selectively. Study Session J, Reading 2 ‘Question 14 (ID: 20640} | Feecback NotesRobert Smith is responsible for distriouting the firm's reports and recommendations to clients through e-mails and updating the firm's webpages. He emailed all clients very carefully but failed to update the webpage. Has Smith violated Code and Standards? A. No B. Yes, he violated Standard | (C)-Misrepresentation C. Yes, he violated Standard Ill (D)-Performance Presentation Robert Smith has violated Standard | (C)-Misrepresentation. A misrepresentation is any untrue statement or omission of fact or statement that is false or misleading. It may include oral representations, advertising, electronic communication or written materials. Electronic communications include webpages, chat rooms and e-mails. Members or candidates who use webpages should regularly monitor materials posted on the site. Study Session J, Reading 2‘Question 15 (1D: 20661) || Feecback Notes Paul Williams manages a large closed end fund. In order to fulfil his duty of loyalty with clients regarding proxy voting, what is the most likely required action under Code and Standards? Williams: A. should disclose to clients his proxy voting policies. B. should vote all proxies for every client. C. can vote some proxies blindly on non-routine governance issues. * Acost benefit analysis may show that voting all proxies may not benefit the client so voting policies may not be necessary in all instances. * Members and candidates should disclose their proxy voting rights. * Amember/candidate who fails to vote, caste a vote without considering the impact of the question, or vote blindly with management on non-routine govemance issues may violate this standard. Study Session J, Reading 2‘Question 16 (1D: 20642} | Feecback Notes When communicating investment performance related information, members/candidates: A. are required to comply with GIPS standards. B. are recommended to state the guaranteed rate of return. C. are required to make reasonable efforts to ensure it is fair, accurate and complete. +t * Standard Ill (D)-Performance Presentation states that when communicating investment performance information, members/candidates must make reasonable efforts to ensure that it is fair, accurate and complete. Applying GIPS standards are recommended for members/candidates. * Members/Candidates should not state guaranteed rate of return that was obtain in the past. Study Session J, Reaaing 2 ‘Question 17 (ID: 20663) | Feeaback NotesGeorge Foster, a research analyst has written a report on LLOYD Inc. His wife has inherited stock options of LLOYD Inc. from a relative. In order to comply with Code & Standards, in his report he will have to disclose the: A. exercise price of these options. B. total number of options. C. amount and expiration date of these options. +e In order to comply with Standard VI (A)-Disclosure of Conflict members/candidates are allowed fo disclose as a footnote in their research report the total amount/volume and expiration date of stock options they or their immediate family member are holding. Study Session J, Reading 2‘Question 18 (1D: 20664) | Feecback — Notes The CFA Logo certification mark cannot be used to directly refer to: A. individual charter holder. B. group of charter holders. C. firm that employs only charter holders. +e The CFA Logo certification mark must be used only to directly refer to either individual charter holders or group of charter holders. Study Session J, Reaaing 2 ‘Question 19 (1D: 20665) | Feecbock NolesJamaica works as a portfolio manager with Diva Investments. One of her clients offers her 20% profit sharing if she earns 18% gross return. Can Jamaica accept this offer? She: A. can accept the offer after obtaining written consent from her employer. B. cannot accept the offer as it may compromise her independence & objectivity. C. can accept the offer if she manage to earn that retum for all of her clients. According to Standard IV (B)-Additional Compensation Arrangements members/candidates must obtain permission for additional compensation/benefits from employer. Written consent includes any form of communication that can be documented. Study Session J, Reading 2 ‘Question 20 (1D: 20646) | Feecback NotesDavid Young is a senior vice president for Garcia Inc., an advisory firm with large number of employees. He is responsible for the work performed by his firm. In order to fulfil his responsibilities adequately Young: A. should personally evaluate the conduct of his employees ona continuing basis. B. may delegate some duties to his subordinates that relieve him from those responsibilities. C. may delegate some duties fo his subordinates but is still responsible for instructions to whom supervision is delegated. According to Standard IV (C)-Responsibilities of Supervisors, members/candidates who supervise large number of employees can't personally evaluate the conduct of their employees on continuing basis. Although they may delegate supervisory responsibilities but such delegation does not relieve them from their supervisory responsibilities. study Session 1, Reaaing 2 Question 21 (ID: 20667} || Feecback — NotesAaron Pratt is a board member of Teresa Group and occasionally writes research reports for Roy Investments regarding Health care industry. If Pratt fails to mention his board membership in his research report, he will most likely violate: A. Standard V (B)-Communication with Clients & Prospective Clients. B. Standard VI (A)-Disclosure of Conflicts. C. Standard IV (B)-Additional Compensation Arrangements. If Pratt fails to mention his board membership in his research report, he will violate Standard VI (A)-Disclosure of Conflicts. Study Session 1, Reaaing 2 ‘Question 22 (ID: 20668) | Feecback NotesMark and Jones work as financial analysts for ADA Advisors. The CEO of the firm asked them to issue bullish research report for Nutshell Corp. as the company has planned expansion and earnings can grow significantly in futures. Mark follows CEO directions but Jones refuses. Which of the following statement is most likely correct? A. Mark violated Standard I-Professionalism B. Jones violated Standard |V-Duties to employer C. Jones violated Standard V-Investment Analysis, Recommendations, and Actions Mark violated Standard I(B) Independence and objectivity which is a sub category of Professionalism. Members and candidates are personally responsible for maintaining independence and objectivity when preparing research reports. Any pressure either from outside or from employer is inappropriate. Study Session 1, Reading 2 ‘Question 23 (ID: 20649} | Feecback NotesOnce accepted as a CFA Institute member, the member must satisfy the following requirements to maintain his status: A. Pay applicable membership dues annually and submit professional conduct statement once. 8B. Pay applicable membership dues once and submit annually Professional Conduct Statement. C. Pay applicable membership dues on an annual basis and also submit annually Professional Conduct Statement. +e Once accepted as a CFA Institute member, the member must satisfy the following requirements to maintain his status: 1. Remit annually to CFA Institute a completed Professional Conduct Statement 2. Pay applicable CFA Institute membership dues on an annual basis Study Session 1, Reading 2‘Question 24 (1D: 20670} | Feecback Notes Amember resides in country U (which states that law of client's home country governs) does business in country C with a client who is citizen of country H. The securities laws & regulations of: * Country U are more strict than Code & Standards * Country C &H are less strict than Code & Standards Applicable law is of country U. The member must adhere to: A. Laws of country U. B. Code & Standards. C. Laws of country H. Standard 1-(A) Knowledge of Law states that a member resides in MS (more strict) country, does business in LS (less strict) country with a client who is a citizen of LS country; MS laws applies, but if it states that the law of the client's home country governs, then members must adhere to code and standards. Study Session J, Reading 2‘Question 25 (ID: 20671) | Feecback Notes Clyde Gilmore started his career with O'Neal Corp. The marketing material of the firm contain following statement about Gilmore. “Gilmore is a chartered financial analyst & has passed all three levels in three consecutive years" Is this advertisement in violation of Code and Standards? A, No B. Yes because Gilmore cannot advertise his passing all three levels in consecutive years C. Yes because mentioning Gilmore is a charted financial analyst is incorrect The CFA & chartered financial analyst designations must always be used as adjectives, never as nouns and common names. However it can be stated that he has passed all three levels in three consecutive years because it is a fact. The correct statement may be: Gilmore has earned the right to use the chartered financial analyst designation & he has passed all three levels in three consecutive years. Study Session J, Reading 2Question 26 (1D: 20691) | Feecback NotesRichard Anderson works as a portfolio manager in Emma Investments. While still employed, he also wants to manage funds of individual clients independently in his spare time. Which of the following statement is most likely correct? A. Standards IV(A)-Loyalty prohibits Anderson from entering into an independent business while still employed B. If Anderson fulfills his responsibilities at Emma Investments and his independent work is done on his own spare time, he is not in violation of any code and standards C. Anderson cannot render services to his individual clients until he receive consent from his employer Although Standards |V(A)-Loyalty does not prohibit members from entering into independent business while still employed, they must notify their employer and describe the type of service, expected duration and compensation. Members must not render service until they receive consent from employer. Study Session J, Reading 2 ‘Question 27 (ID: 20692} || Feecback NotesEdward Dixon prepared a financial model to evaluate the market movement and its impact on stock prices. He carefully selecis all the inputs used in financial model but gives less attention to the assumptions. His model works well for observable databases. Has Dixon violated any CFA Institute Code & Standards? A. No, he has not violated any standard as his mode! works well for observable databases B. No, he has not violated any standard as he carefully selects all the inputs used in model C. Yes, he has violated standards by not giving much attention to the assumptions used in the model +e He has violated Standard V (A)-Diligence & Reasonable Basis by not giving much attention to the assumptions used in the model. Although his model works well for observable databases but these assumptions may give different results by using volatility and performance expectations for scenarios outside the observable databases. Study Session J, Reaaing 2‘Question 28 (ID: 20693) | Feecback — Notes In order to deal with over-subscribed IPOs, the best course of action for a member to avoid violation of Standard VI (B) Priority of transactions is to allocate shares: A. equally to all his clients to whom investment is appropriate and to himself B. firstly to his clients to whom investment is appropriate and then allocate remaining shares for himself C. to his clients to whom investment is appropriate and not to participate in IPO personally +t In case of oversubscribed shares, the best course of action for member/candidate is to allocate shares to his clients to whom investment is appropriate and not participate personally. Members and candidates should not benefit from the position that their clients occupy in the marketplace-through preferred trading, the allocation of limited offerings, and/or oversubscription. Study Session J, Reading 2‘Question 29 (ID: 20694) | Feecback Notes An analyst has been asked by his firm to write a report on Sega Group. He uses following sources to get non-material non- public information to prepare for his report. * He got some information through contacts with corporate insiders. * He attended oral presentation by company executives in analysts’ meeting. * He collected some information from company’s competitors. A. Analyst has violated Standard II (A}-Integrity of Capital Markets. B. Analyst has violated Standard | (B)-Independence & Objectivity. C. Analyst has been in compliance with code & standards in preparation of his report. Analyst has been in compliance with code and standards in preparation of his report as he uses sources to get nonpublic non-material information. Under Mosaic theory, analyst can use all the sources as long as information is public and nonpublic non-material, Study Session J, Reaaing 2‘Question 30 (1D: 20695) | Feecback Notes George Martin manages an investment portfolio for Jennifer Miller. If Miller refuses to fully disclose her other investments, what is the most likely action of Martin? A. He should updaie the IPS based on the information provided by Miller B. He should not continue managing portfolio of Miller C. He should categorize Miller's portfolio as an Index portfolio where funds are managed consistently with stated mandate According to Standard Ill (C)-Suitability, if clients withhold information about their financial portfolio, the suitability analysis conducted by members/candidates cannot be expected to be complete: it must be based on the information provided. study Session J, Reaaing 2 ‘Question 31 (ID: 20696) | Feecback NolesIn an interview Misty Kirk, CFA specified, “By receiving my charter | have obtained the highest set of credentials in the global investment management industry and now lam committed to the utmost ethical standards”. Has Kirk violated any CFA code & standards? A. Yes, she has violated standard VII (A)-Conduct as member in CFA Program B. Yes, she has violated standard VII (B)-Reference to CFA Designation/Program C. No, she has not violated any standard Kirk has not violated any standard by stating that by receiving my charter | have obtained the highest set of credentials in the global investment management industry and now lam committed to the utmost ethical standards. Statements that highlight the commitment of CFA charter holders to ethical and professional conduct are appropriate. Sludy Session J, Reading 2‘Question 32 (1D: 20697} || Feecback Notes The CEO of Pearl Brokerage firm offered the supervisory responsibility of money market division to Steven White. White noticed that the firm has inadequate compliance system. White should: A. accept the supervisory responsibilities and bring the problem to the attention of firm's seniors. 