CFA 2018 Quest bank 02 Standards of Professional ... Guidance Professionalism

Question #1 of 53

Question ID: 412288

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ᅞ B)

ᅚ C)

Question #2 of 53

Question ID: 412289

ᅞ A) ᅞ B) ᅚ C)

Question #3 of 53

Question ID: 412290

ᅞ A) ᅞ B) ᅚ C)

Standards of Professional Conduct & Guidance

:

Professionalism

Test ID: 7293275

CFA Institute believes:

thatamaximumlevelofprofessionalresponsibility andconductdictatesthatmembers be awareofandcomply with laws, rules, andregulations governing theirconduct.

thatfirmsshouldcomply with alldomesticlawsandregulationsandthattheselawsalso

govern behaviorinforeignmarkets, regardlessofforeignlawsandrequirements.

thataminimumlevelofprofessionalresponsibility andconductdictatesthatmembers be awareofandcomply with laws, rules, andregulations governing theirconduct.

Explanation

CFA Institute'sCodeandStandardsdictateaminimumlevelofconduct. Standardsshouldnot be basedonethicsofuppermanagement andthe boardofdirectorsofacompany. Firmsmustcomply with thestrictestapplicablestandards, whetherthey beforeignordomestic lawsandregulations.

Kenny Barrett, CFA, is working in theAustralian officeofAmerican InvestmentsCo. From an informalconversation, Barrett learnsthatthecompany's mostrecent investmentreport was basedon misappropriated information. NooneattheAustralian officeexpressesconcern, however, becausethere has been no breach ofAustralian law. Barrettshould:

disassociate himselffrom thecase with a written reportto hissupervisor. do nothing becausethe branch isoutsideof U.S. jurisdiction.

seek advicefrom company counseltodetermineappropriateaction.

Explanation

Kenny's bestchoice istoseek thecompany counsel'sadvice. If Kenny does nothing, he is breaching Standard I(A) Knowledge ofthe Law. Disassociation is notenough.

Foranemployee with theCFAdesignation who worksforafirm, which ofthefollowing is NOTnecessary tomeettherequirementsofthe

CodeandStandards?

ItisrecommendedthattheiremployerisawareoftheCodeandStandards.

Recommendnotifying theiremployeroftheirresponsibility tofollow theCodeandStandards.

Deliveracopy oftheCodeandStandardstotheiremployer.

Question #

4

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Question ID: 412293

ᅚ A) ᅞ B)

ᅞ C)

Question #5 of 53

Question ID: 412294

ᅞ A) ᅞ B) ᅚ C)

Question #6 of 53

Question ID: 412296

ᅞ A) ᅞ B) ᅚ C)

It is nolongerrequired butrecommendedthatCFA membersandcandidates notify theiremployerthatthey arerequiredto follow theCodeandStandards.

IfaCFA Institute member knowsthatafellow employee has violatedalaw, according toStandard I(A)the member:

shouldseek advicefrom thefirm'slegalcounseloracomplianceofficer.

isrequiredtoreporttheemployee violating thelaw totheappropriate governmental authority.

isrequiredtoreporttheemployee violating thelaw totheappropriatesupervisor in the firm.

Explanation

The mostappropriateaction istoseek adviceaboutthepotential violation. Standard I(A)does notrequireaCFA Institute membertoreportpotential violations by others.

TheSEC's new stock-trading rule has just gone intoeffect. TheSEC will give brokersa10-day graceperiod, during which violatorsoftherule will be immediately notifiedand given achancetoremedy theirsituation tocomply with the new rule. Ifa CFA Institute member unknowingly violatestheruleandthen remediesthesituation within the10-day graceperiod, hasthe member violatedStandard I(A)?

No, becausethe member unknowingly broketherule. No, becausethe memberremediedthesituation.

Yes, becausethe memberdid not maintain knowledgeand know oftherule.

Explanation

Standard I(A)explicitly saysthata membershall maintain knowledgeandcomply with laws, rules, andregulations. By not knowing oftherule, the member brokethestandard. IfaCFA Institute memberaccidentally breaksarulefrom acareless errorandremediesthesituation, this would not bea violation ofStandard I(A).

ACFA Institutememberisalsoamemberandtheportfoliomanagerofanenvironmentalist group. Initscharter, theenvironmentalist

grouplistsa groupofcompaniesitsmembersshould boycott. TheCFA Institutemember would violateStandard I(A)concerning obeying

allrulesandregulationsifthemember:

actively protestsagainstapublicly tradedfirm boycotted by the group.

performseitheroftheactivitieslisted here.

Question #7 of 53

Question ID: 412297

ᅞ A) ᅚ B)

ᅞ C)

Question #

8

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Question ID: 412298

ᅞ A) ᅚ B) ᅞ C)

Question #

9

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Question ID: 412299

Explanation

Standard I(A)saysthemembermust be guided by allapplicablerulesandregulationsofprofessionalassociations governing the member'sprofessionalactivities. Purchasing thestock forthefirm would bea violation becauseitinvolvesthemember'sprofessional activitiesandtherulesofa groupto which themember belongsand worksfor. Actively protesting wouldnot becovered by thatstandard.

