CFA 2018 Quest bank 06 Standards of Professional ...ommendations, and Actions

Question #1 of 42

Question ID: 412559

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ᅞ B)

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Questions #2-7 of 42

Standards of Professional Conduct & Guidance: Investment

Analysis, Recommendations, and Actions

Test ID: 7440156

Standard V(B), Communication with Clients and Prospective Clients, leastlikelyrequires members to:

use reasonable judgment regarding the inclusion or exclusion of relevant factors in research reports.

disclose the general principles of investment processes used to analyze and select securities, andconstruct portfolios.

make clear buy or sell recommendations on the securities covered inresearch

reports.

Explanation

There is noobligation tomake buy or sell recommendations on securities that are covered by research reports.

Vera Sandrorecently joinedSeamarkSecurities as a portfoliomanager.Sandro alsorecently took the Level III examination in

the Chartered Financial Analyst program, but has not yet received herresults.Seamark is a medium-sizedfirm that employs

many CFA Institute members.

Sandro has been asked by her supervisor, Ledia Ferrazzo,CFA, to write a brief biography to be included in the promotional brochure Sandro hands out toprospective clients.Sandro included the following sentences in her biography: "Vera Sandro, a

Chartered Financial Analyst Level III candidate, has focused educational and investment experience in the small-cap stock market.She has consistently achieved better-than-average market returns and expects todo so in the future as well." The brochure was printed and is beingused by Sandro as a marketing tool.

Soon afterjoiningSeamark,Sandro attended a conference at which Liam Wright presented several computerized

spreadsheets that he haddeveloped tovalue high-tech stocks. During the presentation,Sandrocopied the spreadsheets on

her laptopcomputer. Later,Sandromade majorchanges to Wright's initial model.After testing the new model,Sandro was impressed with the results. Wright usedStandard&Poor's data as inputs for the model, but Sandrouseddata supplied by Moody's Investors Service.Sandro wrote a research report describing the revisedmodel and its results indetail and sent the

report to her biggest client, along with some stockpicks selected by the model.

Ferrazzo, the headportfoliomanagerforSeamark,oftenmeets corporate executives in the course of her evaluationof potential investments.A week ago, Ferrazzo had lunch with Ralph Henderson, a seniorvice president of Kellogg Industries, a

makerof luxury linens. Ferrazzo told Henderson that she was lookingfor an appropriate investment in the fabric industry for

her large client,Parker Jones. Hendersonresponded that he thought his company was well-positioned in the market, though he admitted tounderestimating the demandfor silk sheets in the region.After lunch, Ferrazzoread a research report that said

all of Kellogg's silkplants were running at capacity, and the company might have trouble meeting the long-termdemand.Two days later, Ferrazzoobserved another seniorvice president of Kellogg at a restaurant havingdinner with the chieffinancial

officerofBradley Textiles, a makerofvarious kinds of silkfabrics. It is widely known in the market that Bradley is seeking a

potential mergerpartner, as the founder andCEO is ready toretire.

Question #2 of 42

Question ID: 461204

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ᅞ B)

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Question #3 of 42

Question ID: 461205

ᅞ A)

ᅞ B) ᅚ C)

in several areas and similarmanagement cultures.She alsorememberedreading in Forbes a story in which Kellogg's CFO was quoted as saying the company had the financial wherewithal for a merger and an interest in expansion. Ferrazzo's

research indicated that Bradley's market value exceeded its intrinsicvalue, suggesting that Kellogg was unlikely topay a high

mergerpremium. Nonetheless, Ferrazzoproceeded topurchase stock inBradley on behalfof herclients.Sixmonths later,

Kellogg acquiredBradley andpaid a 40percent premiumovermarket price.

Sandro shares a workspace with Don Wilson, a CFAcharterholder. Wilsonrecommends that one of his clients buy Alpha Co.

shares basedupondetailedresearch conducted by a Seamark analyst.Sandrorecommends that one of herclients sell Alpha

Co. shares baseduponcomprehensive research conducted by another brokerage firm.

Seamark has evaluatedprospective brokers to execute trades on behalfof its investment-management clients.The findings are as follows:

White Brokerage Co.offers best price and execution,charges an average of $99 for a typical trade, andprovides

generous soft dollars.

GreenBrokers Inc.,offers goodprice and execution,charges an average of $59 for a typical trade, andprovides

moderate soft dollars.

Blue Brokerage Services Inc.,offers best price and execution,charges an average of $79 for a typical trade, andprovides

moderate soft dollars.

With regard to Ferrazzo's purchase ofBradley stock, she violated:

Standard III(E): Preservation of Confidentiality and Standard II(A):Material

Nonpublic Information.

Standard III(E): PreservationofConfidentiality, but not Standard V(A): Diligence and Reasonable Basis.

Standard V(A): Diligence andReasonable Basis, but not Standard II(A): Material Nonpublic Information.

Explanation

Ferrazzo's disclosure of the name of herclient,Parker Jones, to HendersonviolatedStandard III(E): Preservationof Confidentiality. Ferrazzoused the mosaic theory todetermine that Kellogg was pursuing an acquisition anddidnot violate

Standard II(A): Material Nonpublic Information.The purchase ofBradley violatedStandard V(A): Diligence andReasonable

Basis, because Ferrazzo hadreason to believe that even ifBradley was going to be acquired, the premium was likely to be low.The fact that she got lucky andguessedright does not satisfy the Standard.

Regarding the high-tech stockmodel, which of the following actions is least likely to helpSandro avoidviolating the standards

regardingplagiarism andresearch reports?

Acknowledging Standard & Poor's as the original data source and Moody's

Investors Service as the new data source.

Acknowledging Wright's development of the initial model.

