CFA 2018 Quest bank 05 Standards of Professional ...dance Duties to Employers

Question #1 of 40

Question ID: 412498

ᅞ A) ᅚ B)

ᅞ C)

Question #

2

of 40

Question ID: 412492

ᅞ A)

ᅚ B)

ᅞ C)

Question #3 of 40

Question ID: 454922

Standards of Professional Conduct & Guidance: Duties to

Employers

Test ID: 7440154

DavidSaul, CFA, headsthetrustdepartmentatSavage NationalBank. FairwayEnterprisesinvitesSaultositonitsBoardof Directors. Inreturnfor hisservicesontheBoard, FairwayofferstoprovideSauland hisfamily with accesstothefacilitiesat WilmontCountryClub atnocost. Saul willnotreceiveanymonetarycompensationfor hisservicesontheBoard. According to CFA InstituteStandardsofProfessionalConduct, which ofthefollowing actionsmustSaultake?

Saul must reject the offer to serve on the Board of Directors.

Saulmustobtain writtenconsentfromallpartiestoonlyif hedecidestoacceptthe offertoserveontheBoardof Directors.

Saulmustdisclosein writing toSavageBank thetermsoftheoffer whetherornot he acceptstheoffertoserveontheBoardof Directors.

Explanation

Standard IV(B)requiresthatmembersobtain writtenconsentfromallpartiesinvolved beforeaccepting monetary

compensationorother benefitsthattheyreceivefortheirservicesthatareinadditiontocompensationor benefitsconferred byamember'semployer. Inthissituation, Saulmayalso beobligatedtodisclose hisparticipationon Fairway'sBoardto clients, prospectiveclients, andemployerunderStandard VI(A), DisclosureofConflicts.

Nancy Korthauer, CFA, haslaunchedanew hedgefundcalledthe KorthauerTautology Fund but has hadtrouble hiring analysts whoareCFAcharterholdersas wellas with finding clients. Sheoffersa $15,000incentive bonustoanycharterholder whojoinsthefirm with over $1millionincommittedclientinvestments. Which ofthefollowing interpretationsoftheCodeand Standardsismostaccurate?

A member or candidate may arrange for current clients to switch to the

Korthauer Tautology Fund provided the member or candidate refuses to accept the incentive bonus.

Amemberorcandidatemaynotsolicitcurrentclientsawayfromtheircurrent employer.

Amemberorcandidatemayarrangeforcurrentclientstoswitch tothe Korthauer Tautology Fundprovidedclientsareinformedoftheincentive bonus.

Explanation

AmemberorcandidatemaynotsolicitcurrentclientsawayfromtheircurrentemployerunderStandard IV(A) "Loyalty."

ᅚ A)

ᅞ B)

ᅞ C)

Question #4 of 40

Question ID: 412496

ᅞ A)

ᅚ B)

ᅞ C)

Question #

5

of 40

Question ID: 412463

ᅞ A) ᅞ B) ᅚ C)

If a subordinate violates a securities law,her supervisor is in violation of Standard IV(C).

Ifnoeffortismadetodetect violations, thesupervisorisin violationofStandard IV(C) evenifno violations by hersubordinates haveoccurred.

Ifthesupervisormakesareasonableefforttodetect violations, butfailstodetecta violationthatoccurs, sheisincompliance with Standard IV(C).

Explanation

Standard IV(C) ResponsibilitiesofSupervisorsrequiresmemberstomakeareasonableefforttoensurecompliance with applicablelaws, regulations, andrules bytheirsubordinates. Violations bysubordinatesdonotnecessarilymeanthe supervisor has violatedthisStandardifthesupervisor hasmadereasonableeffortstodetectandprevent violations.

Sharon West is aCFAcharterholderand trust officerfor REO Trust Company. Soonafter beginning work for REO, West finds that REO

has beenconducting allits securities transactions through her brother whois aregisteredrepresentative. West's brothercharges REO

commissions that areequal to thelowest availablefromanother broker. West's brother tells her that if shecontinues doing business with

him, he will give hera substantialdiscount onallpersonal transactions sheconducts through him. West:

does not need to inform her employer of the arrangement because the commissions her

brother charges the firm are the lowest possible.

must inform heremployerof thearrangement becauseit provides her with additional

compensation.

must inform heremployerof thearrangement because sheis doing business with amember

of herimmediatefamily.

Explanation

Members arerequired todisclose to theiremployerin writing allmonetarycompensationorother benefit theyreceiveinaddition to the

employer's compensation. Thediscounting of West's commissions is a benefit that must bedisclosed.

May Frost, CFA, isconcernedaboutthecommentsandactivitiesofseveralof hercoworkersandfeels both ethicalandlegal violationsareroutinelyoverlooked. According totheCodeandStandards, arecommendedfirststep wouldleastlikely beto:

provide her supervisor with a copy of the Code and Standards.

review thecompany'spoliciesandproceduresforreporting ethical violations.

contactindustryregulators.