Allen Parsons, aCFAcandidate, suspectsacolleagueat hisfirm ofengaging in an illegalactivity. Which ofthefollowing statementsaboutproceduresforcompliance involving Standard I(A), Knowledgeofthelaw is NOTcorrect? Parsons:

should urge hisfirm toattempttopersuadetheperpetratortoceasesuch conduct. isrequiredtoreportthislegal violation totheappropriate governmentalorregulatory organizations.

shouldconsultcounseltodetermine whethertheconduct is, in fact, illegal.

Explanation

Standard I(A), Knowledgeofthelaw, does notrequirethatParsonsreportlegal violationstotheappropriate governmentalor regulatory organizations, butsuch disclosures may beappropriate undercertain circumstances.

MichaelBellow, CFA, CAIA, isan investment banker who is involved with an initialpublicoffering (IPO)of NewCo. Becausethis isBellow'sfirst involvement in an IPO, hereportstoan experiencedsupervisor. Whilereviewing pastfinancialstatements provided by NewCo, Bellow suspectsthat NewCodeliberately overstated itsearningsforthepastseveral quarters. Bellow seekstheadviceof hisfirm's highly competent generalcounselandfollowstheadvice given withoutdeviation. Basedon the generalcounsel'sadvice, Bellow consults his immediatesupervisoraboutthesuspectedoverstatementofearnings. After reviewing thesituation, Bellow'ssupervisorexplains why NewCo'scalculationsof itsearningsarecorrect. Bellow realizesthat his inexperienceandexuberance initially led him toan incorrectconclusion about NewCo'searnings.

Which ofthefollowing statementsaboutBellow'sactions involving Standard I(A), Knowledgeofthelaw, andStandard I(C), Misrepresentation, isCORRECT? Bellow:

violatedStandard I(A) butdid not violateStandard I(C). did not violateeitherStandard I(A)orStandard I(C). violated both Standard I(A)andStandard I(C).

Explanation

Question #1

2

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Question ID: 412302

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Question #13 of 53

Question ID: 412310

ᅞ A) ᅞ B) ᅚ C)

Question #1

4

of 53

Question ID: 412313

Explanation

BecauseBlanfordsuspectsShantiofengaging inongoing illegalactivities, Blanfordshouldtakeaction by determining the legality ofthesuspectedaction, disassociating fromany illegalactivity, andurging hisfirmtoattempttopersuadeShantito ceasesuch conductifsuch anactivity isillegalorunethical.

Shortly after becoming employed by Valco&Co., aninvestment banking firm, Stan McDowell, CFA, learnsthatmostof Valco's initialpublicofferings (IPO)arereally effectedinordertoprofitmanagement viapricemanipulationoftheshares. McDowell

observesanillegalact, sanctioned by seniormanagement, inprogressandrefusestosignoffon hisresponsibility. Instead, McDowelltakesthedocumentationto hissupervisorandtells him heshouldsignitin hisplace. Thisactionis:

a violationoftheCodeandStandardssince heisrequirednotto knowingly participate

orassistinsuch anact.

asuitablereaction, and heisincompliance with theCodeandStandards.

anoverreaction. Seniormanagement'ssanctioning oftheactabsolves McDowellfrom

hisordinary responsibility asaCFA Institutemember.

Explanation

McDowell, by hisactionintaking thedocumentationto hissupervisor, is knowingly participating inand/orassisting inanillegal act. Thisisclearly prohibitedunderStandard I(A), and heisin violationoftheStandard.

JanetGreen, CFA, providesinvestmentadviceandotherservicestoclientsinseveralcountries. SheresidesinCountry A

whosesecuritieslawsandregulationsarelessstrictthantheCodeandStandards. Shealsoconducts business with clientsin Country B, which hasnosecuritieslawsorregulations, andinCountry C, which hassecuritieslawsandregulationsthatare stricterthantheCodeandStandards. Which ofthefollowing statementsisCORRECT? According toCFA InstituteStandards

ofProfessionalConduct, GreenmustadheretotheCodeandStandardsin:

Country A butthelaw inCountry BandCountry C.

Country A, Country B, andCountry C.

Country AandCountry B butthelaw inCountry C.

Explanation

Greenneedstofollow Standard I(A) -- Knowledgeofthelaw. InCountry A, GreenmustadheretotheCodeandStandards becauseCountry A'slawsarelessstrict. InCountry B, GreenmustalsoadherestotheCodeandStandards becauseCountry

B hasnosecuritieslaws. BecauseCountry C'sapplicablelaw isstricterthantherequirementsoftheCodeandStandards,

ᅞ A) ᅚ B) ᅞ C)

Question #15 of 53

Question ID: 412314

ᅞ A)

ᅚ B)

ᅞ C)

Question #16 of 53

Question ID: 412315

ᅞ A) ᅚ B) ᅞ C)

ACFA Institutememberconscientiously maintainsrecordsofchangesinsecurity regulations. Themembernoticesthat hiscolleaguesdo

not, anddoes NOTsay anything. Isthisa violationofStandard I(A)?

Yes, andthemembershoulddisassociatefromthesecolleagues.

