Crash Course For Ethics CFA Level-I Exam: This Files Has Expired at 30-Jun-13

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Crash Course for Ethics CFA Level-I Exam
Ethical and Professional Standards
Neev Knowledge Management Pristine
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Ethical & Professional Standards
Code of Ethics
Ethical Standard
Global Investment Professional Standard (GIPS)
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Code of Ethics
Ethical Standard
Act with integrity in the global capital markets Integrity above personal interest Reasonable care in investment analysis Practice in Ethical Manner Promote the integrity of capital markets Maintain professional competence
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Code of Ethics
Ethical Standard
Professionalism
Integrity of Capital Markets
Duties to Clients
Duties to Employer
Investment Analysis , Recommendations & Actions
Conflicts of Interest
Responsibilities as a CFA institute Member or CFA Candidate
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Code of Ethics
Ethical Standard
Professionalism
Duties to Clients
Duties to Employer
Knowledge of Law: Understand and comply with all applicable laws, rules, and regulations Independence & Objectivity: Use reasonable care and judgment to achieve and maintain independence and objectivity Misinterpretation: Do not make any misrepresentations knowingly Misconduct: Do not engage in any professional conduct involving dishonesty, fraud, or deceit
Q. Mr. Ritesh Shah, CFA works for Lemon Brothers and is responsible for covering automobile sector across Europe. One of the automobile company that he covers has arranged analyst meet in Monte Carlo, for which company has arranged presidential suite for Mr. Shah and dinner with F1 champion driver. Is Shah in violation of CFA standards of professional conduct if he accepts the proposal? Ans. Mr. Shah has violated Standard I(B) because accepting these substantial gifts or royal treatment may impede his independence and objectivity. Basic expenses for travel and accommodations should have been paid by his employer. Q. Rachit Jain, CFA works for an Indian arm of US based investment bank. Indian securities law allow investment bankers, fund managers in participating primary market for their own accounts, whereas US law prohibits managers from participating in IPOs. Jain has applied for shares in NMDC IPO, which is underwritten by his own bank. Is Jain in violation of code and standards of ethics, if he fails to corner any shares of NMDC? A. The correct answer is Violated standard I(A) Knowledge of the Law Jain should have followed US law which is more stringent than local law
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Code of Ethics
Ethical Standard
Professionalism
Duties to Clients
Duties to Employer
Material nonpublic information: Do not act or cause others to act on the material non public information. Market Manipulation: Do not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.
Q. Jain, CFA is working for a multinational auditor and during the process of auditing books of account of a publicly listed company, he comes to know that particular company is misstating its revenue. Immediately next day Jain manages to offload his personal holding in that particular company. Is Jain in violation of any of the code and standards of ethics? A. The correct answer is Violated standard II(A) Material nonpublic information Jain should not have acted upon any material nonpublic information, which gives him advantage over any other investor.
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Code of Ethics
Ethical Standard
Professionalism
Duties to Clients
Duties to Employer
Loyalty, prudence & care: Loyalty to their clients and act with reasonable care and exercise prudent judgment. Fair dealing: Deal fairly and objectively with all clients in all professional activities. Suitability: Make investment recommendations that are consistent with the stated objectives and constraints of the clients portfolio Performance presentation: Communication about investment performance must be fair, accurate, and complete . Preservation of confidentiality: Keep information about current, former, and prospective clients confidential unless: The information concerns illegal activities, Disclosure is required by law, The client or prospective client permits disclosure of the information.
Q. Mr. Jayant Patel, CFA is working for Neev Bank and serve Banks HNI clients. Recently he acquired a new HNI client, to whom Mr. Patel promised shares of the latest hot IPO at the time of acquisition. Is Mr. Patel in violation of CFA standards of professional conduct? Ans. Mr. Patel has violated Standard III(B) fair dealing by offering client IPO shares at the cost of his old clients. Patel is providing investment recommendations before making inquiries about the clients financial situation, investment experience, or investment objectives. Patel is thus violating Standard III(C) Suitability.