Explanation

Question #

6

of 40

Question ID: 412474

ᅞ A) ᅚ B) ᅞ C)

Question #7 of 40

Question ID: 412490

ᅞ A) ᅞ B) ᅚ C)

Question #

8

of 40

Question ID: 412470

ᅚ A)

ᅞ B) ᅞ C)

Bill Valley has been working forAdvisors, Inc., forseveralyears, and hejustjoinedCFA Institute. Valley'ssisterjustreceiveda

large bonusintheformofstock optionsin Zephyr, Inc. Valley'ssister knowsnothing aboutfinancialassetsandoffers Valleya

week at her holiday homeeach yearinexchangefor Valleymonitoring Zephyrandthe valueof herstock options. Inorderto comply with theCodeandStandards, ValleyneedstoinformAdvisorsof:

the compensation in the form of the use of the holiday home only.

both theuseofthe holiday homeand hissister'soptions.

nothing sincenomoneyisinvolvedanditisafavorforafamilymember.

Explanation

According toStandard IV(A), LoyaltytoEmployer, ValleymustinformAdvisorsof hisoutsideconsultationevenifitisnotfor monetarycompensation. According toStandard VI(A), DisclosureofConflicts, Valleymustalsodisclosepossibleconflictsof

interest, and hissister'sposition qualifies.

Which ofthefollowing statementsregarding employee/employerrelationshipsis NOTcorrect?

A written contract may or may not exist between employer and employee.

Anemployeeissomeoneintheserviceofanother.

Theremust bemonetarycompensationforanemployer/employeerelationshiptoexist.

Explanation

Monetarycompensationis not a requirementof the employee/employer relationship.

JanetThompson, CFA, isemployedasananalyst by NationwideSecurities. According toCFA InstituteStandardsof ProfessionalConduct, which ofthefollowing statementsaboutThompson'sdutyto Nationwideis NOTcorrect? Thompson

mustrefrainfrom:

making arrangements to go into a competitive business before terminatingher relationship withNationwide.

engaging inanyconductthat wouldinjure Nationwide.

engaging inindependentcompetitiveactivitythatcouldconflict with the businessof Nationwideunlessshereceives writtenconsent.

Explanation

Question #

9

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Question ID: 412471

ᅞ A)

ᅚ B)

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Question #10 of 40

Question ID: 471000

ᅞ A) ᅞ B) ᅚ C)

Question #11 of 40

Question ID: 471001

ᅞ A)

ᅚ B)

Michel Marchant, CFA, recently becameanindependentmoneymanager. Aftersix months, he hasonlytenclients, whoare familyandfriends. Tosupplement hisincome, Marchantacceptedpart-timeemploymentasanadvisorat Middleton Financial Advisors. According toCFA InstituteStandardsofProfessionalConduct, which ofthefollowing statementsabout Marchant's dutyto hisnew employerisCORRECT?

Marchant must inform Middleton about his existing clients but need not inform his existing clients about his new part-time employment withMiddleton. Marchantmustinform Middletonto keep hisexisting clientsandmustinform his existing clientsof hisnew part-timeemploymentat Middleton.

Marchantneednotinform Middletonabout hisexisting clients butmustinform his existing clientsabout hisnew part-timeemploymentat Middleton.

Explanation

Standard IV(A)and IV(B)requiresthat Marchantinform both Middletonand hisexisting clients.

GrantStarks, CFA, has been working forAdvisors, Inc., foreightyears. Starksisabouttostart hisownmoneymanagement

businessand has given histwo-week noticeof hisresignation. Afew days before hisresignationtakeseffect, acurrentclient ofAdvisorscalls himat hisofficetoinquireaboutsomeservicesfor heraccountatAdvisors. During theconversation, Starks

tellstheclientthat hisnew business will havelowercommissionsthanAdvisors. Starks hasmostlikely violated:

Standard VI(B), Priority of Transactions.

Standard V(B), Communication with ClientsandProspecitveClients. Standard IV(A), LoyaltytoEmployer.

Explanation

Thisisa breach ofloyaltyto hiscurrentemployer. Bytelling acurrentclientof hisemployeraboutthelowercommissions he willchargein hisnew business, Starksisplacing himselfindirectcompetition with Advisors, andthisisa violationofStandard IV(A).

Bill Fence, CFA, supervisesa groupofresearch analysts, noneof whom haveearnedtheCFAdesignation (noraretheyCFA candidates). Onseveraloccasions he hasattemptedto get hisfirmtoadoptacompliancesystemtoensurethatapplicable lawsandregulationsarefollowed. However, thefirm'sprincipals haveneveradopted hisrecommendations. Fenceshould mostappropriately:

take no further action,because by encouraginghis firm to adopt a compliance system he has fulfilled his obligations under the Code and Standards.