Yes, becausethememberis bound by theCodeof Ethics.

No, aslong asthecolleaguesdonot violatethenew rules.

Explanation

Thelast bulletpointoftheCodesaysthatamembershall "Maintainandimprovetheirprofessionalcompetenceandstrivetomaintain

andimprovethecompetenceofotherinvestmentprofessionals." Ignoring theneglectofrulechangesofothers wouldclearly be

incongruent with thiscomponent. Aslong asthecolleaguesdonot violatethelaws, thememberdoesnot havetodisassociate himself

fromthecolleagues.

Maria Valdes, CFA, isananalystfor Venture Investmentsinthecountry of Newamerica, which haslawsprohibiting theacceptanceof

any giftfroma vendorifthe giftexceeds US $250. Valdes hasevidencethat her Venture Investmentscolleague, Ernesto Martinez, CFA,

has beenreceiving giftsfrom vendorsinexcessof US $250.

Valdesisobligatedto:

disassociate herselffromtheactivity, urge Venturetopersuade Martinez toceasethe

activity, andinformCFA Instituteandregulatory authoritiesofthe violation.

disassociate herselffromtheactivity, andurge Venturetopersuade Martinez toceasethe

activity.

disassociate herselffromtheactivity, urge Venturetopersuade Martinez toceasethe

activity, andinformCFA Instituteofthe violation.

Explanation

Standard I(A), Knowledgeofthe Law requiresmembers who have knowledgeofcolleaguesengaging inillegalactivitiestodisassociate

fromtheactivity andurgetheirfirmstopersuadetheindividualtoceasesuch activity. Reporting toregulatory authoritiesmay beprudent

incertaincircumstances, butisnotrequired. Reporting toCFA Instituteisnotrequired.

ACFA Institutemember worksforSecureSecurities, Inc., andplaysrugby onthefirm'srugby team. SecureSecurities' team recently playedtheteamofarivalfirm. During the game, afight brokeoutandtheCFA Institutemember wastheinstigator, butnoone wasseriously hurt. Isthisa violationof I(A)concerning maintaining knowledgeandcomplying with laws, rules, and regulations?

Question #17 of 53

Question ID: 412316

ᅞ A)

ᅚ B)

ᅞ C)

Question #1

8

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Question ID: 412320

ᅚ A)

ᅞ B) ᅞ C)

Question #1

9

of 53

Question ID: 412321

ᅞ A) Explanation

Standard I(A)coversmembers' professionalactivity only. Violationsoutsideprofessionalactivity thatinvolvefraud, theftor deceit wouldpotentially be violations.

NicholasBrynne, CFA, isafixed-incomeanalyst whotradesinmortgage-backedsecurities (MBS). The MBSindustry hasseen

sweeping regulatory changessinceBrynnetook hiscurrentposition, and henow feels hisunderstanding ofapplicablelaws andregulatory standardsisdated. Brynnemust:

havealltradesreviewed by hiscompliancedepartmentuntil he hasobtainedan

expertlevelof knowledgeincompliance.

update hisunderstanding ofapplicablelawsandregulatory standardsrelating to his

position.

rely on hisfirm'spoliciesandproceduresfor guidanceonlegalandregulatory standards.

Explanation

SeeStandard I(A) "Knowledgeofthe Law." Brynneshouldupdate hisunderstanding ofapplicablelawsandregulatory standardsrelating to hisposition, although heisnotrequiredto beanexpertincompliance. Relying only onfirmpoliciesand proceduresisnotsufficient.

Jane Dawson, CFA, ananalystata New York brokeragefirm, suspectsthatBob Boatman, CFA, anotheranalystatthesamefirm, has

violatedastatesecuritieslaw. According totheCFA InstituteStandardsofProfessionalConduct, Dawsonis:

NOT requiredtoreportthe violationtotheappropriate governmentalorregulatory

organizations.

requiredtoreportthesuspected violationtoCFA Institute.

requiredtoreportthesuspected violationtotheappropriatestateregulatory agency.

Explanation

TheCodeandStandards do not requirethatmembersreportlegal violationstotheappropriate governmentalorregulatory organizations,

butsuch disclosuremay beprudentincertaincircumstances. Dawsonshouldconsultlegalcounselanddisassociatefromtheactivity.

TheCFA InstituteStandardsofPractice Handbook requiresCFA Institutememberstodoallthefollowing EXCEPT:

ᅞ B)

ᅚ C)

Question #

20

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Question ID: 412322

ᅚ A) ᅞ B) ᅞ C)

Question #

2

1 of 53

Question ID: 412323

ᅞ A) ᅚ B)

ᅞ C)

receive writtenpermissionfrom both theiremployerandoutsideclientstoengagein

investmentconsulting outsidethefirm.

todisclosein writing totheproperregulatory authority allobserved violationsofthe securitieslawsandregulations.

Explanation

Membersarenotrequiredtoreport violationsofotherstoregulatory authorities, either verbally orin writing, butsuch reporting

may beprudent.