2 . decline in writing to accept the supervisory responsibilities. C. accept the supervisory responsibility and try to resolve the inadequacy of compliance system. According to Standard IV (C)-Responsibilities of Supervisors, if the compliance system of a firm is inadequate, member/candidate should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to resolve it. Study Session 1, Reading 2‘Question 33 (1D: 20698) || Feecback Notes Larsen, an analyst in GOETHE Investments writes research reporis for the firm and retains all the supporting data in electronic form for 5-years as per requirements of local regulators. Is Larsen in compliance with Standard V (C}-Record Retention? A. Yes B. No because he has to maintain records in hard form C. No because ha has to maintain records for at least 7-years as per CFA Institute requirement Booc +t Larsen is in compliance with Standard V (C}-Record Retention because records may be maintained either in hard copy or electronic form and fulfilling local regulatory requirements satisfy the requirements of Standard V (C)-Record Retention. In the absence of regulatory guidance, CFA Institute recommends maintaining records for at least 7-years. Study Session 1, Reading 2‘Question 34 (1D: 20699} | Feecbock Notes The requirements of standard Ill (E)-Preservation of Confidentiality are: A. intended to preclude members from cooperation with Professional Conduct Program. B. considered to be violated by forwarding confidential information to Professional Conduct Program. C. not intended to preclude members from cooperation with Professional Conduct Program. +e The requirements of standard Ill (E)-Preservation of Confidentiality are not intended to prevent members from cooperation with professional conduct program. Stugy Session |, Reaaing 2 ‘Question 35 (1D: 20700) | Feecback NotesMike Carlos, a research analyst has prepared a report on OSMO Corp. In his report he has used the statistical estimates prepared by others. He identified the sources on the last page of the report but considered it unnecessary to include the qualifying statements. Mike Carlos most likely: A. was in full compliance with the standards. B. violated the standards as he failed to include the qualifying statements. C. violated the standards as statistical estimates and their sources should be on the same page. c +e Mike Carlos has violated the Standard |(C)-Misrepresentation by using statistical estimates prepared by others without including the qualifying statements. It is necessary to identify sources and also include caveats or qualifying statements whenever using data prepared by others. Study Session 1, Reading 2 Question 36 (ID: 20701) | Feecbock NotesBilly Jones, an investment manager with Parker Investments, manages individual accounts by investing particularly in value stocks. In order to increase the performance of his clients’ accounts Jones shifted some portion towards growth-oriented stocks. This change resulted a 5% increase in the performance of his clients. He decided to discuss this change with the clients in the next quarter meeting. In the meeting, his clients surprised with a 5% increase in their portfolio performance. Is Jones in compliance of CFA Institute code & standards? A. Yes because he acted in a prudent & judicious manner for the sole benefits of his clients B. Yes because he improved performance & discussed changes with his clients C. No because he failed to inform changes to his clients timely +t Jones violated standard V (B)-Communication with clients & prospective clients by failing to inform changes in clients’ accounts and decision making process timely. Changing style from value oriented to growth-oriented stocks also changes the risk/return characteristics that require permission from their clients. stugy Session J, Reaaing 2 ‘Question 37 (ID: 20723) | Feecback NotesToby Hayworth works for a large multinational investment bank in Canada. Hayworth is currently working with a Malaysian institutional client. The Malaysian financial market is still in the developing phase, and lacks well-established laws governing monetary transactions as well as the laws governing the communication of investment performance information to clients or other outside parties. The Canadian government, however, requires the fair and complete presentation of performance information. In Canada, past returns can be used as a representative of what clients will achieve in the future. Since the client is located in Malaysia, Hayworth believes that he is not subject to any laws governing performance presentation when dealing with the Malaysian client. With respect to his adherence to applicable laws governing performance presentation, Hayworth is most likely: A. not in violation of the Code and Standards, because the law of locality applies in such situations. B. in violation of the Code and Standards, because he should adhere to the Canadian law. C. in violation of the Code and Standards, because he should adhere to the Code and Standards.The Code and Standards dictate that, in the event of conflict, members and candidates must comply with the strict law, rule, or, regulation. With regards to performance presentation, the Code and Standards state that members and candidates should not state or imply that clients will obtain or benefit from arate of return that was generated in the past. Therefore, the Code and Standards would apply in this case, since laws in both Malaysia and Canada are less strict than the Code and Standards. Study Session J, Reading 2 ‘Question 38 (ID: 20724) | Feecback | Notes Patrick Wayne works as a research analyst at an investment management firm in San Diego, California. Wayne has been asked to issue a research report on Chemicals Energy Group (CEG), a large firm operating in the chemicals industry. The firm will pay Wayne a flat fee plus a bonus if any new investors buy the stock of the company after reading Wayne's report. Wayne just issued the report and did not disclose the compensation arrangement to his clients. Wayne is least likely in violation of which one of the following Standards of Professional Conduct? A, Professionalism B. Conflicts of Interest C. Duties to EmployersWayne is in violation of the standard related to professionalism. Wayne is an issuer-paid analyst who is paid a flat fee plus a bonus if anyone buys the stock of CEG. This fee structure clearly impairs Wayne's independence and objectivity, Standard | (8), since he would be more inclined to issue a buy recommendation. Also, Wayne is in violation of Standard I{C), Misrepresentation, by not disclosing this arrangement to his clients. Wayne is also in violation of Standard VI (A), Disclosure of Conflicts. Wayne is least likely in violation of Standard IV, Duties to Employers. Study Session 1, Reading 2‘Question 39 (1D: 20725) | Feecback — Notes Edward Newman has recently issued buy recommendations on two stocks A and B, respectively. The reasons for his recommendations for the stocks are as follows: Stock A: “This is the stock of a mining company in Canada. After analysis of the mining indusiry and the company’s fundamentals, Newman determined that the stock would outperform the index. Also, Newman recently interacted with the CEO of Precious Miners Ltd. (the company's main competitor), who mentioned that he believes the company will report unexpectedly high earnings for the next quarter. Using this information, as well as the opinions of his co-workers, Newman issued a ‘puy' recommendation for the stock.” Stock B: “This is the stock of a new grocery chain in the U.S. Newman carried out extensive analysis on the company and its competitors. He also visited the suppliers of the company and found out that they were one of the best in the industry. After somecustomer surveys, Newman found out that the chain was fulfilling most of their clients’ demands. Based on this and the company's past financial information, Newman decided to issue a ‘buy’ recommendation for the stock.” With regards to Stock A and Stock B, is Newman most likely in violation of Standard IL, Integrity of Capital Markets? A. Newman is in violation with respect to Stock A, but not Stock B B. Newman is in violation with respect to Stock B, but not Stock A C. Newman is not in violation with respect to both Stock A and Stock B Newman is not in violation of the Standard. For Stock A, although the quarterly earnings information is material and non-public, Newman got the information from an unreliable source (a competitor). This makes the information nonmaterial and can be used for making his decision. For Stock B, Newman has used pieces of public information and nonmaterial non-public information to arrive at the conclusion. According to the mosaic theory, he is not in violation of the Standard. Study Session J, Reading 2 Question 49 (1D: 20726) | Feecback NotesWhich of the following is a recommended procedure for compliance with Standard Ill, Duties to Clients? A. Making investment decisions in the context of the total portfolio B. Voting proxies in an informed and responsible manner C. Developing written trade allocation procedures +t Standard Ill, Duties to Clients, states that members and candidates must make investment decisions in the context of the total portfolio and vote proxies in an informed manner. Option C is a recommended procedure for compliance with Standard Ill (8), Fair Dealing. Study Session 1, Reaaing 2 ‘Question 1 (ID: 20727) | Feecback — NolesMadeline Elliot works at Adept Money Managers (AMM), a portfolio management firm in the U.S. Elliot is not satisfied with her current job, which seems to her as monotonous and non- challenging. She is planning to apply for a job at anew, investment advisory firm. After her successful job interview at the new firm, Elliot planned to copy some financial models and computer spreadsheets she developed during her employment at AMM, and take them with her. Based on the information above, which of the following is most accurate? A. Elliot has not violated the Standard IV, Duties to Employers, because she plans to take material that she developed during her employment B. Elliot has not violated the Standard IV, Duties to Employers, because such material is not the property of the firm C. Elliot has violated the Standard IV, Duties to Employers +e Elliot has violated the Standard IV, Duties to Employers, because departing employees may not take employer's property, which includes books, records, models, reports, and other materials, even those the member or candidate prepared himself. Study Session 1, Reaaing 2‘Question 42 (1D: 20728) | Feecback NotesHelen Dunlop has been analyzing companies in the manufacturing industry. Currently, Dunlop is preparing a research report on Highland Manufacturers. After careful analysis of its operations and suppliers, Dunlop found out that it has contracts with three suppliers in the indusiry. Using the tenure of these contracts and his own estimations, Dunlop determined that the company will have more than $50 million worth inventory in the coming years. Dunlop concluded his report with the following statement: “Highland Manufacturers will accumulate inventory worth $50 million, which shows a high demand for its products. Hence, | recommend a ‘buy’ for this stock." Does Dunlop's conclusion violate any standards? A, No B. Yes, because Dunlop did not have a reasonable and adequate basis C. Yes, because Dunlop needs to distinguish between fact and opinion +e Dunlop has estimated this amount based purely on his own calculations; hence the estimate is an opinion, not a fact. Opinion must be distinguished from fact in the research reports. study Session J, Reading 2‘Question 43 (ID: 20729) || Feecback Notes Rosanne Thomas carried out extensive research on a software company, Easy Solutions (ESOL). She researched its competitors, suppliers, and customers along with its financial history. Thomas used various financial models and spreadsheets to analyze its fundamentals, and concluded that the stock was a ‘buy’. While writing the research report, Thomas described the financial model used in depth, but only briefly mentioned the industry prospects and omitted certain details about its customers. |s the research report prepared in accordance with the Code and Standards? A. Yes B. No, because Thomas did not use independent and objective judgment C. No, because Thomas excluded certain details from the reportbop oc +o While writing a report, a report writer may emphasize certain areas he deems are important, touch briefly on others, and omit certain aspects that are deemed unimportant or unnecessary. As long as Thomas clearly details the important elements to the analysis and conclusion, he is not in violation, since there are limits to the scope of every report. Study Session 1, Reading 2 ‘Question 44 (ID: 20733] | Feecback NotesSamuel Cross works at an agricultural firm based in the U.S. During lunch in the firm's cafeteria, Cross overheard the CEO talking about the regulatory approval of a new product to be launched by the firm in a month. Cross quickly called his broker, Judy Garcia, and advised her to buy the stock of the firm for his account. Garcia also buys some stock for her own portfolio. Are Cross and Garcia most likely in violation of the Code and Standards? A. Yes B. Only Garcia is in violation C. Only Cross is in violation Both Cross and Garcia are in violation of Standard II, Integrity of Capital Markets. Cross has violated the Standard because he communicated material non-public information about the firm to Garcia. Garcia has violated the Standard by initiating the transaction to buy the stock for Cross and herself based on the material non-public information. Study Session J, Reaaing 2‘Question 45 (1D: 20734) | Feecback Notes James Murphy recently bought the stock of HighTech Software Solutions, Inc. worth $10 million. While working on the Internet, Murphy posted several positive comments about the stock. He also spread unsubstantiated information about the release of anew product by the firm as confirmed news on several bulletin boards and investor chat rooms. Which one of the following Standards has Murphy most likely violated? A. Integrity of Capital Markets B. Duties to Employers C. Conflicts of InterestMurphy has violated Standard Il (B), Market Manipulation, by disseminating unsubstantiated information as confirmed news in an attempt to pump up the price of his holdings and mislead market participants. Study Session 1, Reading 2‘Question 46 (ID: 20735} | Feecbock Notes During a meeting with his colleagues, Robert Moody, the compliance officer at an investment firm, made the following comment: “To ensure compliance with Standard IV, Duties to Employers, the following should be adhered to: 1. Members must not solicit their employer's clients prior to leaving their employer. 2. An adequate compliance procedure should be established, which should be contained in a clearly written and accessible manual that is tailored to the member or candidate's operations. 3. If faced with inadequate compliance procedures, members and candidates must decline supervisory responsibility in writing.” Which one of the points mentioned by Moody in his comment is least likely a requirement for adherence with Standard IV, Duties to Employers? A.1 B. 2 C.3 Points 1 and 3 are requirements, whereas Point 2 is a recommendation for Standard IV(C), Responsibilities of Supervisors. Study Session J, Reaaing 2‘Question 47 (ID: 20750) | Feecback Notes Davis Young, a CFA Level Il candidate, always consults with the compliance department and outside legal counsel whenever he is in doubt regarding disclosure of confidential information of clients. Davis Young can: A. consult both compliance department and the outside legal counsel. B. consult the compliance department and cannot consult the outside legal counsel due to confidentiality of the information. C. consult the outside legal department and cannot consult the compliance department. Booc te One of the recommended procedures for compliance with Standard | (A), Knowledge of Law, is that, when in doubt, members and candidates should seek the advice of compliance personnel or legal counsel concerning legal requirements. Study Session |, Reaaing 2Question 48 (1D: 20751) | Feecback Notes McMillan appeared in CFA Level 1 exam. Two days later, he discussed the difficulty of the exam with his colleague, particularly the formula tested in area of “Financial Reporting and Analysis". His colleague is neither a candidate of any CFA level nor has any plans in future to appear in CFA examination. Has McMillan violated any Code and Standards? A. Yes, he has violated Standard VIl-(A) Conduct as member/candidate in CFA program B. No, because his colleague is neither a candidate nor has any plans to appear in the exam C. No, because discussing exam afterwards is not a violation According to the Standard VII (A), providing confidential program or exam information to candidates or the public is a violation. Study Session 1, Reading 2Question 49 (ID: 20752) | Feecback NotesIn an attempt to comply with the CFA Institute's Code and Standards, GreenTech Inc. has established several policies, which are to be followed by each employee of the firm. Three of these policies are highlighted below: I. All clients participating in a block trade must be charged with the same execution price and commission. The execution price and commission may vary based on the block traded. I. In absence of local laws, alll firm records must be retained for a minimum of five years in electronic form. Backup of firm records is not required. I. Analysts are permitted to use model or actual results in performance presentation to clients. No disclosures are mandated. Which of the firm's policies least likely comply with the Code and Standards? A. Land lll B. land ill C. IllonlyPolicy I: Policy Il: Policy Ill: The Standards encourage members to formulate policies, which give all clients’ accounts participating in a block trade the same execution price, and charge the same commission (Standard Ill (B) Fair Dealing). Policy | complies with this recommendation. In the absence of local regulation pertaining to record retention, the CFA Institute encourages members and candidates to retain records for a minimum of seven years (Standard V(C) Record Retention). Thus, GreenTech Inc.'s second policy violates the Code and Standards with respect to the period of record retention. The CFA Institute Code and Standards require members and candidates to disclose the presence of model or simulated results in a performance presentation. By not mandating disclosure, the firm's policy is in violation of Standard Ill (D) Performance Presentation. Study Session J, Reading 2‘Question $0 (ID: 20754) | Feecback — NotesWhich of the following situations most likely constitutes a violation of the Standard | (D) Misconduct? A. Employee A is currently experiencing a bankruptcy crisis, which has forced him to sell his personal property and equity investments B. Employee B was caught cheating during an examination fifteen years ago while attending a local college C. Employee