ᅞ C)

Question #1

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Question ID: 412519

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Question #13 of 40

Question ID: 412493

ᅞ A) ᅞ B) ᅚ C)

Question #14 of 40

Question ID: 412473

reporttheinadequacy bysubmitting acomplaintin writing totheCFA Institute ProfessionalConductProgram.

Explanation

According toStandard IV(C), ResponsibilitiesofSupervisors, ifthemembercannotdischargesupervisoryresponsibilities becauseofapoorornonexistentcompliancesystem, themembershoulddeclinein writing toacceptsupervisoryresponsibility untilthefirmadoptsanadequatesystem.

Wanda Kirby, CFA, recentlyjoinedAllegheny Investmentsasasenioranalyst. Becauseof herextensiveexperienceinthe investments businessand knowledgeoftheCodeandStandards, Allegheny'smanagementasked hertoassumesupervisory responsibility. KirbyreviewedAllegheny'sexisting compliancesystemanddeterminedthatit wasinadequatetoallow herto

clearlydischarge hersupervisoryresponsibility. According toCFA InstituteStandards, Kirbyshould:

agree to accept supervisory responsibility and to develop reasonable procedures to allowher to adequately exercise such responsibility.

agreetoacceptsupervisoryresponsibilityprovidedthatAlleghenyadoptsreasonable procedurestoallow hertoadequatelyexercisesuch responsibility.

declinein writing toacceptsupervisoryresponsibilityuntilAlleghenyadopts reasonableprocedurestoallow hertoadequatelyexercisesuch responsibility.

Explanation

If Kirbyclearlycannotdischargesupervisoryresponsibilities becauseofaninadequatecompliancesystem, sheshoulddecline in writing toacceptsupervisoryresponsibilityuntilAlleghenyadoptsreasonableprocedurestoallow hertoadequatelyexercise such responsibility.

Karen Dalby, CFA, volunteerson herchurch'sfinance board butreceivesnocash compensationsoshedoesnotreportthe arrangementto heremployer. Boardcompensationislimitedtoanannualretreatto Hawaii, buttheaccommodationsare modest. Dalbydoesnotenjoytheretreatandoftenconsidersskipping theevententirely. Dalbyismostlikely:

not in violation of the Code and Standards. in violationofStandard IV(A) "Loyalty."

in violationofStandard IV(B) "AdditionalCompensationArrangements."

Explanation

ᅞ A)

ᅞ B) ᅚ C)

Question #1

5

of 40

Question ID: 412469

ᅞ A) ᅞ B) ᅚ C)

Question #1

6

of 40

Question ID: 412497

ᅚ A) ᅞ B) ᅞ C)

Ananalyst belongstoanationallyrecognizedcharitableorganization, which requiresduesformembership. Theanalyst has workedoutadeal where heprovidesmoneymanagementadviceinlieuofpaying dues. Which ofthefollowing mustthe analystdo?

Resign from the position because the relationship is a conflict with the Standards.

Nothing since heisnotanemployeeofthecharitableorganization. Musttreatthecharitableorganizationas hisemployer.

Explanation

Anemployee/employerrelationshipdoesnotnecessarilymeanmonetarycompensationforservices. Iftheanalystis performing servicesfortheorganization, thentheanalystmusttreatthepositionasif he wereanemployee.

John Hill, CFA, has been working forAdvisors, Inc., foreightyears. Hillisabouttostart hisownmoneymanagement business and has given histwo-week noticeof hisresignationfromAdvisors. Afew days before hisresignationtakeseffect, aformer clientofAdvisorscalls Hillat his homeabout hisnew firm. Theformerclientsaysthat heis very happythat Hillisleaving Advisors becausenow heand Hillcanresumeaprofessionalrelationship. Theclientsaysthat he wouldnever becomeaclient ofAdvisorsagain. Hillpromisestocalltheclient back after he hasleftAdvisors. Hilldoesnottell hisemployeraboutthecall. Hill hasmostlikely:

violated the Standard concerning loyalty to employer. violatedtheStandardconcerning disclosureofconflicts.

not violatedtheStandards.

Explanation

Basedontheinformation here, Hill hasdonenothing wrong. Hetook acallat his home, presumablyon hisowntime, andthe clientmadeitclearthat he wouldnever beaclientofAdvisors. Therefore, there wasno breach ofloyaltytoAdvisors by Hill,

noristhereaconflictofinterest.

Jill Marsh, CFA, worksforAdvisors whereshemanages variousportfolios. Marsh's godfatherisanaccountantand hasdone Marsh'stax returnseveryyearasa birthday gift. Marsh's godfather hasrecently becomeaclientofAdvisorsandasked specificallyfor Marsh tomanage hisaccount. InordertocomplyStandard IV(B), DisclosureofAdditionalCompensation

Arrangements, sheneedsto:

do neither of the actions listed here. have her godfatherceasedoing hertaxes.

liquidatefrom herpersonalportfolioanystocks her godfatherownsand verballytell hersupervisoraboutthetax services.