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Code of Ethics
Ethical Standard
Professionalism
Duties to Clients
Duties to Employer
Loyalty: Act for the benefit of employer and not deprive employer of the advantage of any skills and abilities, Additional compensation arrangements: Must not accept gifts, benefits, compensation, or consideration that likely to create conflict of interests Responsibilities of supervisors: Make reasonable efforts to detect and prevent violations of applicable laws, rules, regulations,
Q. Ms Juhi Kashyap currently works at a investment company as an equity analyst. Without notice to her employer, she registers with government authorities to start an investment company that will compete with her employer. Does registration of this competing company constitute a violation of Standard IV(A)? Ans. Juhis preparations for the new business by registering with the regulatory authorities do not conflict with the work for her employer if the preparations have been done not at the cost of his office work.
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Code of Ethics
Ethical Standard
Professionalism
Duties to Clients
Duties to Employer
Diligence & Reasonable Basis: Exercise diligence, independence and thoroughness in analyzing investments. Have a reasonable and adequate basis, supported by appropriate research and investigation Communication with clients & prospective clients: Disclose to clients the basic format and general principles of the investment processes. Use reasonable judgment in identifying which factors are important to their investment analyses, Distinguish between fact and opinion Record Retention: Must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients Q. A portfolio manager allocates IPO shares to her sisters fee based account, after allocating shares to all other clients portfolio. Is she in violation of any of the code and standards of ethics? A. The correct answer is Violated standard III(B) Fair dealing. Manager should have treated her sisters account at par with her any other client.
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Code of Ethics
Ethical Standard
Professionalism
Duties to Clients
Duties to Employer
Disclosure of conflicts: full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity Priority of transaction: Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner Referral Fees: Disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration received
Q. Mr. Aditya Sarkar, CFA who covers Shivam Computers, came to know about the fraud in Co. through his personal sources, upon which he decides to sell his personal shares immediately. Is Mr. Sarkar in violation of CFA standards of professional conduct? Ans. Mr. Sarkar has not only violated Standard VI(B) by giving preference to his personal transaction over the clients & employers but also violated Standard II(A) by acting on the material non-public information
Q. Members and candidates must disclose their employer and clients any consideration or benefit received for the recommendation of products or services. Members must adhere to this guideline in order to comply with: A. The correct answer is Standard VI(C) Referral fees
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Code of Ethics
Ethical Standard
Professionalism
Duties to Clients
Duties to Employer
Conduct as members & candidate in CFA program Refer to CFA institute, the CFA designation & CFA program
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Code of Ethics
Ethical Standard
Objective Global acceptance of calculation of investment performance in a fair, comparable format Consistent accurate performance data Promote fair competition Self Regulation
Characteristics Firm: Distinct Business Entity Fair Representation and Full Disclosure of results Composite presentation for 5 years Specific calculation disclosure required Contain both required and recommended Provisions No Partial Compliance Follow Local law; disclose conflict
Q. Which of the following should be the course of action for a firm which is located in a country with existing performance reporting standards and these regulations conflicts with GIPS? a. Firm must follow GIPS, because GIPS is a global standards b. Firm must follow country specific regulations c. Firm must follow country specific regulations but must disclose the nature of the conflict
A. The correct answer is Firm must follow country specific regulations but must disclose the nature of the conflict
Q. Which of the following is least likely to be included in all advertisements that include a claim of compliance with the GIPS advertising guidelines? a. A description of the firm b. Total return calculation methodology c. The GIPS advertising guidelines compliance statement A, The correct answer is Total return calculation methodology
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Code of Ethics
Ethical Standard
Eight Sections of GIPS Standards: Fundamentals of compliance, Definition Policy Documentation Compliance Update Compliance Appropriate Verification Statement Input data, Calculation methodology, Composite construction, Disclosures, Presentation & Reporting, Real estate, & Private equity
Q. Which of the following is least likely to be true in case of representation of GIPS compliant performance composite? 1. Atleast 5 years of performance record is necessary 2. Performance record up to 10 years is required 3. Atleast 7 years of performance record is necessary Ans. Atleast 7 years of performance record is necessary
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Question 1
Rachit Jain, CFA works for an Indian arm of US based investment bank. Indian securities law allow investment bankers, fund managers in participating primary market for their own accounts, whereas US law prohibits managers from participating in IPOs. Jain has applied for shares in NMDC IPO, which is underwritten by his own bank. Is Jain in violation of code and standards of ethics, if he fails to corner any shares of NMDC? A. Not violated any code and standards of ethics B. Violated standard I(A) Knowledge of the Law This III(B) files has expired at 30-Jun-13 C. Violated standard Fair dealing
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Answer 1
B. Jain should have followed US law which is more stringent than local law
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Question 2