C works in an insurance industry and has promised attractive equity investment returns despite the equity markets experiencing a cyclical low Members and candidates who comply with Standard | (D) must not engage in any professional conduct involving dishonesty, fraud, or deceit, or commit any act that reflects adversely on their professional reputation, integrity, or competence. Neither bankruptcy crisis nor cheating in a college exam fifteen years ago constitutes a violation of the Standard. However, in the case of Employee C, promising unrealistically high equity returns reflects dishonesty on the part of the employee and is a violation of this Standard. Study Session J, Reading 2 ‘Question 51 (ID: 20755) | Feecback NolesWhen using secondary or third-party research as a source of information for research reports, Standard V (A), Diligence and Reasonable Basis, least likely requires members and candidates to: A. review assumptions used and independence and objectivity of the recommendations. B. determine the extent of analysis performed. C, base analysts' compensation on the quality of research used. When using secondary or third-party research, Standard V (A), Diligence and Reasonable Basis, requires members and candidates to: * review the assumptions used; * determine the extent of the analysis; * identify the timeliness of research reports; and * evaluate the independence and objectivity of the recommendations. Study Session J, Reading 2‘Question $2 (1D: 20756) | Feecback — Notes Under Standard VII (A), Conduct as Members or Candidates in the CFA Program, members: A. violate the Standard if they cheat on the CFA exam. B. are permitted to state that they were charter-holders for the periods during which they paid their dues and signed the Professional Conduct Statement (PCS). C. are not permitted to make the statement: “The CFA Program is a rigorous program, which is comparable to investment banking programs offered by other institutes. However relative to other programs, the failure rates of candidates participating in the CFA Program examinations are quite high.”Standard Vil (A), Conduct as Members or Candidates in the CFA Program, requires members and candidates to avoid engaging in any conduct that compromises the reputation or the integrity, validity, or security of the CFA examination. Actions such as cheating on the CFA exam or any other exam constitute a violation of this Standard. Although members may only use the CFA charter holder designation as long as they sign the PCS and pay their dues annually and may state the periods for which they were charter holders in the past in the event of a failure to fulfill these annual requirements, such guidelines are governed by Standard VIl (B) Reference to CFA Institute, the CFA Designation, and the CFA Program. Under Standard VII (A), members and candidates are not prohibited from expressing their opinions on the CFA Institute or exam program. Study Session 1, Reading 2‘Question §3 (1D: 20759} | Feecback Notes George works for a small money market firm. He always allocates clients’ partially filled orders equally among them. Thus each customer gets same number of shares. Has he violated any standards? A. No B. Yes, he has violated Fair Dealing C. Yes, ha has violated Suitability Standard Ill (B), Fair Dealing, requires members and candidates to deal fairly and objectively with all clients, and prohibits a preferred treatment given to any client. Orders for the clients must be executed on a systematic basis that is fair to all clients. When the full amount of the block order is not executed, members and candidates should allocate partially executed orders among the participating client accounts pro rata on the basis of order size. So, Joseph is in violation of Fair Dealing. Study Session J, Reaaing 2Question 54 (1D: 20760) | Feecbock — Notes Tom Ashley was working in the research department of Miller Inc. where he signed a non-compete agreement. He left the firm, copied all the material he prepared during his job, and started working with a competitor of Miller Inc. Has he violated loyalty with employer? A. Yes, by copying the material B. Yes, by applying his knowledge at the competitive firm C. Yes, both by copying the material and applying his knowledge at the competitive firm +eExcept with the consent of their employer, departing employees may not take employer's property, which includes books, records, reports, and other materials, and may not interfere with their employer's business opportunities. Taking any employer records, even those prepared by the member or candidate, violates Standard IV (A). Members and candidates are free to use public information about their former firm after departing without violating Standard IV (A), absent a specific agreement not to do so. Since Tom has signed a non-compete agreement with his former client, he has violated the Standard IV (A), Loyalty, not only by copying the material, but also by applying his knowledge and serving the new competitive firm. Study Session 1, Reading 2‘Question $5 (ID: 20761) | Feecback Notes Which of the following Standards require investment advisors to consider client's needs and circumstances when making investment recommendations? A. Standards Ill (D)-Performance Presentations B. Standard Ill (A)-Fair Deoling C. Standard Ill (C)-Suitability +e Both Standards Il (A), Loyalty to Clients, and Ill (C), Suitability, require investment advisors to consider client's individual needs and circumstances when determining the appropriateness/suitability of an investment to the client's Portfolio. Study Sesion 1, Reaaing 2 ‘Question 56 (1D: 20763) | Feecback — NotesWhich of the following scenarios, highlighted in Exhibit 1, if left undisclosed, most likely constitute a violation of Code and Standards? Exhibit 1: Firm Scenarios Scenario Details Irvin Bishop is serving Asset Inc. as head of investment management. Bishop has been offered to serve as an investment committee head at Wiseon Securities. His new job requires Bishop attend committee meetings twice a week. | Stevenson Brokerage establishesan | arrangement with Allen Associates, which involves purchasing research from Allen B Associates in exchange for Stevenson Brokerage refering client-accounts whose value exceeds $0.5 million to Allen Associates. While providing investment advice to one of her high-net-worth clients, Delilah Francis uncovers that 20% of client's portfolio funds were used for drug trafficking. A. A, B, and C B. AandB only C. Band C only Scenario A: Standard VI {A}, Disclosure of Conflicts, requires members andcandidates to disclose all actual and potential conflicts of interest that may impair their independence or objectivity or interfere in their respective duties to current clients, prospective clients, or to their employers. Bishop is required to provide adequate disclosure to his employer regarding the potential job offer. Serving as the investment committee head at Wiseon Securities may conflict with his portfolio management responsibilities at Asset Inc., and requires disclosure accordingly. Scenario B: Standard IV (C), Referral Fees, requires members and candidates to disclose to their employers, clients, and prospective clients, as appropriate, any compensation and consideration or benefit received by, or paid to, others for the recommendation of products and services. A failure to disclose the existence of the referral arrangement by either of the two firms in question will constitute a violation of the Code and Standards. Scenario C: Standard Ill (E), Preservation of Confidentiality, requires members and candidates to keep all information about a client confidential unless the information pertains to illegal activities on part of the client, disclosure is mandated by law, or client permits disclosure. A failure to disclose the use of a proportion of portfolio funds for drug trafficking (illegal activities) to the supervisor, at a minimum, will violate this Standard.Study Session J, Reading 2 ‘Question $7 (ID: 20765) | Feecback | Notes Which of the following situations least likely constitutes a violation of CFA Institute Code and Standards? A. Senior Researcher obtained information concerning a potential merger deal pertaining to an issuer company covered by him, which is yet to be publically released. The researcher disclosed this information to his supervisor and compliance department B. Mark Greer recently passed Level Il exam of the CFA Program and does not intend to appear for the Level Ill examination for at least three years. Greer identifies himself as an active candidate of the CFA Program C. Portfolio Manager allocates oversubscribed IPO shares to suitable non-family client accounts prior to family client accounts to avoid the appearance of a conflict Standard II (A), Material Non-Public Information, prohibits members and candidates from trading on, or causing others to trade on, material non-public information that could affect the value of the security. Managers should make reasonable efforts to make material non-public information public by encouraging the issuer company to publically disclose the information. In the event public disclosure is not possible, the member or candidate should make disclosures to its supervisor and compliance department, and not take investment action based on the information. Thus, the handling of information on the potential merger deal by the Parfnlin Mannnar camniias with this StandardUr UNO WIGHUYS! CONES writs iis orn. According to Standard VII (B), Reference to the CFA Institute, the CFA Designation, and the CFA Program, a person is a candidate ift * the person's application for registration in the CFA Program has been accepted by the CFA Institute and the person is enrolled to sit for a specific examination; or + the registered person has sat for a specific exam and the exam results have not yet been received. Individual is no longer considered an active candidate who decline to sit for an examination or does not meet the above requirements, By not sitting/being enrolled for the Level Ill exam for at least three years, Greer has violated this Standard by referring fo himself as an active candidate. Standard VI (B), Priority of Transactions, requires members and candidates to place transactions of clients and employer in priority to transactions in which the member or candidate is the beneficial owner. Alongside this requirement, family accounts, which are client accounts should be treated like any other client accounts, and should not be treated unfairly. By allocating the oversubscribed IPOs to non-family client accounts prior to an allocation to family accounts, Portfolio Manager has violated this Standard. ‘Study Session 1, Reading 2‘Question 58 (1D: 20766) | Feecbock Notes Amember or candidate fails *o fulfill his/her duty of loyalty, prudence, and care to existing and prospective clients if (s)he: A. discloses its proxy voting policies to existing and prospective clients. B. uses client brokerage to purchase research relevant to securities held in the member/candidate's portfolio. C. directs trade to a particular broker, as requested by clients, which provides average execution while disclosing the fact that such arrangements may not result in the best transaction price or execution for the client directing the trade.Standard Ill (A), Loyalty, Prudence, and Care, requires members to have a duty of loyalty with clients, and exercise independent and prudent judgment. Members and candidates fulfill this responsibility if they (amongst other responsibilities): * disclose the proxy voting policies; * use client brokerage to benefit the client and not to fulfill personal or non-client related purposes; * disclose to clients wishing to direct trades to a particular broker that such an arrangement may not provide the best price and execution. Nevertheless, members and candidates have the responsibility to seek out the best price and execution. Study Session J, Reaaing 2 ‘Question $9 (1D: 20782} | Feecback NotesMartin Keefe, CFA, runs a private investment club with his two. friends. The club's investment brochure describes Martin Keefe as follows: “He is one of the club's two CFA charter holders with almost ten years experience in investment banking. The CFA designation enables Keefe to provide high-quality, reasoned, and educated investment advice to his clients and obliges him to uphold an ethical conduct in his professional dealings.” Concerning the information presented, has the brochure violated the standard concerning reference to the CFA Institute, the CFA designation, and the CFA Program? A. No B. Yes, with respect to improper referencing of the CFA designation C. Yes, with respect to exaggerating the meaning of membership in CFA institute +tThe brochure exaggerates the meaning of membership in the CFA Institute by implying that by acquiring membership of the CFA Institute, individuals are able to give superior investment advice. The statement is discriminatory against other professions. However, no standards have been violated by stating that earning the CFA designation compels members to act ethically; this is a fact. The brochure has appropriately described Keefe's designation as an adjective and the standard has not been violated in this respect. Study Session J, Reading 2 ‘Question 60 (1D: 20783) | Feecback NotesBlue House (BH) is a U.S. based investment bank that houses a separate research department. Hugh Granatino is one of BH's research analysts covering the global biochemical sector. Granatino is preparing a research report on Nadine, a biochemical firm. He has rated Nadine as a buy based ona groundbreaking medical study published several days ago. Granatino posts a link to his report on BH's corporate website and mails the same report using an express courier service to selective clients. The same day, several of Granatino's Chinese clients complain that they were unable to access the website as it was accidently blocked by their government and inquire as to why some of the clients have received a mailed recommendation when they have not. Two days later, Granatino purchases Nadine's stock for his personal account. Has Granatino violated any CFA Institute Standards of Professional Conduct? A, No B. Yes, fair dealing C. Yes, priority of transactionsGranatino has not violated any CFA Institute Standards of Professional Conduct. Standard III (B) Fair Dealing requires members and candidates to treat clients fairly when disseminating investment recommendations. However, fairly does not mean equally. Granatino did post a link to the report on the company’s website and thus gave clients access to the report. Mailing selective clients the same report does not violate this standard. Even if the Chinese clients cannot access the report, Granatino has not violated the fair dealing standard. Granatino has not violated the priority of transactions standard because he has given sufficient time for his clients (including the Chinese clients) to act upon the recommendation. Members and candidates are permitted to trade for their personal account as long as they do not front-run client trades. Study Session |, Reading 2‘Question 61 (ID: 20784) || Feecback Notes Which of the following actions represents a violation of the CFA Institute Standards of Professional Conduct concerning misconduct? A. Aresearch analyst violates city traffic laws B. An employer racially discriminates against candidates during a job selection process C. An investment manager experiences personal bankruptcy due to poor investment decisions undertaken for his private accountAction A does not represent a violation because violating traffic laws will not adversely reflect on the members professional integrity. conduct or reputation. Action B represents a violation of Standard | (D) Misconduct which requires members and candidates not to take any action which reflects fraud, deceit, or dishonesty or adversely reflects on their professional integrity, reputation or competence. By discriminating against potential candidates, an employer may be damaging his/her reputation as a fair employer. Action C does not represent a violation; because, undertaking poor investment decisions for a personal account and any related losses experienced does not suggest that the manager has engaged in a professional misconduct involving fraud, deceit, or dishonesty. Study Session 1, Reading 2 ‘Question 62 (ID: 20785) | Feecback NotesWalter Cross, CFA, is a fixed income manager and owner of Terra Cross Wealth Management (TCWM). Cross and his fellow management team are constructing a hedge fund. Prior to developing the fund, Cross attended a conference hosted by Walsh Elite, a renowned investment trust, where the basics of hedge fund construction and investing were explained to attendees. TCWM paid for Cross's travelling and accommodation costs. After the conference, Cross had the privilege to