WEB, aninvestment-banking firm, istheprincipalunderwriterfor MTEX'supcoming debentureissue. Wendy Berry, CFA, ananalyst with

WEB, hasfoundoutfromanemployeein MTEX'sprogramming departmentthataserious glitch wasrecently discoveredinthesoftware

programoftheirmajornew productline. Infact, the glitch isso badthatmostoftheirorders have beencanceled. Berry checkedthe

debenture'sprospectusandfoundnomentionofthisdevelopment. Thered herring prospectus hasalready beendistributed. Berry'sbest

courseofactionisto:

inform herimmediatesupervisorat WEBof herdiscovery.

keep quietsincethisismaterialnon-publicinsideinformation.

notify potentialinvestorsoftheomissiononafairandequitable basis.

Explanation

Berry shouldreportthisinformationonly to herimmediatesupervisor. Subsequently, sheand hersupervisormay consult with legal

counselconcerning thecompeting issuesinthissituation. Forthepresent, sheshouldavoiddisclosuretocolleagues whodonotneedto

know theinformationandsheshouldalsoavoiddisclosuretoclients.

Ifananalystsuspectsaclientoracolleagueofplanning orengaging inongoing illegalactivities, which ofthestatementsabout theactionsthattheanalystshouldtakeismostcorrect? According totheCFA InstituteStandardsofProfessionalConduct, the analystshould:

consultcounseltodeterminethelegality oftheactivity.

consultcounseltodeterminethelegality oftheactivity anddisassociatefromany illegalorunethicalactivity ifthemember hasreasonable groundsto believethatthe activity isillegalorunethical.

disassociatefromany illegalorunethicalactivity ifthemember hasreasonable groundsto believethattheactivity isillegalorunethical.

Explanation

Question #

22

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Question ID: 412326

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ᅞ B)

ᅞ C)

Question #

2

3 of 53

Question ID: 412327

ᅞ A) ᅞ B) ᅚ C)

Question #

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Question ID: 412329

According to the CFA Institute Standards of Professional Conduct, Standard I(A), Knowledge of the Law, members shall not knowingly

participate or assist in any violations of laws, rules, orregulations. An analyst:

is held responsible for participating in illegal acts when the law is evidentto anyone knowing

the law and can participate in a violation by having knowledge of the violation and taking no

action to stop it or disassociate from it.

mustreport all legal violations to the properregulatory commission and is held responsible for

participating in illegal acts when the law is evidentto anyone knowing the law.

is held responsible for participating in illegal acts when the law is evidentto anyone knowing

the law and is held responsible for violations by others when the analyst is unaware of the

facts giving riseto the violation.

Explanation

If you suspect someone is planning orengaging in illegal activities, you should:

1. Determinethe legality of the activities. Consult your supervisor and legal counsel.

2. Take appropriate action. Disassociate, attemptto persuadethe perpetratorto stop. CFA Institute does notrequire you to reportthem

to the authorities, butthe law might.

Deloris Johnson, CFA, suspected that her intern, who was working without pay at her brokerage firm, had violated a federal securities

regulation. Johnson discussed the matter with hercompany's legal counsel who said thatthe intern's conduct was illegal. According to the

CFA Institute Code and Standards of Professional Conduct, Johnson can dissociate herself from this illegal activity by:

telling her intern to stop such conduct.

transferring supervision of the intern to another person.

reporting the activity to the appropriate authorities.

Explanation

Johnson can dissociate herself from the illegal activity by reporting the activity to the appropriate authorities. However, the Code and

Standards do not requirethat shereport legal violations to the appropriate governmental orregulatory organizations, but such disclose is

prudent in this circumstance.

By transferring the intern to another supervisorthis may not solvethe problem of the illegal activity occurring and thecompany would still

be held liable for it.

Joshua Rosenberg, CFA, is an equity analyst who covers Northwest Implements, a farm implement manufacturer. Northwest's main

factory is located in a sparsely inhabited region six hours by automobile from the nearest airport. Northwest has its own corporate jet and

ᅞ A)

ᅚ B) ᅞ C)

Question #

2

5 of 53

Question ID: 412331

ᅞ A)

ᅞ B)

ᅚ C)

Question #

2

6 of 53

Question ID: 412335

ᅞ A) ᅞ B)

ᅚ C)

preparing on thecompany, Northwest's chief financial officer, Thomas Blake, invites Rosenberg to visit Northwest's headquarters and

meet with management. Blake offers to send Northwest's corporate jetto pick up Rosenberg from an airport near Rosenberg's home and

to return him homethe sameevening. Rosenberg estimates that it would requirethree days for him to makethe visit using commercial

travel. If Rosenberg accepts Blake's offer and makes thetrip to Northwest's headquarters on thecorporate jet, Rosenberg:

has violated the Code and Standards unless he discloses thetrip and the payment of his

travel expenses in his report on Northwest.

has not violated the Code and Standards.

has violated the Code and Standards unless hereimburses Northwest forthecost of thetrip.

Explanation

Standard I(B) requires members to maintain independence and objectivity. A visit by an analystto an out-of-the-way site may be paid for

by a clientcompany host as long as the analystcan maintain objectivity. Members should encourageclients to limitthe use of corporate

aircraft, butexceptions can be made if transportation would not otherwise be available or would be inefficient.