Moby Dick, CFA works in an Ethiopian arm of a Mexico based investment bank. Ethiopian and Mexican securities law allow investment bankers, fund managers in using material non public information for making investment decisions. Dick consulting with his supervisor uses material non public information for making investment decisions. Is Dick and his supervisor in violation of codes and standard of ethics? A. Not violated any code and standards of ethics B. Dick violated standard I (A) Knowledge of Law and his supervisor didnt violate any standard This files has expired at his 30-Jun-13 C. Dick violated standard I (A) Knowledge of Law and supervisor violated IV(C) Responsibility of Supervisor
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Answer 2
C. Since Codes and standards doesnt allow using material non public information for making investment decisions , a member should adhere to the strictest of all laws which is in this case Codes and Standards. The supervisor violated IV(C) Responsibility of Supervisor , since there was not proper compliance procedures in place to prevent the activity
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Question 3
Jain, CFA is working for a multinational auditor and during the process of auditing books of account of a publicly listed company, he comes to know that particular company is misstating its revenue. Immediately next day Jain tells the supervisor about his observation and supervisor doesnt take much interest in Jains observation. Then Jain offloads his personal holding in that particular company. Is Jain in violation of any of the code and standards of ethics? A. Violated standard II(A) Material nonpublic information B. Violated standard I(D) Misconduct This files has expired C. Not violated any code and standards of ethics at 30-Jun-13
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Answer 3
A. Jain should not have acted upon any material nonpublic information, which gives him advantage over any other investor.
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Question 4
Kashish CFA is working with ABC financial firm. After finding a reasonable basis, he sends a purchase recommendation to all the clients for which the following recommendation is suitable. Then he calls two of his HNI clients and discuss about the recommendation. Has Kashish violated any standards: A. Violated the standard III(B) Fair Dealing, because he called only his two clients B. Violated the Standard III(A) Loyalty, Prudence and Care C. Didnt violate any Standards
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Answer 4
C. Since he disseminated the information to all his clients at the same time. Different Service levels to different clients are allowed as per the Codes & Standards but it shouldnt harm any client in the process.
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Question 5
A fund manager for a big pension fund is on the board of directors of a company, which is a part of pension funds portfolio. As a board member, CFA institute member receives sitting fees for attending board meetings and free membership of recreational club. Is member in violation of any of the code and standards of ethics, if member has informed his employer about sitting fees but not about membership? A. Violated IV(B) additional compensation arrangements B. Violated standard III(A) Loyalty, prudence and care C. Not violated any code and standards of ethics
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Answer 5
A. Member should have informed his employer about membership of club
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Question 6
Which of the following is least likely recommended procedures for compliance of standard VI(B) priority of transaction A. No restriction on participation in initial public offering. B. Members must fully disclose to investors their firms personal trading policies C. Employees involved in investment decision making should have blackout periods prior to trading for clients
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Answer 6
A. There should be limited participation or no participation in equity IPO to address conflicts created by personal investing.
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Question 7
A portfolio manager allocates IPO shares to her sisters fee based account, after allocating shares to all other clients portfolio. Is she in violation of any of the code and standards of ethics? A. Violated standard III(B) Fair dealing B. Violated standard VI(B) priority of transaction C. Not violated any code and standards of ethics
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Answer 7
A. Manager should have treated her sisters account at par with her any other client.
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Question 8
Mrs Meenakshi CFA , an analyst for a Indian Brokerage firm researches the Biotechnology industry in India.She makes a following statement in the recent report Based on the fact that the Biotechnology sector has seen rapid growth in new orders, we believe that most of the companies will able to convert the revenue increase into profits. We are sure that this trend will continue over for the next 3-5 years The report then goes describing about the details of the industry. Meenakshis report has: A. Not violated any standards B. Violated Standard V(A) Diligence and Reasonable basis This V(B) files has expired at and 30-Jun-13 C. Violated Standard Communication with clients prospective clients
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Answer 8
C. Since she is not able to distinguish between Fact and opinion and states the they are sure that this particular trend will continue in the future years
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Question 9
Which of the following is least likely to be correct regarding guidance provided by CFA institute in order to comply with Standard I (B) Independence and objectivity? A. Analyst should not be pressurized by the companies they cover to issue favourable rating B. Use various sources other than company management like suppliers, clients and competitors for research C. Even if the conflicts are effectively managed and disclosed, analyst should not work with investment bankers in road shows
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Answer 9
C.