dine with WE's chief investment officer (CIO) due to his personal contact at WE. During the dinner, the ClO offered to personally overlook the fund construction and initial operation period. When asked how he met the CIO by his colleagues, Cross casually mentions that he spoke to him at the seminar. Details of the meeting have not been disclosed to clients. Cross has least likely violated the CFA Institute Standards of Professional Conduct concerning: A. disclosure of conflicts. B. independence and objectivity. C. communication with clients and prospects.There is no evidence that Cross has violated the communications with clients and prospects standard. According to Standard VI (A) Disclosure of Conflicts, members and candidates must make full and fair disclosures of all matters that may impair their independence and objectivity to clients, prospects and their employers. Details of the special meeting with the CIO, the contact at WE, and the privileged information received as a result may have been the predominant factors contributing to his selection of the ClO as a menior and have influenced his independence and objectivity. This fact needs to be disclosed to Cross's clients and prospects. According to Standard I(B) Independence and Objectivity, members and candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. The arrangement of the personal meeting with WE's CIO was not offered to any of the other conference attendees and thus would have influenced Cross's selection of a mentor for the hedge fund. Study Session 1, Reading 2‘Question 63 (1D: 20786) | Feecback NotesTwo years ago, Earl Robinson and his wife Trisha Martin, CFA, established Robinson-Martin (RM), an investment management firm providing investment banking and research services. The couple has mutually agreed to manage the two services independently. Verizon Technologies (VT), Martin's exclusive investment banking client, has expressed an interest in RM's research services to promote its stock issuance. Fearing that she may compromise the independence and objectivity of her firm's research department, Martin refers VT to a fellow research analyst and personal friend, Rene Greene. When referring VT to Greene, Martin states, “VT is in a poor state; please ensure our client is in safe hands.” Surprised by VT's state of affairs, which is perceived to be operating steadily by market analysts, Greene decides to issue a buy recommendation to honor her side of the agreement. Which of the following CFA Institute Standards of Professional Conduct have least likely been violated? A. Referral fees B. Independence and objectivity C. Material nonpublic informationAlthough Martin could indirectly benefit from referring VT to Greene, there is no evidence that either Greene or Martin has failed to disclose this arrangement. Thus, there is insufficient information to conclude that Standard VI (C), Referral fees, has been violated. According to Standard | (B) Independence and Objectivity, members and candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Greene's investment recommendation is influenced by her relationship with Martin. Given the firm's circumstances, Greene may have issued a different rating; therefore, she is in violation of this standard. According to Standard II (A) Material Nonpublic Information, members and candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information. By sharing material nonpublic information concerning VT with Greene, Martin is in violation of this standard even if Greene does not issue a rating, which differs from a ‘buy’. Study Session 1, Reading 2‘Question 64 (ID: 20787} || Feecback Notes The Drake Trust (DT) is a large investment trust that is headquartered in the U.S. Its investment-banking arm, Montgomery Inc. (Ml), is situated in Nepastine, a developing counity in Southeast Asia. Local consumer data confidentiality laws are lax and allow for the sharing of information between public and private sector corporations to foster transparency in the business community. Ml’s management uses this data to assess the demand for certain asset classes and to search for and make contact with potential high net-worth clients. As a member of the business community, MI feels it is its responsibility to share this information with other businesses. By using client data, MI’s management has least likely violated the CFA Institute Standards of Professional Conduct relating to: A. suitability. B. knowledge of the law. C. preservation of client confidentiality.Standard Ill (C) Suitability requires members and candidates to make a reasonable inquiry into a client's or prospective client's investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action. There is no evidence of this standard being violated. Standard Ill (E) Preservation of Confidentiality requires members and candidates to keep information about current, former and prospective clients confidential unless the information concerns illegal activities on the part of the client, and thus, disclosure is required by law, or the client or prospective clients permit disclosure. By sharing confidential client information with other businesses, Ml's management is violating this standard. Standard I (A), Knowledge of the Law, requires members and candidates to comply with the law in each country or area in which they conduct their professional activities. Members and candidates must comply with the strictest law. Because Nepastine lacks adequate data protection laws, MI's management must comply with Standard Ill (E), which calls for the preservation of client confidentiality. By complying with the Nepastine law, its management has violated this standard. Study Session |, Reading 2‘Question 65 (1D: 20788) | Feecback Notes Lara Scoit is an analyst serving an equity research firm. She has recently developed a model that generates stock values using quantitative factors such as general macro-economic factors and qualitative factors specific to the corporation, such as the quality of a firm's corporate governance structure. Her model makes use of complex regression techniques to value stocks. Many of these techniques are quite complex and therefore, Scott has decided to list the regression factors used and identify the name of the regression model in her research report. Has Scott violated the CFA Institute Standards of Professional Conduct with respect to her research report? A. No B. Yes, she needs to fully explain the regression techniques used C. Yes, she has used non-quantitative factors in her regression modelStandard V (B), Communication with Clients and Prospects, requires members and candidates to disclose the basic format and general principles of the investment process used to analyze investments, select securities and construct portfolios. Members and candidates are not obliged to include all the details of the investment process and may choose to exclude certain information. By excluding information that may be complex for clients and prospects to comprehend, Scott is not in violation of the code and standards of professional conduct. Study Session 1, Reading 2‘Question 66 (1D: 20789} | Feecback Notes The management of Greenwhich, a Swiss watchmaker, has decided to take the company public and raise funds through an IPO. Gloria Trust (GT) is a firm providing investment banking and brokerage services and will underwrite the issue. The issue is currently oversubscribed and one of GT's trust officers prorates the issue to each account holder expressing an interest. Beneficial family member accounts and suitable non- family member accounts are not given priority in the trade allocation. Has the GT trust officer allocated the Greenwhich trade fairly? A. Yes B. No, he has not considered suitable client accounts C. No, he has not considered beneficial family member accountsbec +o The GT trust officer has failed to allocate the Greenwhich trade fairly by failing to consider accounts for which the trade will be suitable. Standard Ill (B) Fair Dealing requires Members and candidates to treat all clients fairly during their investment actions and recommendations. By failing to give priority to suitable client accounts, he has violated the fair dealing standard as well as the suitability standard. By choosing not to allocate trades to beneficial family member accounts, the officer has not violated any standard. This is because these clients should not be treated equivalent fo regular fee paying family member accounts in which an employee does not hold a beneficial position. Study Session 1, Reading 2‘Question 67 (1D: 20790} | Feecback Notes Hussein Amin is an analyst covering South African equities at Denver Associates (DA), a U.S. based research firm. Amin's wife serves on the board of a South African company currently being covered by Amin as well as owns shares of the company’s stock. Her role in the company existed before Amin joined DA that is why he never felt the obligation to disclose this fact to his employer. Recently his wife has made frequent trips to South Africa and has written an email to Amin briefly mentioning that she is feeling extremely exhausted and the working environment has become hostile. Without being provided with any further information, Amin issues a sell recommendation on the South African stock. By issuing a sell recommendation, Amin has least likely violated: A. disclosure of conflicts. B. diligence and reasonable basis. C. communication with clients and prospects.Standard VI (A), Disclosure of Conflicts, requires members and candidates to make full and fair disclosures of all matters that may impair their independence and objectivity to clients, prospects and their employers. The executive position his wife holds at the South African company coupled with her stock position may impair his judgment of the company he covers and requires disclosure to his clients, prospects and employer. By basing his sell recommendation solely on the wife's email, which does not provide any clear indication of the company's state of affairs, Amin's recommendation lacks an adequate and reasonable basis and is in violation of the Standard, V (A) Diligence and Reasonable basis. Amin is not in violation of the Standard V (B), Communication with Clients and Prospective Clients. Study Session |, Reading 2‘Question 68 (1D: 20791) | Feecback — Notes Peter O' Toole has recently left a large investment bank to develop his own investment fund, Beata. Toole’s expertise lies in developed market equities and corporate bonds. His team will include Roy Thomson, a friend and expert in REIT securities. He distributes a prospect to prospective clients which states, “The management of Beata welcomes you to invest with us. We specialize in developed market equities, fixed income securities, and REIT securities. Although we do not guarantee performance results, we can assure that you will not be disappointed.” By distributing the brochure, Toole has least likely violated the CFA Institute Standards of Professional Conduct by: A. providing performance guarantees, B. misrepresenting Beata’s specialization with respect to REIT securities. C. misrepresenting Beata's specialization with respect to fixed income securities.Although Toole does not explicitly guarantee performance he indirectly assures clients that the fund will meet their expectations; thus, he is in violation of Standard III (D) Performance Presentation, which prohibits members and candidates from guaranteeing performance. Also Toole is in violation of Standard | (C) Misrepresentation by misrepresenting his expertise in fixed income securities. Toole only specializes in corporate bonds, a category of fixed income securities; fixed income securities include securities beyond corporate bonds such as mortgage-backed securities, Treasury bills and other securities. Toole has not violated any standard by disclosing Beata's expertise in REIT securities. Study Session |, Reading 2‘Question 69 (ID: 20792} | Feecback | Notes Henry Cooper, CFA, is a sell-side analyst serving Arial Investments (Al). Cooper is writing a research report on a mining company. In the past, Cooper held an executive position in the company. He left the position prior to joining Al but maintains a good personal relationship with Al's management. Since he no longer holds an executive position, Cooper has not shared this information with his supervisor. Cooper is most likely in violation of the CFA Institute Standards of Professional Conduct concerning: A. loyalty to employer. B. disclosure of conflicts. C. additional compensation arrangements. c te Cooper is in not in violation of Standard IV (A) Loyalty. His past involvement and present relationship will impair his independent and objective judgment and requires disclosure. By failing to disclose the conflict of interest with his supervisor, Cooper is in violation of Standard VI (A) Disclosure of Conflicts. However, Cooper is not in violation of the standard conceming additional compensation arrangements because he does not receive any compensation nor does he possess stock ownership in the company. Study Session J, Reading 2‘Question 70 (1D: 20793) | Feecback — Notes Cassandra Payne is a candidate of the CFA Program. She serves as a research assistant at Tidara Associates (TA), an investment bank. For her first assignment, Payne is asked to write a research report that aims to forecast the possibility of a rise in interest rates and its impact on the property market. She gathers information from several analysts’ reports, property dealer websites, and articles from newspapers that provide summaries of financial reports; however, she does not access the original financial reports discussed. On the last page of the research report, she cites the websites, analyst reports and the newspaper articles as her research sources. Is Payne is in violation of the CFA Institute Standards of Professional Conduct? A. No B. Yes, she is not required to cite the dealer websites C. Yes, she has not cited the original financial reportsPayne isin violation of Standard | (C), misrepresentation, because she has not cited the financial reports appropriately. To avoid violation, Payne should have cited either the original financial reports discussed in the newspaper articles or both the newspaper articles and the financial reports. By solely relying on the newspaper articles, Payne runs the risk of misrepresenting the facts of the financial reports. Payne is required to cite the dealer websites as well as the analysts’ reports used. Study Session |, Reading 2 ‘Question 71 (ID: 20794) | Feecback NotesAcandidate of the CFA program is working as a research assistant and is part of a team preparing a group research report. The group is divided on the final rating to give the stock being covered. A majority of the group believes a buy rating to be appropriate while the candidate believes a hold rating should be issued. All members have a reasonable and adequate basis for their recommendations. The best course of action for the candidate to take is: A. decline to be associated with the report. B. continue to be associated with the report. C. challenge the opinions of the group's members. When a research report is a group effort, different analysts may have their own opinions and it is not necessary for these opinions to match. Given that the analysts have a reasonable and adequate basis for their recommendations, the best course of action is to continue to be associated with the report. Study Session J, Reading 2‘Question 72 (1D: 20795) || Feecback — Notes Chantal Pierre owns a large investment fund in Swami, a country with an emerging market. She is Swami's largest dealer of developed market equities. When Pierre places a buy order for her fund, the price of developed market equities significantly rises prohibiting many local investment funds from purchasing the securities. Similarly, when Pierre places a sell order, equity prices significantly decline. In this way, Pierre always manages to obtain the best price for her transactions. Many traders have complained that Pierre is exploiting her position in developed market equities and that her fund's frequent trades have significantly increased equity market volatility over the past year. Are Pierre's actions in violation of the CFA Institute Standards of Professional Conduct? A. No B. Yes, she is front running the fund's trades C. Yes, she is manipulating the market using her dealer positionStandard II (B) Market Manipulation prohibits members and candidates from engaging in practices that artificially inflate trading volume with the intent to mislead participants. Pierre is not manipulating the market through her fund's trades. This is because her dominant position will naturally have a significant effect on the market regardless of the type of trades she undertakes. Her intent is not to mislead the market. There is no evidence of Pierre front running her fund's trades. Study