Question #17 of 40

Question ID: 454918

ᅞ A)

ᅚ B)

ᅞ C)

Question #1

8

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Question ID: 461194

ᅞ A) ᅚ B)

ᅞ C)

Standard IV(B)requiresthatmembersdisclosetotheiremployerin writing all benefitsthattheyreceiveinadditiontotheir regularcompensationforservicestheyperformon behalfoftheiremployer. Itisnotunreasonableforanindividual's godfather

to givethema birthday gift. Moreover, sincethetax services werearegular birthdaypresent before her godfather becamea client, thisimpliesthattheyareunrelatedtoanyinvestmentmanagementservices.

MartinTripp, CFA, is vice-presidentoftheequitydepartmentat Walker Financial, alargemoneymanagementfirm. Ofthe

twentyanalystsin hisdepartmentfor whom he hassupervisoryresponsibility, eightaresubjecttoCFA InstituteStandardsof ProfessionalConduct. Tripp believesthat hecannotpersonallyevaluatetheconductofthetwentyanalystsonacontinuing basis. Therefore, heplanstodelegatesomeof hissupervisorydutiestoSarah Green, whoissubjecttotheStandards, and sometoBob Brown, whoisnotsubjecttotheStandards. According toCFA InstituteStandardsofProfessionalConduct, which

ofthefollowing statementsaboutTripp'sabilitytodelegatesupervisorydutiesismostaccurate? Tripp may delegate some or all of his supervisory duties only to Green because she is subject to the Standards.

Trippmaydelegatesomeorallof hissupervisorydutiestoBrown, eventhough Brown isnotsubjecttotheStandards.

Trippmaynotdelegateanyof hissupervisorydutiestoeitherGreenorBrown.

Explanation

Standard IV(C) ResponsibilitiesofSupervisorspermitsTripptodelegatesupervisorydutiestoGreen, Brown, or both, butsuch

delegationdoesnotrelieveTrippof hissupervisoryresponsibility.

Jill Fiedler, CFA, isaportfoliomanagerforAspire Investments, Inc. She hasagreedto helpmanagetheendowmentfundfor herchildren'sprivatedayschool. She believesit willonlytakeacoupleof hourseach weekend, andshe willreceiveadiscount

ontuitionfor hertwochildren. Tocomply with theStandardsofPractice, Fiedlermust: do nothing; it's her own time and won't interfere withher work.

inform heremployerofallthedetailsofthisarrangementandreceivepermission

before beginning.

inform heremployerofthearrangement butneednot getpermissionasthe work ison

herowntime.

Explanation

Fiedler'sarrangement with theschoolcan be viewedasindependentpracticeunderStandard IV(A) Loyalty, andthediscount

shereceivesontuitioncan beseenasanadditionalcompensationarrangementunderStandard IV(B). UndereitherStandard,

sheneedstoobtain heremployer'spermission becausethearrangementcreatesapotentialconflict with heremployer's interests.

Question #1

9

of 40

Question ID: 454916

ᅞ A)

ᅞ B) ᅚ C)

Question #

2

0 of 40

Question ID: 436849

ᅚ A) ᅞ B) ᅞ C)

Question #

2

1 of 40

Question ID: 412467

ᅞ A) ᅞ B) ᅚ C)

JessGreen, CFAistheresearch directorforCastle Investment, Inc., and hassupervisoryresponsibilityovereightanalysts,

including threeCFAcharterholders. Castle hasacomplianceprograminplace. According toCFA InstituteStandardsof ProfessionalConduct, which ofthefollowing isleastlikelyanactionthatGreenshouldtaketoadheretothecompliance

proceduresinvolving responsibilitiesofsupervisors? Greenshould:

issue periodic reminders of the procedures to all analysts under his supervision.

disseminatethecontentsofthecomplianceprogramtotheeightanalysts.

incorporateaprofessionalconductevaluationaspartoftheperformancereview only forthethreeCFAcharterholders.

Explanation

Greenshouldincorporateaprofessionalconductevaluationaspartof hisreview ofalleightanalystsunder hissupervision,

notjustthethreeCFAcharterholders.

BrianBellow, aCFA Institutemember, isaportfoliomanagerforProgressiveTrustCompany. SeveralfriendsaskedBellow to

review theirinvestmentportfolios. On hisowntime, Bellow examinedtheirportfoliosandmadeseveralrecommendations. He receivednomonetarycompensationfrom hisfriendsfor hisinvestmentadviceandprovidednofutureinvestmentcounselto

them. According toCFA InstituteStandardsofProfessionalConduct, didBellow violate hisdutytoProgressiveTrust?

No,because Bellow received no compensation for his services.

No, becauseBellow providednoongoing investmentadvice.

Yes, because heundertook anindependentpracticethatcouldresultincompensation orother benefitto him.

Explanation

Standard IV(A) Loyaltyrequiresmembersandcandidatestodisclosetotheiremployersanyindependentpracticefor compensation. Inthiscase, Bellow didnotreceiveanycompensationfor hisadviceandthereforedidnotengagein independentpractice.