In orderto comply with the CFA Institute Standards, an analyst should:

use only his own research in making investmentrecommendations, because anything else

would violate Standard I(B), Independence and Objectivity.

use only his company's research when making investmentrecommendations and use outside

research forreports and analysis on stocks.

use outsideresearch only after verifying its accuracy.

Explanation

Standard I(B), Independence and Objectivity: the analyst is allowed to use outsideresearch only after an insightful review. There are no

restrictions regarding theexclusive use of outside information or in-house information.

An analyst who is a CFA Institute memberreceives an invitation from a business associate's firm to spend the weekend in a high-quality

resort. In orderto abide by the Standards, the analyst should (may):

refusethe invitation if the associate is from a firm he analyzes for his employer.

obtain written consent from his supervisor if the offer is contingent on achieving a target

investmentreturn.

do both of the actions listed here.

Explanation

According to Standard I(B) Independence and Objectivity, the analyst should refusethe invitation if it is from a firm the analystcovers for

his employer. The analystcan acceptthe invitation if it is from a client butthe analyst must get written consent from his employer if the

Question #

2

7 of 53

Question ID: 412338

ᅚ A) ᅞ B) ᅞ C)

Question #

28

of 53

Question ID: 412340

ᅞ A) ᅚ B) ᅞ C)

Question #

29

of 53

Question ID: 412341

ᅚ A) ᅞ B) ᅞ C)

An analyst preparing a report needs to cite which of the following?

A recent quote from the Federal Reserve Chairman.

Estimates of betas provided by Standard & Poor's.

The individual who developed a chart from the same firm.

Explanation

Statistics provided by a recognized agency, such as Standard and Poor's, do not need to becited. Charts, quotes, and algorithms

developed by the firm would need to becited when they are used butthe individual(s) who developed the materials within the firm do not

need to becited.

According to CFA Institute Standards of Professional Conduct, which of the following statements aboutthe prohibition against plagiarism

is most correct? The prohibition against plagiarism applies to written materials:

and oral communications only.

oral communications, and telecommunications.

only.

Explanation

The prohibition against plagiarism applies to all three areas.

The following information involves two research analysts at a brokerage firm.

Erik Bagenot, CFA, is preparing a research report on Global Enterprises, Inc. In preparing thereport, he uses materials from many

sources. Forexample, he uses factual information published by Standard & Poor's Corporation without acknowledging the source. He

also uses excerpts from a research report prepared by another analyst. Bagenot makes only a slightchange in wording forthese

excerpts, but acknowledges the source.

Sally Wain, who is currently enrolled in the CFA program, is preparing a research report on Manson Telecommunications. She attends

a conference in which several investmentexperts providetheir views aboutthe future prospects of this company. Wain cites several

quotations from these investmentexperts in herreport without specificreference.

According to CFA Institute Standards of Professional Conduct involving prohibition against plagiarism, which of the following statements

is CORRECT?

Wain violated the Standards, but Bagenot did not.

Both Bagenot and Wain violated the Standards.

Bagenot violated the Standards, but Wain did not.

Question #3

0

of 53

Question ID: 412342

ᅞ A)

ᅚ B)

ᅞ C)

Question #31 of 53

Question ID: 412343

ᅚ A)

ᅞ B) ᅞ C)

Question #3

2

of 53

Question ID: 412344

ᅞ A) ᅚ B)

Bagenotcomplied with Standard I(C), which permits publishing factual information from Standard & Poor's without acknowledgment and

using excerpts with acknowledgment. Wain committed plagiarism because she failed to give specificreferences forthe quotations that

she used.

Which of the following is NOT a form of plagiarism?

Citing quotations said to be attributableto "leading analysts" or "investmentexperts" without

specificreference.

Using factual information published by a recognized financial statistics reporting service

without acknowledgment.

Presenting statistical forecasts by others with the sources identified but withoutthe qualifying

statements that may have been used by the originator.

Explanation

Members may not generally use material without acknowledging the original source, but an exception is made for factual information

published by recognized financial and statistical reporting services.

Wes Smith, CFA, has been working toward thecompletion of a Master of Science in Finance. He has passed all the necessary courses

and written the necessary thesis. He still must defend thethesis in one month. Smith's thesis advisor assures him that he will pass the

thesis defense. Smith has new business cards printed with "M.S. in Finance" after his name. This is a violation of:

none of the Standards if Smith does not makethecards public until after he defends his

thesis and receives his degree.

Standard I(C), Misrepresentation.

Standard VII(B), Referenceto CFA Institute, the CFA Designation, and the CFA Program.

Explanation

If thecards were distributed today he would be in violation of Standard I(C), Misrepresentation. However, if Smith does not makethe

cards public until after hereceives the degree, there is no violation.

Sandra Bulow, CFA, is responsible for updating heremploying firm's websiteto includechanges in analysis techniques and trading

procedures. She is often very delinquent in making thesechanges, despite working extensive hours. She is awareclients are using the

websiteto make investment decisions, and has received complaints from the sales department as the information on the website if often

different from what is presented in sales meetings. Bulow is most likely:

not in violation of any Standard.