Session J, Reaaing 2 ‘Question 73 (ID: 20814) | Feecbock Notes Which of the following actions least likely represent a violation of the CFA Institute Standards of Professional Conduct? A. An investment banker lacks complete knowledge of his country's security trading laws 8. A manager discloses illegal activities concerning a former client to his company's attorney C. A CFA charterholder does not disclose that he holds an MBA degree to his employerSituation A does not represent a violation. Standard | (A), Knowledge of the Law, requires members and candidates to understand and comply with the laws, rules, and regulations which govern their professional activities. The standard requires members and candidates to understand the laws and regulations of the countries or regions in which they conduct business. However, members and candidates are not required to become experts of the law. By not possessing full knowledge of his country's trading laws the investment banker is not in violation. Situation B represents a violation of Standard Ill (E) Preservation of Confidentiality. The standard requires members and candidates to keep information about current, former and prospective clients confidential unless the information concerns illegal activities on the part of the client, disclosure is required by law, or the client or prospective clients permit disclosure. By disclosing the illegal activities to his company's attorney, the manager is in violation of this standard. Situation C represents a violation of the CFA Institute Standards of Professional Conduct, | (C) Misrepresentation and IV (A) Loyalty. The charter holder has misrepresented his qualifications and he may be denying his employer the advantage of his skills and ability as an MBA. Study Session 1, Reading 2‘Question 74 (ID: 20815) | Feecback | Notes Mark Strong is a CFA charterholder serving as a sell-side analyst in a firm providing investment banking and corporate finance services to institutions. Strong has referred several clients to the firm's finance division. Some of these clients include institutions that he has covered in the past. In return, Strong earns a bonus for each client referred. Since Strong is compensated by a department within his firm, he does not disclose the arrangement to his clients. Is Strong in violation of the CFA Institute Standards of Professional Conduct? A. No B. Yes, Strong has misrepresented his role at the firm C. Yes, Strong is required to disclose the referral arrangement to clients and prospectsStandard VI (C) Referral Fees requires members and candidates to disclose the compensation or consideration received from referral arrangements to clients, prospects and employers. By failing to disclose the arrangement to clients and prospects, Strong has violated this standard. There is no evidence which indicates that Strong has misrepresented his role at the firm. Study Session 1, Reading 2‘Question 75 (1D: 20816) | Feecback Notes Walter Reid, CFA, works for Sun Associates, an investment advisory. SA is situated in a country with laws requiring investment managers to report any stock transaction which exceeds $10 million to the concerned regional market regulator. These laws aim to control the degree of market volatility. One of Reid's clients has placed a $12 million order to purchase shares of a company's stock. Due to his personal relationship with the client, Reid discovers that the funds have been acquired through fraudulent means. To preserve the confidentiality of the matter, Reid does not report the transaction to the regulator. Has Reid violated any CFA Institute Standards of Professional Conduct? A. No, he has preserved client confidentiality B. Yes, he failed to report the transaction to the regional market regulator C. Yes, he failed to disclose his personal relationship with the client to his employerReid has violated Standard | (A]-Knowledge of the Law, by not reporting the transaction to the market regulator. The standard requires members and candidates to understand the laws and regulations of the countries or regions in which they conduct business. Members and candidates must comply with the strictest laws and regulations. Given that the country's laws are stricter than the CFA Institute Standards with respect to the reporting of transactions, Reid has a duty to abide with these laws. However, Reid must not disclose the source of the funds to the regulator to avoid violating standard III (E) Preservation of Confidentiality. There is no evidence which indicates that Reid has not disclosed his personal relationship with the client fo his employer. Therefore Reid has not violated any standard in this regard. Study Session 1, Reading 2 Question 76 (ID: 20817} | Feecback NotesTina Marshall is a portfolio manager at a renowned asset management firm. During weekends, she offers yoga and Pilates sessions. She charges a significant fee for these sessions but does not disclose details of the arrangement to her employer. Rita Evans, one of Marshall's clients, has recently Joined these sessions based on a recommendation from her mother. At her first session, Evans is surprised to see her manager as her instructor. During one of her breaks, Evans shares the news of receiving $100,000 as inheritance from her deceased uncle's estate. The next day Marshall discusses the details of the Evans incident, including the inheritance, with a colleague. Marshall has most likely violated the CFA Institute Standards of Professional Conduct by: A. accepting Evans as a customer. B. discussing details of the incident with her colleague. C. failing to disclose the details of the sessions to her employer.Marshall has not violated the CFA Institute Standards by accepting Evans in her sessions. Evans has not been offered a special fee arrangement despite her relationship with Marshall. Furthermore, Marshall has not violated any standard by failing to disclose the details of these sessions to her employer. She provides these sessions during her spare time and this does not interfere with her duties to her employer. However Marshall is clearly in violation of Standard Ill (E) Preservation of Confidentiality. This is because she has shared confidential client information, particularly the receipt of the $100,000 inheritance, with her colleague. Study Session 1, Reading 2 ‘Question 77 (ID: 20818) | Feeaback NotesRicardo Trust (RT) is the trustee of a corporation's defined benefit pension plan. A majority of the employees covered by the plan are three years awoy from retirement. RT's chief investment officer (CIO), Miguel Donald, has allocated high tisk emerging market equities to the plan's pension portfolio despite the investment mandate exclusively prohibiting allocation to high risk securities. Donald justifies his decision by stating that the low correlation between emerging equities and existing domestic equity stocks will lower the portfolio's volatility and bring diversification benefits. He also states that investments should be viewed in context of the entire portfolio. By allocating emerging market equities to the plan's investment portfolio, Donald has most likely violated: A. none of the standards. B. the standard relating fo suitability. C. the standard relating to diligence and reasonable basis.When managing an investment portfolio to an investment mandate, Standard Ill (C)-Suitability, expressly requires members and candidates to make recommendations and take investment actions that are consistent with the objectives and constraints of the portfolio. The investment mandate has expressly disallowed the inclusion of high risk securities. By allocating these securities to the plan's investment portfolio, Donald is in violation. Standard V (A), Diligence and Reasonable Basis, requires members and candidates to exercise thoroughness, independence, and diligence in analyzing investments, making investment recommendations, and taking investment action. The standard also calls for a reasonable and adequate basis for any investment action, recommendation or analysis. There is no evidence of this standard being violated by Donald. Study Session 1, Reading 2 ‘Question 78 (1D: 20819} | Feecbock NotesBlake Marshall, CFA, is a research analyst serving Research Inc., an equity oriented research firm. Marshall is preparing a report on the timber industry in Brazil. During one of his visits to Titania, a Brazilian timber corporation, he overheard site workers complaining of the poor working conditions and their intentions to organize a strike for a pay rise. The same evening. Marshall decides to conclude his report with a sell rating for Titania and justifies his report by stating that a worker strike could cripple productivity and reduce output. By issuing his research report, Marshall would most likely violate CFA Institute Standards of Professional Conduct relating to: A. misconduct. B. diligence and reasonable basis. C. material nonpublic information. Standard V (A) Diligence and Reasonable Basis requires members and candidates to exercise thoroughness, independence, and diligence when conducting investment analysis, making investment recommendations, and taking investment action. The standard also calls for a reasonable and adequate basis for any investment action, recommendation or analysis. By basing his recommendation solely on the discussion between site workers, Donald lacks a reasonable and adequate basis for his recommendation. He should carry out a thorough investigation by interviewing Titania's staff, competitors, and its competitors. According to Standard Il (A}-Material Nonpublic Information,members and candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information. A discussion between site workers and their plans to launch a strike is nonmaterial even if it is nonpublic. Standard | (D], Misconduct, is not violated because there is no evidence of Marshall engaging in a fraudulent or dishonest behavior. Study Session 1, Reading 2‘Question 79 (ID: 20821) | Feecback | Notes Samantha Davis, CFA, has managed the account of Jill Kyle for almost five years. Due to excellent account performance in the current year, Kyle rewards Davis with two exclusive front row tickets to an opera in Sydney. Travel costs will be fully paid by Kyle, and Davis will stay at Kyle's studio apartment. Davis accepts the offer and informs her employer upon returning from her trip. Are Davis's actions in compliance with the CFA Institute Standards of Professional Conduct? A. Yes B. No, the offer compromises her independence and objectivity C. No, she should have informed her employer before accepting the offer Davis's actions are not in compliance with the Standard | (B)- Independence and Objectivity, because the compensation is excessive and may influence Davis's impartiality towards Kyle's account. Exclusive front row tickets to an opera are generally difficult to obtain and would not be available to everyone. Furthermore, by fully paying for Davis's travel, Kyle's offer cannot be viewed as ordinary. Informing her employer of the offer will not change the fact that her actions violate this standard. Study Session J, Reading 2‘Question 80 (1D: 20822) | Feeaback | NolesMartha Lopez is a portfolio manager at Hampshire Bank (HB), a local investment bank in Florida. HB’s policy is to allocate trades fairly and equitably to all client accounts. Lopez trades small-cap and mid-cap stocks on behalf of her clients. Following a severe decline in small-cap stocks, Lopez significantly reduces the allocation to these stocks from portfolios most sensitive to losses first followed by other client accounts. She also decides to increase the allocation to mid- cap stocks for all client accounts. She fully discloses the actions to her clients after she completes the trades. Lopez has least likely violated the CFA Institute Standards of Professional Conduct relating to: A. fair dealing. B. loyalty, prudence and care. C. diligence and reasonable basis.Lopez has not acted fairly with all her client accounts by giving priority to the most sensitive client accounts when selling small- cap shares. Thus, she is in violation of the fair dealing standard. Lopez has not violated the standard concerning loyalty, prudence and care. Her actions are taken in the best interests of clients and she has not placed her firm's or her own interests before her clients’ interests. There is no reasonable and adequate basis for Lopez's decision to increase the allocation to mid-cap stocks. Lopez should conduct a thorough analysis before increasing the allocation to this stock category. study Session 1, Reaaing 2 ‘Question 81 (1D: 20823) | Feeaback NotesGene Carter, CFA, manages an investment fund comprising of high net-worth client accoun's. Carter directs her trades to Hogwart Associates (HA), a broker-dealer firm. HA provides superior quality brokerage services but its fees are higher than what most brokers charge in the market. To encourage Carter to place more trades with HA, the firm offers Carter a 5% bonus on any accounts placed with the broker which are worth $100,000 or more. Carter uses the bonus money to improve his fund's advertising scheme. He discloses HA's offer to clients and prospects but does not disclose how he utilizes the bonus as they are employed for improving the fund and not for personal benefit. Carter has most likely violated the CFA Institute Standards of Professional Conduct relating to: A. loyalty to employer. B. loyalty, prudence and care. C. additional compensation arrangements.Carter has most likely violated Standard Ill (A) Loyalty, Prudence and Care by using the bonus money to benefit his own fund rather than for the benefit of clients. He should have employed the funds to purchase goods or services that benefit the clients. By not disclosing this fact to clients, Carter has further violated this standard. There is no evidence of Standard IV (A) Loyalty or Standard IV (B) Additional Compensation Arrangements being violated. The refunded money does not represent additional compensation and thus the latter standard does not apply. Study Session |, Reading 2 ‘Question 82 (1D: 20824) | Feecback | NotesSentosa Limited (SL) is a firm providing investment banking and research services to individual high net-worth clients. Jacques Monipellier is a SL's senior research manager and has delegated the task of preparing a research report on a railroad construction firm to Jules Devilries, a junior analyst. With little knowledge of the construction firm, Devilries accesses information conceming its current projects and forecasted revenues from SL's client database. Relying on the information in the database Devilries issues a ‘sell’ recommendation. Upon the release of the report, a representative from the construction firm contacts Devilries claiming that one of the projects discussed in the report had been terminated several years ago and that the exclusion of this project should alter Devilries' recommendation. Which of the following CFA Institute Standards of Professional Conduct are least likely being violated? A. Responsibility of supervisors B. Independence and objectivity C. Diligence and reasonable basisStandard IV (C) Responsibility of Supervisors is being violated because Montpellier did not verify that the information stored in the database is up to date. Even if Montpellier had delegated the task of preparing the research report to Devilries, he still remains responsible for ensuring that analysts use a reasonable and adequate basis, carry out the necessary diligence in their analysis, and ensure the accuracy of information used for investment analysis. Montpellier has not implemented the necessary measures to ensure this violation does not take place. Standard V (A)-Diligence and Reasonable Basis, requires members and candidates to conduct thoroughness and diligence in their investment analysis and recommendations. Devilries has not ensured that the information in the firm's database is accurate and up to date and is thus in violation of this standard. Furthermore, Devilries should have considered information from other sources. By solely relying on the database and not carrying out a thorough investigation of the construction firm she is in violation of this standard. There is no evidence of Devilries acting in a manner which compromises her independence and objectivity. Study Session 1, Roading 2 ‘Question 83 (ID: 20825) || Feecback NotesAccording to Standards of Practice Handbook which of the following statements is most accurate regarding material nonpublic information? When in possession of material nonpublic information, a firm should: A. ban all types of propriety activity. B. make a broad distribution of the restricted list. C. ban arbitrage trading for securities placed on a watch list. +e A prohibition of all types of propriety trading when in possession of material nonpublic information is not appropriate. However, in the case of risk-arbitrage trading a trading prohibition must be considered as the potential for illegal profits is greater. The most prudent course of action for firms is to suspend arbitrage activity when a security is placed ‘on the watch list. Securities should be placed on a restricted list when a firm possesses material nonpublic information. However, a broad distribution of this list will trigger the type of trading this list was intended to avoid. Study Session 1, Reading 2‘Question 84 (ID: 20827} Feedback Notes According to the Standards of Practice Handbook, which of the following statements is most likely correct regarding priority of transactions? Members and candidates: A. should pre-clear their participation in IPOs. B. should not be permitted to trade for three days before and one day after placing a client's trade. C. are not permitted to undertake personal transactions in accounts for which they are a beneficial owner.Standard VI (B]-Priority of Transactions, encourages members and candidates to pre-clear their participation in IPOs. The standard recommends that investment personnel involved in the investment decision-making process should establish blackout periods prior to trading for clients to prevent front- running by managers; however, the duration and severity of the blackout period is contingent on the type of firm (the duration has not been specified by the CFA Institute). Additionally, members and candidates are permitted to undertake personal transactions in accounts for which they are a beneficial owner only after their clients have had an adequate opportunity to act on a recommendation Study Session 1, Reading 2Question 85 (1D: 20848) | Feecback — Notes Jorge Neal, CFA, is a bond portfolio manager for institutional investors at Alvin Financials. Neal is an enthusiastic employee and dedicates much of his spare time working as an environmental activist with the local environmental society. Neal has never had the opportunity to tell his employer about his participation as an environmental activist. Neal conducted a survey to determine the environmental effects of the government's proposed projects on botanical resources. Neal was arrested for providing email addresses he received on that survey to a local firm engaged in environmental cleaning products. According to the Standards of Practice Handbook, Neal: A. did not violate any Standard. 