John Hill, CFA, has been working forAdvisors, Inc., foreightyears. Hillisabouttostart hisownmoneymanagement business

and has given histwo-week noticeof hisresignationfromAdvisors. Afew days before hisresignationtakeseffect, on hislunch hour, hetakesoutaloanfroma bank on behalfof hisnew businessandusesthemoneyto buysomeofficeequipmentfor his new business. Since heengagedinthesetransactions whilestillanemployeeofAdvisors, Hill violatedStandard IV(A), Loyalty

toEmployer, by:

both taking out the loan and purchasing the office equipment.

engaging inafinancialtransaction, liketaking outaloan, only.

Question #

22

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Question ID: 412500

ᅞ A) ᅚ B) ᅞ C)

Questions #

2

3

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of 40

Explanation

TheStandardsofPracticeunder IV(A)expresslysaysthatadeparting employeeis "generallyfreetomakearrangementsor

preparationsto gointoacompetitive business beforeterminating therelationship with theemployee'semployerprovidedthat

such preparationsdonot breach theemployee'sdutyofloyalty." Neitheroftheseactionsareinconflict with theinterestsof Advisors, and Hillperformedthemon hisowntime.

ChrisBabcock, CFA, aportfoliomanagerforalargeTexasinvestmentfirm, has beenofferedcompensationinadditionto what

herfirmpays her. Theofferisfromoneof herclientsandtheadditionalcompensation will be basedon heryearly performanceinexcessofthemarketindex. Babcock should:

make written disclosure to her other clients before she accepts this offer. make writtendisclosuretoallpartiesinvolved beforesheacceptsthisoffer.

turndowntheoffer becauseitrepresentsaclearconflict betweenthisclientand Babcock'sotherclients.

Explanation

Standard IV(B), AdditionalCompensationArrangements, appliesinthissituation. Standard IV(B)states, "No gifts, benefits, compensation, orconsiderationareto beaccepted with maycreateaconflictofinterest with theemployer'sinterestunless

writtenconsentisreceivedfromallparties."

The key words hereare "writtenconsent" - membersmustobtain writtenconsent becausesuch arrangementsmayaffect

loyaltiesandobjectivityandcreatepotentialconflictsofinterest.

Rolf Lindquist, aCFAcharterholder, isaportfoliomanagerat Midwestern Investment Management, afirmcatering to high-net -worth individualclients. Lindquist has workedintheinvestmentindustryfor10years, thefirstfouryears with KMGR andthe

lastsix with Midwestern. Inadvertising material, Lindquistreports hisinvestmentperformanceoverthelast10years without

identifying thefirstfouryearsas being achievedat KMGR.

Lindquistsitsonthe boardofdirectorsof Western Inns, a hotelchain. Inreturnfor hisservicesonthe board, hereceivesfree

lodging from Western when hetravelsfor businessandpleasure. Hecurrently holdsno Westernstock inanyof hisclients'

portfolios, although intherecentpastsomeoftheseportfolios haveincluded Western. Lindquistdiscusses his Western directorship with hissupervisor, but because hedoesnotreceiveanymonetarycompensation, hedoesnotformallydisclose

thisarrangementin writing to hisemployeror hisclients.

Lindquistmanagestheportfolioof Martha Olson. Lastyear, Lindquist beatthe benchmark portfoliofor Olson by180 basis points. Inappreciationforthatperformance, Olson gives Lindquisttwothird-row ticketstothe NCAA basketballchampionship. Lindquistdisclosesthis giftto hisemployer. Lindquistalsoreceivesatwo-week, expense-paidtriptoParisfromBostonand Co., a brokeragefirm, inreturnforproviding Boston with businessduring theyear.

Lindquistalsomanagestheportfolioof JerryChandler, aconservativeinvestor with alow toleranceforrisk. Lindquist

Question #

2

3 of 40

Question ID: 461196

ᅚ A) ᅞ B)

ᅞ C)

Question #

2

4 of 40

Question ID: 461197

ᅚ A)

ᅞ B) ᅞ C)

Question #

25

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Question ID: 461198

Chandlerontherisksandrewardsofsuch astrategy, including therisk thatequityprices willincreaseandthatthis would

causethe valueoftheputoptions willfall.

Midwestern hasdevelopedaproprietarymodelthat has beenthoroughlyresearchedandis knownthroughouttheindustryas

the Midwesternmodel. Themodelispurely quantitativeandscreensstocksinto buy, hold, andsellcategories. The basic

philosophyofthemodelisthoroughlyexplainedtoclients. Thedirectorofresearch frequentlyaltersthemodel basedon

rigorousresearch-anaspectthatisdisclosedtoclients, although thespecificalterationsarenotcontinuallydisclosed. Portfolio managersthenmakespecificsectorandsecurity holding decisions, purchasing onlysecuritiesthatareindicatedas "buys" by

themodel. Lindquistmodifiesthemodelonanexperimental basis byadding factors hereadsaboutinthefinancialpress, but

doesnot back testtheresults. Whenmaking trading decisions, heapplies hisown versionofthemodel, which isoccasionally inconflict with the Midwesternmodel. Lindquistdiscloses hisuseofthisexperimentalmodelto hisownclients, butnotto his supervisor.