ᅞ C)

Question #33 of 53

Question ID: 412348

ᅞ A) ᅞ B) ᅚ C)

Question #3

4

of 53

Question ID: 412350

ᅞ A) ᅚ B) ᅞ C)

Question #35 of 53

Question ID: 412351

in violation of Standard III(B) "Fair Dealing."

Explanation

Bulow is most likely in violation of Standard I(C) "Misrepresentation." The web site information is erroneous, and needs to be updated to

match the firm's current practices.

Marc Randall, CFA, is an investment analyst. During a meeting with a potential client, Randall's boss states that, "You can be sure our

investments will always outperform Treasury Bonds because of our fineresearch staff members, like Marc." Randall knows thatthis

statement is:

not in violation of the Code and Standards.

a violation of fiduciary duties owed to clients underthe Standards.

a violation of the Standard concerning prohibition against misrepresentation.

Explanation

Under Standard I(C), members are forbidden from guaranteeing a specificrate of return on volatile investments. Therefore, the statement

is in violation of the Standard.

Ellen Miamoto, CFA, is preparing a research report on an employment agency, Temp Help, Inc. She includes in herreport:

A copy of a paragraph from a report by the Wall Streetresearch firm of Benson Smith.

A graph Miamoto has modified based on an original graph prepared by Gordon Thompson that was published in the WallS_treet

Jou_rnal.

A chart of national employmenttrends that Miamoto created using data from the U.S. government's Bureau of Labor Statistics.

In herreport, Miamoto must identify and acknowledge:

Benson Smith, Gordon Thompson, and the Bureau of Labor Statistics.

Benson Smith and Gordon Thompson.

Benson Smith only.

Explanation

Standard I(C) Misrepresentation requires members to acknowledge and identify the author, publisher, or source of material they use in

substantially the same form as the original. The use of Benson Smith's original material and Gordon Thompson's modified material must

be acknowledged. Theexception to this requirement is information from recognized financial and statistical reporting services, such as

the government agencies thatcompile national economic statistics.

ᅚ A) ᅞ B) ᅞ C)

Question #36 of 53

Question ID: 412355

ᅚ A) ᅞ B) ᅞ C)

Question #37 of 53

Question ID: 412363

ᅚ A) ᅞ B)

ᅞ C)

Question #3

8

of 53

Question ID: 412366

report she is preparing and fails to reportthe data source in thereport. This is:

not a violation of Standard I(C) if the data can be gathered from several public sources.

a violation of Standard I(C).

not a violation of Standard I(C) if the data cannot be gathered from several public sources.

Explanation

Sincethe security prices represent factual information thatcan be verified from several sources, there is no violation. Itcould have been

a violation had the information been exclusively published by the source.

A money manager works for a full-service brokerage firm. After meeting with a new client and gathering all relevant information, the money

manager says that shethinks her firm can perform all the financial services the new client needs. With respectto Standard I(C),

Misrepresentation, this:

may not be a violation if the manager's opinion is based upon the factual information gathered.

may not be a violation if therepresentation was made orally.

is a violation because shecannot make statements likethis under any circumstances.

Explanation

There is no violation if the opinion is based upon the factual information gathered and the firm's actual capabilities. This is true whether or

nottherepresentation was written, oral, orelectronic. None of the otherchoices arecorrect.

Nancy Hall, a candidate in the CFA program, is an analyst for a mutual fund. As part of her job she makes company visits to interview

executives. On a recenttrip she stayed with her sister instead of at a hotel. In herexpenses Hall included a hotel charge of $100, which

was less than the amount allowed by heremployer. Afterreceiving a check for herexpenses, Hall disclosed to her supervisorthat she

had stayed with her sister instead of at a hotel. She also returned the $100 to heremployer. According to CFA Institute Standards of

Professional Conduct, which of the following statements best describes Hall's professional conduct?

Hall engaged in professional misconduct.

Hall did notengage in professional misconduct because she did not meet all of the

requirements to usethe CFA designation.

Hall did notengage in professional misconduct because sheeventually disclosed this

information and returned the $100 to heremployer.

Explanation

ᅞ A) ᅞ B)

ᅚ C)

Question #3

9

of 53

Question ID: 412368

ᅚ A) ᅞ B) ᅞ C)

Question #

40

of 53

Question ID: 412370

ᅚ A) ᅞ B) ᅞ C)

Question #

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A CFA charterholder in a managerial position is in the process of hiring new analysts. If thecharterholderconducts background checks on

the job applicants with respectto theircharacter, thecharterholder has:

violated the Code of Ethics by invading the applicants' privacy.

complied with Standard VII(A) concerning conduct of members and candidates in the CFA

Program.

complied with Standard I(D) concerning professional misconduct.

Explanation

To avoid potential problems and comply with Standard I(D), employers areencouraged to conduct background checks on potential

employees.

A CFA charterholder is caught shoplifting and is sentenced to nine months in prison. Is this a violation of Standard I(D) Misconduct?

Yes, becausethecrime involved stealing.

No, becausethecrime does notrelateto the investment profession.