2 . violated Standard FD 'Misconduct". C. violated Standard FD ‘Misconduct' and Standard IV- ‘Loyalty’.bec +o Neal violated Standard I-D ‘Misconduct’ because he engaged in intentional conduct involving fraud for providing personal data gathered under an environmental survey for promotional campaigns to a local firm. Study Session 1, Reading 2‘Question 86 (1D: 20849} | Feecback Notes Bill Hardy works for Dwight Inc. and manages Lance Hogan's family trust portfolio which is designed mirror the $&P-500 index fund. Hardy's supervisor who is also a director of his firm's research department forecasted a decrease in interest rates and recommended Hardy to invest some portion of clients’ funds in fixed income instruments as it may increase their returns and also generate commission for the firm. Hardy called Hogan only to find him out of town at the time. Hardy left a message about investing a portion of trust funds in fixed income instruments. The next day, the local government announces a lowering of interest rates and Hardy earns huge profits on Hogan's investments. Hardy has least likely violated the CFA Institute Standards of Professional Conduct relating to: A. Suitability. B. Loyalty, Prudence and Care. C. Diligence and Reasonable Basis. +tHardy is responsible for managing the Hogan's trust according to a specific mandate i.e. to replicate the $&P-500 index. By not investing accordingly he violated the CFA Institute Standards of Professional Conduct relating to Loyalty, Prudence and Care and Suitability. There is no any evidence that he violated the standard relating to diligence and reasonable basis as the firm's research depariment properly researches and recommends interest rate movements. Study Session |, Reading 2‘Question 87 (ID: 20850) | Feecback Notes When communicating a brief investment performance presentation to clients, members or candidates: A. must include reference to the limited nature of information provided. B. must make available to clients the detailed information supporting that communication. C. must make available to clients and prospects the detailed information supporting that communication on request. According to Standard IlI-D ‘Performance Presentation’, if the presentation is brief, member or candidate must make available to clients and prospects on request the detailed information supporting communication. Best practice (strong recommendation) dictates that brief presentation include a reference to the limited nature of the information provided.Study Session 1, Reaaing 2 ‘Question 88 (1D: 20852) | Feecback NotesAnton Lewis is writing a report on Hall Care Inc.(HCl), a medical equipment manufacturer. By studying financial reports and operations of HCI and its competitors, Lewis determined that the outlook of HCl is positive and its stock is undervalued. For further information, Lewis planned a meeting with his family doctor. While waiting for him in the hospital cafeteria, Lewis overheard a doctor complaining about HCI's products. Lewis immediately returned to his office and extended his research work to better understand the problems and risks associated with HCl's products. Two days later Lewis released a “sell" recommendation to the public. Lewis: A. violated Standard V-A ‘Diligence and Reasonable Basis’. B. violated Standard I-B ‘Independence and Objectivity’. C. was in full compliance according to the Standards of Practice Handbook. According to Standard V-A ‘Diligence and Reasonable Basis’ opinion of a customer only is not an adequate basis for Lewis to change his recommendation. As Lewis conducted further research and investigation to understand the problems and risks associated with them as identified by a customer, so his change of opinion is justified and is appropriate. Study Session 1, Reading 2 ‘Question 89 (ID: 20853) | Feecback — NotesAccording to the Standards of Practice Handbook, fulfilling the local regulators’ requirements related to record retention: A. satisfies the requirements of Standard V-C, ‘Record Retention’. B. does not relieve them from complying with Standard V- C, ‘Record Retention’ C. satisfies the requirements of Standard V-C, ‘Record Retention’ only if records are maintained for at least seven years. Local regulators often impose requirements on members, candidates or their firms, related to record retention that must be followed. Fulfilling such requirements also may satisfy the requirements of Standard V-C, but members or candidates should explicitly determine whether it does. stugy Session J, Reaging 2 ‘Question 90 (1D: 20854) | Feecback | NolesKarl Flynn is a senior research analyst at Sparks Investment. The firm has offered a supervisory responsibility to Flynn. Before accepting the responsibility Flynn came to know that on some areas compliance procedures are not adequate. What would be the most likely action of Flynn according to Siandards of Practice Handbook? A. Flynn should accept the responsibility and should make all reasonable efforts for appropriate compliance procedures. B. Flynn should decline in writing to accept supervisory responsibility until the firm adopts reasonable compliance procedures. C. Flynn should accept the responsibility but should not delegate the authority until the firm assures reasonable compliance procedures. c te In the absence of compliance procedures or due to an inadequate compliance system, a member or candidate should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures. Study Session 1, Reading 2‘Question 91 (1D: 20855) | Feedback Notes Helen Jenkins is an experienced independent research analyst who specializes in making recommendations on emerging market equities. She is writing a report on Moreno Inc., an emerging food and drug retailer. On analyzing Moreno's financials, Jenkins found that the company is anticipating a lower amount of impairment losses. On the basis of that information, Jenkins wrote in her report, “Moreno is expecting a significant increase in profitability in the next quarter, as their impairment losses are negligible”. She also disclosed her personal holdings in Moreno's stocks. Two days later stock price increased substantially and Jenkins sold her holdings of Moreno's stock. Jenkins has most likely violated CFA Institute Standards of Professional Conduct relating to: A. Market Manipulation and Misrepresentation B. Independence and objectivity and Misrepresentation C. Market Manipulation and Communications with clients and prospective clients. +eJenkins violated Standard V-B "Communication with clients and prospective clients” by failing to distinguish facts from opinions in the presentation of investment analysis and recommendations. The retailer reported lower impairment losses but it was Jenkins' opinion that Moreno's profitability will be increasing next quarter due to the reduction. Jenkins has also violated Standard |I-B “Market Manipulation" by issuing overly optimistic projections through information- based manipulation. Study Session J, Reading 2 ‘Question 92 (ID: 20857} | Feeaback — NotesJane Terry is a research analyst at Victor Investments, a large investment management firm with separate investment banking and research departments. Terry follows all the major firms in the mining industry including Todd Minors Inc. The investment banking department of Victor Investments is involved in a deal with Todd Minors Inc. and Terry has provided limited assistance to investment banking department. Under such circumstances Terry must be treated as a (n}: A. corporate insider of Todd Minors Inc. B. research analyst at Victor Investments. C. investment banker of Victor Investments. According to Standard II-A ‘Material Non-Public Information’, an analyst who follows a particular company may provide limited assistance to the investment bankers when the firm's investment banking department is involved in a deal with the company. That analyst must consider as though (s) he is an investment banker and the analyst must remain on the invesiment banking side of the wall until any information (s) he learns is publically disclosed. Stuay Session J, Reading 2 ‘Question 93 (1D: 20858) | Feecback — NotesDenton Inc. has been in existence since 2001 and has decided to comply with the GIPSs in 2012. Initially, the firm must present GIPS compliant annual investment performance fora minimum of: A. 5 years. B. 10 years. Cc. 11 years. A firm is required to initially present at a minimum 5 years of annual investment performance that is compliant with GIPS standards. Sludy Session 1, Reaaing 2 ‘Question 94(ID:20861} | Feecback Notes Dian Owens, CFA, works as an analyst in Hawk Securities, an investment-banking firm. The firm is raising equity capital on behalf of SWK Inc. Owens notices her supervisor has underestimated the amount of impairment losses and overestimated the unrealized gains on SWK's financials. Owens calls her uncle and stops him from participating in the IPO of SWK Inc. Owens has least likely violated the CFA Standard of Professional Conduct relating to the: A. Knowledge of law (Standard I-A). B. Disclosure of conflicts (Standard VIA). C. Material nonpublic information (Standard II-A).bec +e cal Owens has violated Standard I-A (Knowledge of Law). Knowing that financials of SWK Inc. are misleading, she should report the problem to the supervisory persons in her firm. If the employer does not take actions to correct the financials she should not only dissociate herself from such activity but also consider leaving the firm. Owns has also violated Standard II-A (Material Non-public Information) on the basis of material non-public information, inducing her uncle not to participate. Study Session 1, Reading 2‘Question 95 (ID: 20842) || Feecback Notes Julia Ruiz manages portfolios for retirees at Kim & Ford Investments. Richard Hancock is one of her high net worth clients whose account is being managed by Ruiz for almost one decade. Last year Hancock offered Ruiz a one-month stay on his beach house on earning a return above 18% on his portfolio. With great efforts Ruiz managed to earn nearly 18.5% for all her clients including Hancock. Hancock threw a grand party and invited the whole management of Kim & Ford Investments. At the party, Ruiz disclosed her reward regarding her one-month stay to her employer. Is Ruiz in compliance with the CFA Standards of Practice Handbook? A. Yes. B. No, she has violated Standard Ill-B ‘Fair Dealing’. C. No, she has violated Standard IV-B ‘Additional Compensation Arrangements’. Standard IV-B ‘Additional Compensation & Arrangements’ requires members or candidates fo obtain written permission from their employer before accepting compensation including direct compensation from the client. Disclosure allows employer to consider the outside arrangements when evaluating the actions and motivations of employee. Ruiz failed to make a timely disclosure to her employer regarding the performance reward offered by Hancock.Shucy Session 1, Reaaing 2 ‘Question 96 (1D: 20863) | Feecback NotesAccording to Standards of Practice Handbook, which of the following standards is violated when an analyst's report fails to distinguish between facts and opinions? A. Misrepresentation B. Performance Presentation C. Communication with Clients and Prospective Clients +t Standard V-B “Communication with Clients and Prospective Clients" requires that opinion be separated from fact. Violations occur when reports fail to separate the past from the future by not clearly indicating that they are not facts but opinions subject to future circumstances. Study Session J, Reading 2 Question 97 (ID: 20864) | Feecback NolesWilbert Dalton, was quite hopeful for his Level Ill exam result but after failing to pass the exam he told his colleagues "I believe exam developers have been increasing the difficulty level every year and examiners are overly strict in their grading process.” Hugh Morales, one of his colleagues, told Dalton “In the past two consecutive attempts to pass Level Ill, including the recent exam, | have observed thai the CFA Institute is increasing the weight of derivatives in the exam.” Has Dalton or Morales violated Standard VII-A ‘Conduct as Members and Candidates in CFA Program'? A. No, because both shared their opinions regarding the exam. B. Yes, because Dalton undermined the integrity of the CFA exam process. C. Yes, because Morales disclosed confidential information with respect to the CFA exam. +t Morales violated Standard VII-A by disclosing specific exam detail. When expressing a personal opinion a candidate/member is prohibited from disclosing content specific information including any actual exam question and the information as to subject matter covered or not covered in the exam. The standard does not prohibit a member or candidate from expressing opinions regarding the CFA program or CFA Institute. Members are free to disagree and express their disagreement with CFA Institute on its policies, procedures or any advocacy positions taken by the organization.Study Session 1, Reaaing 2 ‘Question 98 (ID: 20879} | Feecback Notes Julia Long has passed all three levels of the CFA program and may be eligible for a CFA charter upon completion of the required work experience next month. On her resume, she has mentioned her name as Julia Long, CFA (Level Ill passed). Is Long in compliance with the CFA code and standards? A. Yes, as she has passed all the three levels. B. No, as she is not eligible to write CFA with her name. C. No, as she is not required to write (Level Ill passed) along with the CFA designation. c te A candidate, who has passed Level Il but has not received his /her charter, cannot use the CFA or Chartered Financial Analyst along with his/her name. Study Session J, Reading 2‘Question 99 (1D: 20880) | Feecback | Notes Campbell Investments, an investment management firm, is a market maker for Allan Inc. and also possesses material non- public information of the stock of Allan Inc. What would be the most recommended action with respect to Campbell's proprietary activities? A. Firm should prohibit all proprietary activities of Allan Inc.'s to maintain confidentiality. B. Firm should withdraw from market-making activities of Allan Inc. as it holds material non-public information. C. Firms should take only the contra side of trade in its market making activities to remain passive in the stock Allan Inc. +e A prohibition of all types of proprietary activity when firm comes into possession of material non-public information is not appropriate. Firms that continue market making activities while