Regarding theParistrip, Lindquist:

cannot accept the gift under any circumstances.

canacceptthe giftif hedetermines, inconsultation with hisemployer, thataccepting

the gift wouldnotcompromise hisobjectivity.

cannotacceptthe gift withoutdisclosing itto hisemployer.

Explanation

According toStandard I(B)concerning independenceandobjectivity, Lindquistcannotaccept giftsthatreasonablycould be expectedtocompromise hisindependenceandobjectivity. Acceptanceofsuch a gift wouldcallinto question hisindependence andobjectivity; hisfirstobligationisto hisclients, nottoBostonandCo. (StudySession1, LOS 2.a,b)

With regardtotheChandlerportfolio, Lindquist violated:

neither Standard III(C): Suitability, nor Standard III(A):Loyalty, Prudence, and Care.

Standard III(A): Loyalty, Prudence, andCare, butnotStandard I(D): Misconduct.

Standard III(C): Suitability, butnotStandard III(A): Loyalty, Prudence, andCare.

Explanation

Lindquist'sactionsconformtoStandard III(C): Suitability, Standard V(A): Diligenceand ReasonableBasis, andStandard III(A): Loyalty, Prudence, andCare. Lindquistmusttakeintoaccounttherisk leveloftheportfolioinitsentirety, notindividual securities withintheportfolio. Although purchasing index putoptionsis, byitself, inherentlyrisky, inthecontextofadiversified portfolioitmay wellconformtoaconservativeclient'srisk tolerance by hedging someoftherisk ofowning equities. Lindquist

mayrightlydeterminethatsuch astrategyisconsistent with Chandler'sinvestmentpolicystatement. Ifproperlyconstructed originallyandproperlyexplainedtotheclient, nochangeintheinvestmentpolicystatementisneeded. (StudySession1, LOS

2.a,b)

ᅚ A)

ᅞ B)

ᅞ C)

Question #

26

of 40

Question ID: 461199

ᅞ A) ᅞ B) ᅚ C)

Question #

2

7 of 40

Question ID: 461200

ᅚ A) ᅞ B)

ᅞ C)

Standard VI(A):Disclosure of Conflicts, and Standard IV(B): Additional Compensation Arrangements.

Standard VI(A): DisclosureofConflicts, butnotStandard IV(B): Additional CompensationArrangements.

nostandards.

Explanation

UnderStandard IV(B), Lindquistisrequiredtodisclosein writing to hisemployerany benefits (monetaryornon-monetary) he receivesforservicesthatareinadditiontocompensationor benefitsprovided by hisemployer. Aninformaldiscussion with his supervisordoesnotconformtotherequirementthatthenotice bein writing. UnderStandard VI(A), heisalsorequiredto disclosethearrangementto hisclients becauseadirectorshipisaconflictofinterestthatcouldreasonably beexpectedto impair hisobjectivity. Hemustdosoevenif hecurrently holdsnosharesof Westernin hisclients' portfolios becauseitmay impair hisobjectivityinrecommending thestock forinclusioninclients' portfoliosinthefuture. Lindquist violatedStandard I(B)

becauseclientscouldreasonablyassume hisobjectivityisin question. (StudySession1, LOS 2.a,b)

Which ofthefollowing standardsismostlikely violatedin Lindquist'suseof hisexperimental versionofthe Midwesternmodel?

Standard I(C):Misrepresentation (plagiarism). Standard IV(C): ResponsibilitiesofSupervisors.

Standard V(A): Diligenceand ReasonableBasis.

Explanation

Lindquist'sexperimentalmodelisnotpartoftheformalresearch processand hasnot beenadequatelyresearchedortested.

So, Lindquistdoesnot haveareasonable basisfor hisrecommendations. Lindquist'ssupervisorisrequiredtomake reasonableeffortstodetectandprevent violationsofapplicablelawsandtheCodeandStandards, butcannot be held

responsibleforallof Lindquist'sactions whenthereisdeliberatedeceitinvolved. Plagiarismisnotrelevant here, because Lindquist haspermissiontousethemodel, andisnotmisrepresenting the work ofothersas hisown work. (StudySession1, LOS 2.a,b)

Lindquist'sactionsinadvertising hisinvestmentperformance:

violate Standard III(D): Performance Presentation.

conformtostandardsconcerning performancepresentationaslong as Lindquistdoes notclaimcompliance with CFA InstituteGlobal InvestmentPerformanceStandards. conformtoallstandards.