Yes, becausethe prison sentence is morethan six months.

Explanation

Any act involving lying, cheating, stealing, or other dishonestconductthatreflects adversely on thecharterholder's professional activities

is a violation of Standard I(D). Although thecrime did notrelateto the investment profession, itcertainly reflected adversely on the

charterholder professionally.

Timothy Hooper, CFA, is a security analyst at an investment firm. In his sparetime, Hooper serves as a volunteer for City Pride, which

collects clothes forthe homeless. Hooper has occasionally given some of theclothes to his friends or sold theclothes instead of

returning all of theclothing to City Pride. City Pride discovers what he has been doing and dismisses him. Later, City Pride learns that

other volunteer organizations have dismissed Hooper for similar actions. Has Hooper violated Standard I(D) on professional misconduct in

the CFA Institute Standards of Professional Conduct?

Yes.

No, because Hooper volunteers his services to City Pride.

No, because Hooper's conduct is unrelated to his professional activities as a security analyst.

Explanation

Hooper violated Standard I(D) because herepeatedly engaged in conductthat involves dishonestconduct. This violation occurred despite

the factthat his offenses do notrelate directly to his professional activities. However, Hooper's conductreflects poorly on his professional

Question ID: 412371

ᅚ A) ᅞ B) ᅞ C)

Question #

42

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Question ID: 442248

ᅞ A)

ᅞ B) ᅚ C)

Question #

4

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Question ID: 442249

ᅞ A) ᅚ B)

ᅞ C)

Question #

44

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Question ID: 442250

ᅞ A)

A CFA charterholder who comes to work intoxicated is:

in violation of Standard I(D) concerning professional misconduct.

not in violation of the standards.

in violation of Standard IV(A) concerning duties to employer.

Explanation

Being intoxicated at work is poor personal behavior. It is a violation of Standard I(D), which covers professional competence and integrity.

All of the following violate Standard I(C), Misrepresentation, EXCEPT:

copying a proprietary computerized spreadsheet without seeking authorization from the

creators.

citing quotes attributableto "investmentexperts" without specificreferences.

presenting factual information published by recognized statistical reporting services without

acknowledgment.

Explanation

Standard I(C), Misrepresentation, permits using factual information from recognized financial and statistical reporting services without

acknowledgment.

Which of the following is most likely permitted under Standard I(C), Misrepresentation?

Using excerpts from reports prepared by others without acknowledgement.

Including data showing thecurrent government bond yield curve in a reportto a client without

stating its source.

Citing quotes attributed to "investmentexperts" without specificreference.

Explanation

The government bond yield curve is factual information that is available from many recognized financial or statistical reporting services.

According to CFA Institute Standards of Professional Conduct, which of the following is least likely a form of misrepresentation?

Presenting statistical estimates of forecasts prepared by others with the source identified, but

ᅞ B)

ᅚ C)

Question #

4

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Question ID: 461164

ᅞ A) ᅚ B) ᅞ C)

Question #

4

6 of 53

Question ID: 461165

ᅞ A) ᅚ B) ᅞ C)

Question #

4

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Question ID: 461166

Attibuting specific quotations to "leading analysts" and "investmentexperts" without specific

reference.

Using factual information published by recognized financial and statistical reporting services

or similar sources without acknowledgment.

Explanation

Standard I(C) provides that "factual information published by recognized financial and statistical reporting services or similar sources"

may be used without an acknowledgment.

A governmentcommittee has concluded that investmentcompany fees should be disclosed to clients each quarter and has proposed new

legislation to requirethis. Currently, the legal requirement is to report such data annually. In compliance with current legal requirements,

Dolphin Investments discloses its fees annually. Eugene Shin, CFA, Dolphin's compliance officer, learns of the proposed changes but

does notconvert Dolphin's reporting to a quarterly basis. Shin's decision notto act:

is a violation of his duty to employer as defined in the Code and Standards.

is not a violation of the Code and Standards.

constitutes professional misconduct as defined in the Code and Standards.

Explanation

The potential change in the law is only a proposal atthis stage. There is no violation as long as Dolphin is following theregulations

currently in force.

Georgia Jones, CFA, is an analyst for Johnson, Thomas & Co. She also serves as an outside director for Dewey Manufacturing, Inc. In

thecourse of her duties, she begins to believethat Dewey's income statement forthe mostrecent period may have been misstated.

Georgia should do all of the following EXCEPT:

consult with Johnson, Thomas' legal counsel.

inform the Securities and Exchange Commission.

consult with Dewey Manufacturing's legal counsel.

Explanation

Jones must pursue herconcerns about a possible misstatement, because, if material, it may be misleading to investors. Consistent with

Standard I(A), Jones must not knowingly participate or assist in a regulatory violation. As long as herconcerns exist, she must not

validate any financial statements by voting to approvethem. In addition she should seek competent legal counsel both at her own firm

and at Dewey Manufacturing. She should not go to regulatory bodies until she has morecertainty aboutthe possible misstatement and

ᅞ A) ᅞ B) ᅚ C)

Question #

48

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Question ID: 461167

ᅚ A)

ᅞ B)

ᅞ C)

Question #

49

of 53

Question ID: 461168

ᅞ A)

ᅚ B) ᅞ C)

Which of the following statements aboutthe CFA Institute Code and Standards is most accurate? The Code and Standards:

prohibit members from accepting gifts thatcreate a conflict with theiremployer's interest.

require members to persuadethe perpetratorto cease illegal activities.

do notrequirethat members report legal violations to the appropriate governmental or

regulatory organization.