in possession of material non-public information should instruct their market makers to remain passive to the market by only taking the contra side of unsolicited customer trades. sluay Session J, Reaaing 2‘Question 100 (1D: 20882) | Feedback | NotesKevin Stewart, CFA. is a portfolio manager at Zachary Advisors managing individual accounts of Angel Corp.'s employees. Alexis Ryan, 40-years old, joined Angel Corp. a month ago. In a meeting with Stewart, Ryan discusses his high-risk tolerance, large asset base and his investmenis in synthetic investment vehicles and derivative products at Stone Advisors. In forming an investment policy statement for Ryan, Stewart is responsible for assessing the suitability of investments: A. for funds provided at Zachary Advisors. B. for funds provided at Zachary Advisors and Stone Advisors C. ina manner consistent with the average employee account of Angel Corp. Stewart is responsible for assessing the suitability of Ryan's total investments on the basis of information provided to him. Ryan provided a full financial picture including funds managed by Stone Advisors and the type of investmenis. Therefore, Stewart should judge the suitability of investment in the context of Ryan's total portfolio. Study Session J, Reading 2Question 101 (1D: 20883) | Feedback | NotesJasmine Porter, CFA, is a highly regarded portfolio manager at Sebastian Advisors. Porter has been managing a fund known as Porter Fund for last 15-years by investing in stocks that give steady high dividends. Porter states in a brochure sent to potential clients, “As a CFA charter holder, | can achieve better performance results. | am hopeful that this year, my fund can achieve 25% return, but cannot guarantee it. However, based on my last 15-years of historical performance, Ican assure you that my fund will achieve at least 15% return before taxes." According to the CFA Institute Code of Ethics and Standards of Professional Conduct, Porter mast likely violated the standard concerning: A. performance presentation. B. responsibility as a CFA Institute member and candidate. C. performance presentation and responsibility as a CFA Institute member and candidate. Porter has violated Standard lll-E Performance Presentation by assuring 15% return and linking past performance with future performance. Porter has also violated Standard VII-B Reference to CFA Institute, the CFA designation and the CFA program. Standard prohibits promotional efforts that make promises or guarantees that are tied to the CFA designation. Study Session J, Reaaing 2‘Question 102 (ID: 20884) | Feedback | NotesRebecca Bowen is a private wealth manager at Denial Investments. She purchases 5-year bonds offered by MKT Inc. for her clients for whom the investment was suitable. The issue was oversubscribed at that time. Although she requested to purchase US $20,000 each, she only received a total of $65,000. On a pro rata basis, she purchases $10,000 for each of her six clients and remaining 5,000 shares for her husband's account. According to the CFA Institute Code and Standards of Professional Conduct, Bowen has violated the standard related to: A. suitability by purchasing an equal amount of shares for her clients. B. fair Dealing by purchasing less shares for her husband's account C. independence and objectivity by purchasing shares for her husband's account. +t Bowen has violated Standard |-B “Independence and objectivity" and “Fair Dealing by buying oversubscribed shares for her husband as this practice provide managers with the opportunity to make quick profits instead of their clients. Such practice is prohibited under Standard |-B and Standard III-B i.e. if issue is oversubscribed, members or candidates should forgo any purchase for themselves or their immediate families. Study Session J, Reading 2‘Question 103 (1D: 20885) | Feedback | Notes Frank Goodman manages many individual accounts for retirees and the Silver fund with a pure value mandate on behalf of Silver Line Corp.'s employees. Aaron Davis, who joined Silver Line a month ago, asked Goodman about investing in Silver Fund. Goodman immediately invested his money without knowing his return requirements and risk profile. Goodman forecasted that for the next six months, growth stocks are expected to achieve a better rate of return compared to value investing. He purchased some undervalued growth stocks for his individual client accounts, but did not make any changes fo the Silver Fund. According to the CFA Institute Standards of Professional Conduct, Goodman: A. did not violate any standard. B. violated the standards relating to suitability and fair dealing. C. violated the standard relating to diligence and reasonable basis.FUR os cc +e Silver Fund is managed according to a specific mandate, which requires value investing. Members or candidates who manage a specific mandate are not responsible for determining the suitability of the fund as investment for investors who are purchasing shares in the fund. Goodman has not violated any standard by not purchasing growth stocks for Silver Fund. Study Session 1, Reading 2‘Question 104 (ID: 20886) | Feedback | Notes Bert Moreno owns a research and consulting company and occasionally works as a sell side research analyst for Hunt Corp. Moreno has an arrangement with Hunt Corp. in which he accepts a flat fee for his report. Hunt Corp. also offered Moreno outstanding stock options that are not part of any compensation package or linked to any recommendation. Moreno did not realize the stock options at the time he published his research report. Moreno: A. should disclose in his report, the amount and expiration date of stock options B. must disclose in writing to his clients, the stock options and fee arrangement by Hunt Corp. C. must not accept the stock options offered by Hunt Corp. unless he obtains a written consent from his clients.According to the recommendations of Standard VI-A “Disclosure of Conflicts,” members or candidates should disclose in their report as a footnote, the amount and expiration date of these options. Moreno is not required to disclose his arrangements to his clients. However, if he works for an employer, he must obtain written consent from his employer. Study Session 1, Reading 2Question 108 (ID: 20887) | Feedback | Noles If a firm is unwilling to permit dissemination of adverse opinions about a corporate client, members or candidates should not: A. encourage the firm to remove the controversial company from the research universe. B. putit on a restricted list so that firm disseminates only factual information about the company. C. encourage the firm to disseminate the adverse opinions in a press release or in oral presentation. +t If a firm is unwilling to permit dissemination of adverse opinions regarding a corporate client, members or candidates should encourage the firm to remove the controversial company from the research universe and put it on a restricted list so that firm disseminates only factual information about the company. Study Session 1, Reading 2Question 106 (ID: 20888) | Feedback | Notes Carol Olson is an advisor for many individual and institutional accounts at Holmes Advisors Services. The firm announces a new buy recommendation for a stock of Chad Inc. with a statement that trading restrictions for firm's employees are now in effect for two trading days. After the announcement, Olson made calls to his institutional clients and to his uncle Beck who has an account with him, and advises them to buy the stocks. Later in the day, he sends buy recommendations through email to all of his clients. By the second day, after carefully checking that all the suitable clients have purchased shares, Olson buys a few shares for his own account. Olson has least likely violated the CFA Institute Standards of Professional Conduct relating to: A. suitability. B. fair dealing. C. priority of transactions. Olson has violated fair dealing by giving unfair advantage to some of his clients. Olson has also violated priority of transactions in not abiding by the rules of his organization. Clients and employers must have priority over investment transactions in which member or candidate is a beneficial owner. Study Session J, Reaaing 2‘Question 107 (1D: 20890) | Feedback | NotesMurray Blue is a large investment management firm located in Singapore. The employer has assigned Gerry Castillo, CFA, to work on Noon Group and handed over all research, models and worksheets related to Noon Group, which was prepared by a previous analyst. According to the Standards of Practice Handbook, under such conditions, which of the following statements is most likely correct? A. The firm may issue a report on Noon Group without attribution to the previous analyst. B. The firm can only issue a report on Noon Group if it properly acknowledges the work of previous analyst. C. Gerry Castillo cannot use the research, models and worksheets on Noon Group prepared by another analyst. Booc +e According to Standard I-C ‘Misrepresentation', members or candidates may use research conducted or models prepared by previous employees within the same firm without committing a violation. Similarly, the firm retains the right to continue to use the work completed after member or candidate leaves the firm. A member or candidate, however, cannot reissue a previously released report solely under his/her own name. Stuy Session J, Reaaing 2‘Question 108 (ID: 20891) | Feedback | Notes What would be a recommended action for a firm that has disclosed material non-public information in an analyst meeting? A. The firm should promptly issue a press release. B. The firm should not act on the information for at least 5- working days. C. The firm should promptly issue a notification to the analysts for not taking any action until the information is disseminated.According to Standard I-A ‘Material Non-Public Information’, companies should consider issuing press releases prior to analysts meetings and conference calls. If material non-public information is disclosed for the first time in an analyst meeting or call, the company should promptly issue a press release. Study Session J, Reading 2 ‘Question 109 (1D: 20892) | Feedback | NotesMarvin Beck manages high net-worth accounts in Patel Capital Management. One of his clients is Oren Bates for whom Beck manages a high growth equity account. For his analysis, Beck relies on a third party research firm that conducts research only on high growth firms. Beck also preferred to use the services of Nunez Brokerage for all of his clients. Nunez charges a slightly high commission, but offers a variety of valuable research and models on complex bonds structures and fixed income instruments to benefit his clients. With reference to the account of Oren Bates, is Beck in compliance with the CFA Institute Code and Standards of Professional Conduct? A. Yes he is in compliance with the Code and Standards. B. No, he has violated Standard V-A (Diligence and Reasonable Basis) C. No, he has violated Standard I-A (Loyalty, Prudence and Care) +tBeck has violated Standard III-A ‘Loyalty, Prudence and Care’. Brokerage commission is the asset of the client and should only be used for the benefit of the client. Beck prefers Nunez Brokerage which charges a high commission and provides data and models that benefit only for those clients who have invested in fixed income instruments. The client brokerage does not benefit Oren Bates and other clients who have equity accounts only. Reliance on third party research is not a violation unless member has reason to suspect their ability and competence. Study Session |, Reading 2 Question 110 (1D: 20893) | Feedback | NotesCyrus Wilkins is writing a research report on Wall Food Inc. He gathered data from many resources including journals, press releases and oral presentations. In an informal meeting with Wall Food Inc.'s financial officer, he came to know that a firm has bought a plant with new technology that can increase production up to 2.5 times. The firm has not mentioned this information on its website. On his report, Wilkins provided a brief introduction and future outlook of Food industry. He prepared a detailed financial model which can forecast financial performance and expected stock value for the next five years. He gave it a buy recommendation on the basis of significant new technology and financial performance. Has Wilkins violated the CFA Institute Code and Standards of Professional Conduct? A.No, he is in compliance with CFA Institute codes and standards. B. Yes, he has violated Standard II-A “Material non-public information” C. Yes, he has violated Standard II-A “Material non-public information and Standard V-A Diligence and reasonable basis”Under a mosaic theory, an analyst gathers and interprets large quantities of information from many sources. Much of the information comes directly from company through contacting with corporate insiders including investor relations staff and financial officers. Similarly, Wilkins reached his conclusion on the basis of the information provided by financial analysts and other sources. If information is not available on the website, it does not mean that the information is non-public material information. The analyst may use significant conclusions derived from the analysis of public and nonmaterial information as the basis for investment recommendations ad decisions even if those conclusions would have been maierial inside information. Stugy Session J, Reading 2 ‘Question 111 (ID: 20874) || Feedback || Notes Felix Savage, CFA, owns a small brokerage firm and manages many individual accounts. One of his clients is Basilia Parrish whose business is located in Nauru, a smalll island in the south pacific with no securities laws and regulations. Both Savage and Panrish live in a country whose securities laws and regulations are stricter than codes and standards and states that law of locality where business is conducted governs. Savage must adhere to: A. laws of Nauru. B. the Code and Standards of Professional Conduct. C. laws of their home country.foc te |f a member resides in more strict (MS) country and does business in less strict (LS) country, MS-laws applies, but if it states that law of locality where business is conducted governs, than members must adhere to the Code and standards. Study Session 1, Reading 2 Question 112 (1D: 20895) | Feedback | NotesIgnacio Dawson is an investment advisor at Larson Securities Inc. Hubert Padilla, a high net worth client, offered Dawson a 2% profit sharing each year on achieving a return above 20%. When Padilla asked about brokerage, Dawson advises Padilla to shift his brokerage towards Willis Brokers as they are best in town in terms of pricing and service quality. When Padilla left, Dawson wrote an email to his employer regarding his compensation arrangement with Padilla. The next day Dawson received a cash check on the name of Larson Securities from Willis Brokers for introducing new client to them. Dawson has most likely violated Standard IV-B Additional Compensation Arrangements by: A. failing to disclose Padilla about Larson's arrangement with Willis Brokers. B. accepting Padilla's offer before obtaining permission from his employer. C. failing to disclose Padilla regarding his firm's arrangement with Willis and failing to disclose his profit sharing arrangement prior to obtain consent from employer. +eDawson has violated Standard IV-B “Additional Compensation Arrangements" by failing to obtain consent from his employer before accepting a profit sharing arrangement with Padilla. Dawson has also violated Standard VI-C “Referral Fees” by failing to disclose to Padilla his firm's referral arrangement with Willis Broker. He should have clearly mentioned his firm's arrangements such as disclosure, which could have caused Padilla to reassess Dawson's recommendation and make a more critical evaluation of Willis Broker's services. Study Session 1, Reading 2 Question 113 (ID: 21657) | Feedback | NotesDebbie Spears is a renowned financial analyst at Flexible Investing (FLIN), an asset management firm with a large client base in the U.S. Spears is admired for her expertise in the financial community and has gained a high standing amongst the top ranked analysis of the industry. Based on independent analysis, Spears changed her recommendation for the OXI Ltd.'s stock from ‘sell’ fo ‘buy’. Just now, Spears is preparing for an interview with Martha Webb, the host of a popular talk show and her client, where she plans to discuss her changed recommendation for the first time in public. Just before the interview she talks about the reasons underlying the altered recommendation with Webb, who quickly buys some OX! stock for herself. Has Webb most likely violated the CFA Institute Standards of Professional Conduct? A. No. B. Yes, because she traded based on material nonpublic information. C. Yes, but only because she did not give