Explanation

LindquistfailedtoconformtoStandard III(D) byreleasing misleading informationconcerning his historicalperformanceat

Midwestern. KMGR mayuseadifferentmanagementstylethan Midwestern, rendering historicalperformanceoflittle valueto

Midwesternclients. Claiming compliance with CFA InstituteGIPS wouldonlycompoundtheproblem. Misrepresenting

performanceresultsasoccurring atonefirm whentheyactuallyoccurredatapreviousemployerisa violationofthe

Question #

28

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Question ID: 461201

ᅞ A)

ᅞ B) ᅚ C)

Question #

29

of 40

Question ID: 412481

ᅞ A)

ᅚ B)

ᅞ C)

Question #30 of 40

Question ID: 412476

ᅞ A)

ᅞ B) ᅚ C)

Regarding the NCAAtickets, whatactionmust Lindquisttaketoavoida violationofStandard I(B): Independenceand

Objectivity?

Disclose his receipt of the tickets to all other clients with the same investment objective as the Olson account.

Obtain writtenconsentfromallpartiesinvolved. Informing hisemployerissufficient.

Explanation

Lindquistmayacceptthis giftfromaclientforpastperformanceaslong as heinforms hisemployer. (StudySession1, LOS

2.a,b)

ACFA Institutemember, undertaking independentpracticethatcouldresultincompensationorother benefit:

must notify the entities for whom he plans to undertake independent practice of the compensation he receives from his employer.

mustnotify hisemployerofthetypesofserviceto berendered, theexpectedduration, andtheexpectedcompensation.

mustnotify hisemployerandclientsofthetypesofserviceto berenderedandthe expectedcompensation.

Explanation

According toStandard IV(A), LoyaltytoEmployer, aCFA Institutemember, undertaking independentpracticethatcouldresult

incompensationorother benefit, mustnotify hisemployerofthetypesofserviceto berendered, theexpectedduration, and

theexpectedcompensation.

PamelaGeeisaportfoliomanager. Sheisplanning toestablish herownmoneymanagementfirm. She hasalreadyinformed

heremployer, Branford, Inc., about herplans. In herremaining timeatBranford, shecan:

inform her current clients about her resignation and let them knowhow to reachher, in case any problems arise in the future.

solicitBranfordcolleagues butnotBranfordclients.

starttheregistrationof hernew company.

Explanation

Question #31 of 40

Question ID: 412488

ᅞ A)

ᅚ B)

ᅞ C)

Question #3

2

of 40

Question ID: 412466

ᅞ A)

ᅚ B)

ᅞ C)

Question #33 of 40

Question ID: 412464

Which ofthefollowing statementsismostcorrectconcerning amember'sobligationto hisor heremployerundertheCode andStandards?

Members are prohibited from making arrangements or preparations to go into competitive business before terminating their relationship with their employer. Consentfromtheemployerisnecessarytopermitindependentpracticethatcould

resultincompensationorother benefitsincompetition with themember'semployer. Membersareprohibitedfromundertaking independentpracticeincompetition with

theiremployer.

Explanation

Thereisno blanketprohibitionagainstindependentpracticeincompetition with amember'semployer. Themembermust

obtainpermissionfromtheemployer. Membersmaymakepreparationsto gointoacompetitive business, butmaynotsolicit

clientsoftheemployeraslong asmembersarestillemployed bytheemployer.

SueParsons, CFA, worksfull-timeasaninvestmentadvisorforthe MalloyGroup, anassetmanagementfirm. To helppayfor herchildren'scollegeexpenses, Parsons wantstoengageinindependentpracticein which she wouldadviseindividualclients ontheirportfolios. She wouldconducttheseinvestmentactivitiesonlyon weekends. Sheiscurrentlyonlyinthepreparation stageand hasnotstartedindependentpracticeyet. Which ofthefollowing statementsaboutStandard IV(A), Loyaltyto Employer, ismostaccurate? Standard IV(A):

requires Parsons to notify Malloy in writing about her intention to undertake an independent practice.

doesnotrequireParsonstonotify Malloyofpreparing toundertakeindependent

practiceunderthecurrentconditions.

requiresParsonstoobtain writtenconsentfrom both Malloyandthepersonsfrom

whomsheundertakesindependentpractice.

Explanation

Standard IV(A), LoyaltytoEmployer, requiresthatParsonsobtain writtenconsentonlyfrom heremployer beforeshe

undertakesindependentpracticethatcouldresultincompensationorother benefitincompetition with Malloy. Itisnotrequired

to getpermissionfromyouremployer whenonlypreparing to gointoindependentpractice.

FernandoAbrea, CFA wasananalystforPacific Investments. In October heleftPacificandjoinedGlobalSecuritiesas managerofalocaloffice. Abrea'schangeofemploymentcameaboutinthefollowing manner:

InApril, AbreacontactedGlobalaboutapossibleposition hesaw advertisedinafinancialpublicationand hadexploratory meetings with Global.