Explanation

The Code and Standards do not requ_ire members to report violations to legal authorities, but such disclosure may be prudent orrequired in

certain circumstances. They do notrequire members to quittheir jobs orto persuade violators to cease illegal activities. They do require

that members report the activities to the appropriate person(s) in their own firm and disassociate themselves from the illegal actions.

Members must obtain written permission to accept gifts that create a conflict with their employer's interest.

Lawrence Kelly is the Chief Investment Officer at a money management company that claims it is in compliance with CFA Institute Soft

Dollar Standards. For the first time, the company has purchased securities in the country of Santa Rosa. He learns that under Santa

Rosen law, one of the company's soft dollar policies is forbidden, yet to conform with the law, Lawrence would have to violate the Soft

Dollar Standards, but not the Standards of Professional Conduct. Lawrence:

should follow the Santa Rosen Law and can still claim compliance with CFA Institute Soft

Dollar Standards.

must follow the CFA Institute Soft Dollar Standards, informing the Santa Rosen regulators of

his reasons.

must follow the Santa Rosen Law and cease claiming compliance with CFA Institute Soft

Dollar Standards.

Explanation

In cases when the Soft Dollar Standards conflict with local law, managers should follow local law and are still in compliance with the

Standards.

According to CFA Institute Standards of Professional Conduct, which of the following is least likely a compliance procedure for

maintaining independence and objectivity in making investment recommendations or taking investment action?

Create a restricted list so that the firm disseminates only factual information about a

controversial company.

Maintain files to support investment recommendations.

Restrict special cost arrangements related to travel.

Explanation

Maintaining files to support investment recommendations is not a compliance procedure for Standard I(B): Independence and Objectivity,

Question #5

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Question ID: 461169

ᅞ A) ᅞ B) ᅚ C)

Question #51 of 53

Question ID: 461170

ᅚ A) ᅞ B) ᅞ C)

Question #5

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Question ID: 470996

ᅚ A) ᅞ B) ᅞ C)

An analyst has been writing research reports on a company for many years. As part of the analyst's continuing research efforts, the

analyst allows the firm to fly him to the firm's headquarters and put him up in the guest quarters the company has for all corporate visitors.

According to Standard I(B), Independence and Objectivity, this is:

a violation no matter what the circumstances.

not a violation under any circumstances.

a violation if the headquarters are within reasonable driving distance from the analyst's home.

Explanation

If such a trip is "out-of-the-way," payment by the company for the trip is acceptable. If the headquarters are within reasonable driving

distance, the analyst should drive there.

Steve Barton, CFA, used to work for Advisors, Inc. After he left Advisors, Barton developed a new screening methodology for determining

which stocks to include in a portfolio. Barton is on friendly terms with his former colleagues at Advisors and shares his screening

methodology with them. If Advisors uses the screening methodology without notifying Barton, then:

Advisors has violated Standard I(C), Misrepresentation.

Barton must assume the responsibility of any client losses.

Advisors must assume the responsibility of any client losses.

Explanation

According to Standard I(C), if an analyst or firm uses the work of others, they must seek authorization from the creators. Such work

includes algorithms, such as a stock screening methodology.

Mary White, CFA, sits on the board of directors of XYZ Manufacturing, Inc. She discovers that management has knowingly participated in

an activity she knows is illegal. According to the CFA Institute Standards of Professional Conduct, White is least likely to be required to:

report the violation to the CFA Institute Professional Conduct Program.

disassociate herself from the activity.

seek legal advice to determine what actions should be taken.

Explanation

Members are encouraged -- but not required -- to report violations of others. Standard I(A), Knowledge of the Law. Prohibition against

knowingly practicing or assisting in violation of laws, rules, and regulations. If White knows that someone has engaged in a possible illegal

activity, she should: (1) report the finding to the appropriate supervisory person at her firm, (2) if the situation is not remedied,

disassociate herself from the situation, and (3) seek legal advice to see what other actions, such as notifying the proper regulatory

Question #53 of 53

Question ID: 470998

ᅞ A) ᅞ B)

ᅚ C)

Which of the following actions most likely violates Standard I(D) Misconduct?

An analyst is arrested for trespassing while participating in an anti-abortion protest.

A member pursues an employment opportunity with a competing firm, primarily as a means of

securing a salary increase from her current employer.

A Level I candidate submits a request to her employer for auto travel reimbursement using

inflated mileage totals

Explanation

Any activity that reflects adversely on a member's professional reputation, integrity, or competence is a violation of Standard I(D)

Misconduct. Standard I(D) is generally not intended to extend to legal transgressions resulting from acts of civil disobedience in support of

personal beliefs. A member can pursue an employment opportunity with a competitor as long as the member abides by the Standards