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Question 10
A member who has left one employer uses public sources to get contact details of previous clients and solicits their business for his new employer. Is member in violation of any of the code and standards of ethics? A. Not violated any code and standards of ethics B. Violated standard IV(A) Loyalty C. Violated standard III(A) Loyalty, prudence and care
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Answer 10
A. Use of public sources to get contact details of previous clients in order to solicit the business does not violate any standards.
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Question 11
Mr Bains, CFA has friend in Research and development department of LCD manufacturing company Sony. He received information from him on social networking site that company has developed a new product and it will boost the revenue of a company going forward. According to the code and standards this information is: A. Both material and nonpublic and Bains should not act on it B. Both material and nonpublic and Bains should not act on it for the personal benefits but can act for the benefits of his clients C. Public as information was shared on social networking site and accessible to This files has expired at 30-Jun-13 general public
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Answer 11
A. Since Mr Bains friend is working in Research and development department , he will have material non public information about the new product and its capacity to generate revenues for the company. Hence it is both material and non public information and Bains should not act on it .
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Question 12
A sell side analyst promised banks investment banking client that bank will initiate the coverage on company post IPO. Is member in violation of any of the code and standards of ethics? A. Violated standard I(B) Independence and objectivity B. Violated standard V(A) Diligence and reasonable basis C. Not violated any code of ethics and standards
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Answer 12
C. Promise to start the coverage does violate code of ethics and standards.
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Question 13
In a marketing brochure of a company member has used the simulated results of an investment strategy and fails to disclose to the clients that the results are not actual but generated through simulation model. Is member in violation of any of the code and standards of ethics? A. Violated standard I(C) Misrepresentation B. Violated standard III(D) Performance representation C. Violated both standard I(C) Misrepresentation and III(D) Performance representation
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Answer 13
B. Member has violated standards by not disclosing clients that results are simulated and not actual.
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Question 14
Which of the following is least likely to be compliance procedures adopted by an employer in order to comply with standard IV(C) responsibilities of supervisors? A. Designate a compliance officer with authority clearly defined B. Seek an opinion of legal counsel C. Procedures for reporting violations and sanctions
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Answer 14
B. Seeking opinion of legal counsel is not a compliance procedure to be adopted by the supervisor , rather it is a measure taken by employee when he feels the company procedures are inadequate .
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Question 15
A member is a research analyst with a local brokerage house, does not recommend an undervalued stock to his employer as he wants to buy this undervalued stock for his personal account. Is member in violation of any of the code and standards of ethics? A. Violated standard VII(B) Priority of transactions B. Violated standard IV(A) Loyalty C. Violated both Violated standard VII(B) Priority of transactions and Violated standard IV(A) Loyalty
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Answer 15
B. Members and candidates must act for the benefit of the employer and not deprive the employer of the advantage of their skill and abilities.
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Question 16
Which of the following should be the course of action for a firm which is located in a country with existing performance reporting standards and these regulations conflicts with GIPS? A. Firm must follow GIPS, because GIPS is a global standards B. Firm must follow country specific regulations C. Firm must follow country specific regulations but must disclose the nature of the conflict
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Answer 16
C. As per GIPS , companies need to follow the local law for cases in which a local or country specific law or regulation conflicts with GIPS , but need to disclose the conflict.
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Question 17
Which of the following is least likely to be included in all advertisements that include a claim of compliance with the GIPS advertising guidelines? A. A description of the firm B. Total return calculation methodology C. The GIPS advertising guidelines compliance statement
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Answer 17
B. A firm is least likely to include total return calculation methodology in its advertisements.
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Question 18
Which of the following is least likely to be a violation of standard I(D) Misconduct? A. Member has been arrested several times by police for civil disobedience like participation in nonviolent protests B. Member intentionally includes his personal expenses as business expenses for a company trip C. Member assures client that he will be able to offer him a good deal on house purchase through his personal contact, but instead gets him poor deal and accepts commission on this deal
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Answer 18
A. Standard I(D) misconduct refers to misconduct by member in his professional career and not refers to cause like civil disobedience.
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