ᅚ A) ᅞ B) ᅞ C)

Question #34 of 40

Question ID: 412460

ᅚ A)

ᅞ B) ᅞ C)

Question #3

5

of 40

Question ID: 412557

ᅚ A) ᅞ B) ᅞ C)

spaceon behalfofGlobal.

On October15, Abrea'sresignationfromPacific becameeffective. HedidnottakeanyclientlistsfromPacific.

On October16, Abreamailedaletterthatexplained hisnew undertaking with Globaltoprospectiveclients, including his formerclientsatPacific.

With respecttoStandard IV(A) Loyalty, Abrea:

did not violate the Standard.

violatedtheStandard bycontracting forofficespaceon behalfofGlobal. violatedtheStandard bycontacting hisformerclientsatPacific.

Explanation

According toStandard IV(A) Loyalty, preparationstoleaveemploymentarenotprohibited. Eventhough Abreaengagedin significantpreparatoryactivitiespriorto beginning hisnew venture, noneoftheseactionssuggestAbreadidnotcontinueto

actinPacific'sinterests while he wasemployed byPacific. Abreamaycontact hisformerclientson behalfofGlobalafter his

employment byPacific hasofficiallyended, aslong as hedidnotmisappropriatetheircontactinformationfromPacific.

Dave Kline, CFA, isapersonalinvestmentadvisor with 200individual, family, andcorporateaccounts. Afteradispute with a coworkeronmarginpolicy, heformallyresigns hisposition by giving suitablenotice. However, hedoesnotfollow hisfirm's

established "TransitionandExitPolicies" regarding hisaccounts. Thefirm'sstatedpoliciesrequire himtonotifyeach clientof

hisplanneddepartureandpersonallyintroducethemtotheirnew accountrepresentative, Greg Potter. KlineseesPotterasa rivalandstates "...letPotterdo hisown work andfind hisownclients." Klineismostlikely:

in violation of Standard IV(A) "Loyalty" for failing to follow the employer's policies and procedures related to notifying clients of his departure. notin violationoftheCodeandStandards.

in violationofStandard I(D) "Misconduct" forleaving clientssubjecttoanaccount

representative hedoesnotfindsuitable.

Explanation

Klineisin violationofStandard IV(A) "Loyalty" forfailing tofollow theemployer'spoliciesandproceduresrelatedtonotifying clientsof hisdeparture.

Ananalyst belongstoanationallyrecognizedcharitableorganization, which requiresduesformembership. Theanalyst has

workedoutadealthat heprovidesmoneymanagementadviceinlieuofpaying dues. Forthisarrangementtocomply with the

standards, theanalystneedsconsentfrom:

bothhis supervisor in the organization and his regular place of work.

hissupervisorintheorganizationonly.

Question #3

6

of 40

Question ID: 454919

ᅞ A)

ᅚ B)

ᅞ C)

Question #37 of 40

Question ID: 412504

ᅞ A)

ᅚ B) ᅞ C)

Question #3

8

of 40

Question ID: 412459

Explanation

Anemployee/employerrelationshipdoesnotnecessarilymeanmonetarycompensationforservices. Iftheanalystis performing servicesfortheorganization, thentheanalystmusttreatthepositionasif he wereanemployeeandobtain

consentfrom both hissupervisorintheorganizationandin hisregularplaceof work.

Afirmrecently hired HalCrane, CFA, to beasupervisorinthefirm. Crane hasreviewedtheproceduresforcomplying with the

CodeandStandardsinthecompany. ItisCrane's beliefthattheproceduresneedrevisioninorderto beeffective. Crane

must:

make reasonable efforts to encourage the company to adopt an adequate compliance system.

declinesupervisoryresponsibilitiesin writing untilthecompanyadoptsanadequate compliancesystem.

exercise hissupervisoryresponsibilities with the greaterlevelofdiligencerequired by

theCodeandStandards.

Explanation

According toStandard IV(C) ResponsibilitiesofSupervisors, ifCrane believesthecompany'scomplianceproceduresarenot

adequate, Craneshoulddeclinesupervisoryresponsibilitiesin writing untilanadequatesystemisadopted.

Ananalyst working ataninvestmentfirm hasaclientthatrentslimousines. Theclienttellstheanalystthataslong as heisthe client'sanalyst, hecan havefreeuseofalimousineseveraltimesayear. Theanalystneedsto:

do nothing since the offer is not linked to the performance of the client's portfolio.

inform hissupervisorin writing oftheofferiftheanalystintendstoaccepttheoffer. explicitlyrefusesuch anoffer.

Explanation

Standard IV(B)requiresthatmembersdisclosetotheiremployerin writing all benefitsthattheyreceiveinadditiontotheir regularcompensationforservicestheyperformon behalfoftheiremployer. Theyalsoneedto getconsentfromtheir employerin writing. The writtenreporttotheemployershouldincludethedetailsofany writtenororalagreementforextra compensation. Theanalystdoesnot havetorefusetheoffer.