time for the information to be disseminated widely. Webb is a client of Spears. She has all the right to obtain early access of the information prior to publication. Hence, Webb's purchase of OXI's stock is not in violation of the Standards. Shucy Session 1, Reaaing 2 Question 114 (ID: 20705) | Feedback | NotesWhich of the following statement is most likely correct regarding GIPS compliance? Statement 1:“A composite must include all portfolios of a firm managed in accordance with a particular strategy.” Statement 2: “Only investment management firms that actually manage assets can claim compliance with the GIPS." A. Both statements are correct B. Only one statement is correct C. Both statements are incorrect Booc +e Both of the above mentioned statements are correct. A composite include all portfolios of a firm managed in accordance with a particular strategy. Only investment management firms that actually manage assets can claim compliance with the GIPS standards. Stugy Session J, Reaaing 3‘Question 115 (ID: 20730) | Feedback | NotesWhich of the following is most likely correct with respect to the application of GIPS? A. GIPS are voluntary standards applicable to investment managers and are developed to provide performance results to potential clients B. GIPS are involuntary standards applicable to investment managers and are developed to provide performance results to current and potential clients C. GIPS are voluntary standards applicable to investment management firms and are developed to provide performance results to current and potential clients +e GIPS are voluntary standards applicable to investment management firms and are developed to provide performance results to current and potential clients. study Session I, Reading 3Question 116 (ID: 20796) | Feedback | Noles Which of the following firms can most likely claim compliance to the GIPS standards? A. Commercial bank B. Software vendors C. Investment management firms Cis correct. Only investment management firms which actually manage assets can claim compliance to the standards. Ais incorrect. Commercial banks cannot be compliant. B is incorrect. Software vendors and software cannot be compliant. Study Session J, Reaaing 3 Question 117 (ID: 20797) | Feedback | NotesIn order to comply with the GIPS standards, portfolios should be selected for composites on a(n): A. ex-ante basis. B. ex-post basis. C. subjective basis. Firms may not subjectively select which portfolios to include and exclude from the calculation and presentation of each composite. Determining which portfolios to include should be done on an ex-ante basis; that is, selection should be made according to pre-established criteria. Study Session 1, Reading 3 ‘Question 118 (ID: 20881) | Feedback | Notes A composite is most likely defined as a (n): A. aggregation of one or more accounts managed by one portfolio manager or advisor in a GIPS compliant firm. B. collection of one or more portfolios managed according to similar investment mandate(s). C. asset weighted average value of all the portfolios collected under similar investment mandate or strategy.A composite is an aggregation of one or more portfolios managed according to a similar investment mandate, objective or strategy. Study Session J, Reading 3 Question 119 (ID: 20672) | Feedback | Notes Firms may link non-GIPS compliance performance to GIPS compliance performance provided that firms disclose periods of non compliance and only GIPS compliance performance is presented for periods: A. after 1% January 2000. B. before 1s January 2006. C. prior to 1 January 2000. Firms may link non-GIPS compliance performance to GIPS compliance performance provided that firm disclose periods of non compliance and only GIPS compliance performance is presented for periods after 1: January 2000. study Session J, Reaaing 4‘Question 120 ID: 20673) || Feedback | Notes Franklin Advisors is a GIPS compliant asset management firm. The total firm assets must: A. not include assets assigned to a sub-advisor. B. include assets assigned to a sub-advisor provided firm has discretion over his selection. C. include assets assigned to a sub-advisor provided sub- advisor also claim compliance with GIPS. Total firm assets must include assets assigned to a sub-advisor provided the firm has discretion over the selection of the sub- advisor. Stuay Session J, Reading 4 Question 121 (ID: 20674) | Feedback | NotesWhich of the following action of investment management firm complying with GIPS is voluntary? A. Listing discontinued composites for five years B. Independent 3¢ party verification C. Applying GIPS on a firm wide basis c +t Applying GIPS on firm wide basis and listing discontinued composites for at least five years are requirements of firms complying with GIPS. However 3° party verification is voluntary for GIPS complying firms. Stugy Session |, Reading 4 Question 122 ID: 20675) || Feedback | Notes Which of the following is least likely the section of GIPS? A. Input data B. Equity construction C. Presentation & reportingThe nine sections of GIPS are: 0. Fundamentals of compliance 1. Input data . Calculation methodology Composite construction . Disclosure . Presentation& reporting . Real estate . Private equity ONAWR WH . Wrap fee/Separately managed accounts (SMA) portfolios Study Session J, Reaaing 4 ‘Question 123 (ID: 20704) | Feedback | Notes Firms generally comply with GIPS to: A. ensure fair representation and full disclosure of investment performance. 8. present performance for a selected time period during which the mandate produced excellent result. C. select a top-performing portfolio to represent the firm's overall investment results for a specific mandate.Booc +e Both options B & C represent the misleading practices that hinder the comparability of performance results of different firms. However option A is correct. Firms comply with GIPS standards to ensure fair representation and full disclosure of investment performance. Study Session J, Reading 4 ‘Question 124 [ID:20706) || Feedback || Notes Allium Investments is an asset management firm that claims compliance with GIPS. Which of the following action is the requirement for claiming compliance? A. Providing complete list of composite descriptions to any prospective client that makes such a request B. Verifying firm from independent third party C. Providing compliant presentation annually to each existing client Both options B & C are recommendations for fundamentals of compliance while option A is the requirement of GIPS compliance. stugy Session |, Reading 4‘Question 125 (ID: 20707) |) Feedback || Noles If laws and regulations conflict with GIPS, firms are required to comply with the: A. regulations and avoid disclosing conflict in compliance presentation. B. GIPS and disclose conflict in the compliance presentation. C. regulations and disclose conflict in the compliance presentation. +o If laws and regulations conflict with GIPS, firms are required to comply with the regulations and disclose conflict in the compliance presentation. Study Session 1, Reaaing 4Question 126 (1D: 20731) | Feedback | Notes Which of the following statement is most likely correct regarding requirements of GIPS compliance? A. Changes in firm's organizations must lead to alteration of historical composite performance B. Firms must comply with all applicable laws/regulations regarding the calculation and presentation of performance C. The GIPS must be applied on composite-wide basis * Changes in firm's organizations must not lead to alteration of historical composite performance + Firms must comply with all applicable laws/regulations regarding the calculation and presentation of performance * The GIPS must be applied on Firm-wide basis Study Session 1, Reading 4‘Question 127 (ID: 20757) | Feedback | Noles Which of the following statements best characterizes GIPS objectives? A. When a firm advocates itself as GIPS-compliant, then it is mandated to comply with both required and recommended provisions B. It is mandated for a firm to comply with both required and recommended provisions, regardless of its compliance with GIPS C. A firm is only mandated to comply with the required provisions if the firm is advocating itself as GIPS-compliant If a firm is advocating itself as GIPS-compliant, then the firm must comply with the required provisions of GIPS, and it is encouraged to comply with the recommended provisions. Study Session |, Reading 4‘Question 128 (1D: 20758) | Feedback | Notes Which of the following is least likely a section of GIPS standards? A. Input data B. Composite calculation C. Private equity Following are the sections of GIPS standards: 0. Fundamentals of compliance 1. Input data . Calculation methodology . Composite construction }. Disclosure . Presentation and reporting . Real estate NOwWRwHD . Private equity Study Session 1, Reading 4Question 129 (ID: 20767) | Feedback | Notes According to the Global Investment Performance Standards (GIPS), noncompliant data can be presented for any tenure if the data belongs to a period most likely before: A. January 1, 2000. B. January 1, 2005. C. January 1, 2006. The noncompliant data can be presented for any tenure if the data belongs to a period before January 1, 2000. Study Sesion 1, Reading # ‘Question 130 (ID: 20798) | Feedback | Noles In order to claim compliance with the GIPS standards, a firm in existence for ten years is required to initially present GIPS compliant investment performance for a: A. minimum of fen years. B. minimum of five years. C. maximum of ten years.Bis correct. With respect to historical performance records, GIPS requires firms to initially present a minimum of five years of annual GIPS compliant investment performance. If the firm or composite is in existence for less than five years, the firm must present performance since the inception or the composite inception date. Since the firm is in existence for ten years, it is required to present GIPS compliant investment performance for a minimum of five years. A is incorrect. Once the firm has presented five years of GIPS compliant data, it is required to present an additional year of performance each year, going forward, building up to a minimum of 10 years of GIPS-compliant performance. Cis incorrect. GIPS do not specify maximum periods for presenting GIPS compliant performance. Study Session J, Reading 4Question 131 (1D: 20799) | Feedback | Notes When local laws and/or regulations conflict with Global Investment Performance Standards (GIPS) firms are most likely required to: A. comply with GIPS. B. seek legal guidance. C. comply with local laws and/or regulations. +t When local laws and/or regulations conflict with GIPS, firms are required to comply with local laws and/or regulations and make full disclosure of the conflict. Stuy Session |, Reaaing 4‘Question 132 (ID: 20828) | Feedback | Notes A firm values its assets using fair values. Its asset base comprises of the following asset categories: * Category 1: Fee-paying discretionary portfolios * Category 2: Non-fee paying discretionary portfolios * Category 3: Fee-paying non-discretionary portfolios * Category 4: Non-fee paying non-discretionary porifolios Based on the requirements of the Global Investment Performance Standards (GIPS), for periods beginning on or after January 1, 2011, the firm's total assets are the aggregate of: A. all four categories. 8. categories 1 and 2 only. C. categories 1, 2.and 3 only. For periods beginning on or after January 1, 2011, total firm assets must be the aggregate fair value of all discretionary and non-discretionary assets managed by the firm. This includes fee-paying and non-fee paying portfolios (0.4.13). This implies that the firm will include all four categories when defining total firm assets. Study Session 1, Reading 4‘Question 133 (ID: 20829) | Feedback | Notes Firms are required to provide a compliant presentation for any composite listed on the firm's list of composite descriptions to: A. selective clients. 8. current and prospective clients. C. those prospective clients making a request. +e Firms are required to make a compliant presentation for any composites listed on the firm's list of composite descriptions for any prospective client which makes such a request. Study Session J, Reading 4‘Question 134 (1D: 20830) | Feedback | Notes Which of the following is most likely a requirement of GIPS? A. Firms must adopt the broadest, most meaningful definition of the firm B. Firms must comply with the applicable laws and regulations regarding the presentation and calculation of performance C. Firms must provide a compliant presentation of the composite to each existing client, in which the client's portfolio is included, on an annual basis c +e Bis correct. Firms must comply with the applicable laws and regulations regarding the presentation and calculation of performance. Aand C represent recommendations of GIPS. Study Session 1, Reading 4‘Question 135 (1D: 20831) | Feedback | Noles Statements referring to a calculation methodology as being in accordance with GIPS are: A. permitted. B. prohibited. C. only permitted if the GIPS compliant firm reports the performance of an individual client's portfolio to that client. Statements referring to a calculation methodology as being “in accordance", “in compliance", or “consistent” with GIPS are prohibited. Study Session J, Reading 4 ‘Question 136 [ID:20847) || Feedback || NotesWhich of the following procedures is compulsory for the firms complying with GIPS? A. Independent third party verification. B. Composite testing performed by independent third party. C. Providing a complete list of composite descriptions on request of prospective clients. +t Firms complying with GIPS may choose to have independent third party verification and may also choose to have composite testing performed by an independent third party. According to the fundamentals of compliance 0.A.10, firms must provide a complete list of composite descriptions to any prospective client that makes such a request. Study Session J, Reading 4 Question 137 (ID: 20851) | Feedback | Notes Which of the following is most likely an objective of the global investment performance standards (GIPS)? A. To foster the notion of industry “self regulation" on a global basis. B. To encourage fair competition among local investment firms without creating barriers to entry. C. To promote the use of accurate and consistent investment performance data through outsourcing.FUR os cc +e The objectives of global investment performance standards are: * To foster the notion of industry “self regulation” on a global basis. * To encourage fair global competition among investment firms without creating barriers to entry. * To promote the use of accurate and consistent investment performance data. Study Session |, Reading 4 ‘Question 138 (1D: 20856) | Feedback | NotesWhich of the following statements is most likely correct regarding GIPS's requirements of fundamentals of compliance? A. The GIPS must be applied on a composite wide basis. B. Changes in firm's organization must lead to alteration of historical composite performance. C. Firms must comply with all applicable laws/regulations regarding the calculations and presentations of performance. The correct statements regarding GIPS requirements of fundamental compliance are: * The GIPS must be applied on a firm wide basis. * Changes in firm's organization must not lead fo alteration of historical composite performance. * Firms must comply with all applicable laws/regulations regarding the calculations and presentations of performance. Study Session 1, Reading 4 ‘Question 199 ID: 20889) |) Feedback | NotesWhich of the following statements represents the requirements of GIPS compliance: A. Firms must comply with the recommendations of GIPS standards. B. Changes in firm's organization must lead to alteration of historical composite performance. C. Firms must document their policies and procedures used in establishing and maintaining compliance with the GIPS standards. Option C is the requirement of GIPS ‘Fundamentals of Compliance’. Option A is not a requirement. Firms should comply with the recommendations of GIPS standards. Option B is incorrect. Changes in a firm's organization must not lead to alteration of historical composite performance. Study Session 1, Reading 4Question 140 (1D: 20896) | Feedback | Noles In complying with GIPS, total firm assets: A. must not include assets assigned to sub-advisors either discretionary or non-discretionary. B. must include assets assigned to sub-advisor both discretionary and non-discretionary. C. must include assets assigned to sub-advisor, provided the firm has discretion over the selection of sub-advisor. +e In complying with GIPS, total firm assets must include assets assigned to sub-advisor, provided the firm has discretion over the selection of sub-advisor. Study Session J, Reading 4 Test ‘Quester lad ot 40 ~. Qn