Providing basic information about technology stocks in the research report.

Question #4 of 42

Question ID: 461206

ᅞ A) ᅚ B)

ᅞ C)

Question #

5

of 42

Question ID: 461207

ᅞ A) ᅚ B) ᅞ C)

Question #6 of 42

Question ID: 461208

ᅞ A) ᅞ B) ᅚ C)

Tocomply with Standard I(C): Misrepresentation,Sandro should have gottenpermissionfrom Wright tocopy the

spreadsheets.The Standard alsorequires that Sandro identify Wright as the source of the initial model despite the fact that she made majorchanges to it.The plagiarism standardpermits publishingfactual informationfrom Moody's andS&P without acknowledgment, but the use ofdifferent data sources could affect the performance of the model, and should be disclosed to

satisfy Standard V(B): Communication with Clients andProspective Clients.Because the report is going to an individual client, Sandroneednot provide basic information about technology stocks, according toStandard V(B): Communication with Clients andProspective Clients.

The productionof the advertisingrepresented a violationof:

Standard IV(A):Loyalty to Employer and Standard I(C):Misrepresentation.

Standard IV(C):Responsibilities ofSupervisors, but not Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFAProgram.

Standard VII(B): Reference toCFA Institute, the CFA Designation, and the CFA Program, andStandard I(C): Misrepresentation.

Explanation

Sandro's descriptionof herCFA standing is truthful in this case because she is still technically a CFAcandidate.Sandro is not allowed to imply that she cancontinue toproduce superiorreturns, and as such violated the misrepresentation standard.

Ferrazzo, in her supervisory role, should have prevented the violation but didnot.Standard IV(A): Loyalty to Employerrefers to independent practice, and is not relevant to this situation.

Ferrazzomay use which of the following brokers?

Blue and Green only. White andBlue only. Blue only.

Explanation

The CFA Institute Soft DollarStandards dictate members must always seek best price and execution.Soft-dollar

arrangements must provide a benefit toclients, be disclosed, and be reasonable inrelation to the research and execution

services provided.Because both White andBlue provide best price and execution, it is within Ferrazzo's discretion topay

more for White's services as long as the research benefit is reasonable.Both White andBlue may be used.

Which of the following statements regardingAlpha Co. is least accurate?

BothWilson and Sandro have a reasonable basis for their recommendations.

The fair-dealing standard has not beenviolated. Sandro has breached a fiduciary duty to herclient.

Explanation

Question #7 of 42

Question ID: 461209

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ᅚ B)

ᅞ C)

Question #

8

of 42

Question ID: 461218

ᅞ A) ᅞ B) ᅚ C)

has not beenviolated, as neitherclient was put at a disadvantage by the advice, even though the analysts' advice was

contradictory.The fair-dealing standardrequires the notificationofclients who trade inopposition to the firm's official

recommendation, so the trade shouldnot be executeduntil the client is told about the firm's buy rating. While Sandro's advice

differs from that of hercolleague and is basedon a competitor's research, she didnot necessarily breach a fiduciary duty, if

the investment made sense for the client.There are numerous investments that are appropriate forcertain types ofclients and

inappropriate forothers.

Which of the following statements regardingSandro's biography is least accurate?

Sandro must disclose her stake in a thinly traded, family-owned construction company.

Sandrocan beginusing the CFAdesignation as soon as she receives her exam results.

Sandroneednot deliver a copy of the Code andStandards to Ferrazzo.

Explanation

Just because Sandroreceives herresults fromCFA Institute, she still must satisfy all of the requirements before she canuse the designation.The standardgoverninguse of the CFAmark states that there is no acceptable termfor a partial designation. According the Standards ofPractice Handbook, 9th Edition,delivering a copy of the Code andStandards is no longerrequired. Standard VI(A): Disclosure ofConflicts,requires the disclosure of all security ownership that might interfere with a member's

duties. While the stock is thinly traded, it still might be of interest toSeamarkclients, andSandromust disclose herownership.

In addition, if she holds a position in the company oron the board that could take up some of her time,Standard IV(A): Loyalty to Employer, alsocomes intoplay.

Midland Investment Banking issues a prospectus for its open-end MidlandGold Fund. In the prospectus, the investment policy is disclosed as, "We will maintain an investment posture of 50% ormore ingold stocks and/or bullion,dependinguponmarket

conditions." This policy is maintaineduntil the price ofgoldfalls by 20%, leaving the fund40% invested ingold stocks and

bullion. Management decides that since the allocation was affected by market conditions,no action to eitherchange the investment policy or torebalance the portfolio is required.This decision is:

under the circumstances, not in violation of the Code and Standards. inviolationof the Standardconcerningfiduciary duties toclients.

inviolationof the Standardconcerningdisclosure of investment processes.

Explanation

Standard V(B)Communication with Clients andProspective Clients requires members todisclose "general principles and

investment processes" toclients and to "promptly disclose any changes that might significantly affect those processes." Under

the Standard, Midlandmanagement is required either to:

1. rebalance the portfolio in a timely manner so as tomaintaincompliance with the investment policy or

2. communicate an intendedchange in that policy well in advance of the actual change so as to afford investors time to act

Question #

9

of 42

Question ID: 412537

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Question #10 of 42

Question ID: 412539

ᅚ A) ᅞ B)

ᅞ C)

Midland is inviolationof the Standard.

Bill Fox,CFA, has beenpreparing a research report on New London Wire andCable,one of his major investment clients. He hadcompletedmuch of his analysis and hadplannedon having his report typed and bound today. Unfortunately, his briefcase was stolen while he ate breakfast, and he lost all his notes and workingpapers.The lost materials included his notes from management interviews,conversations with suppliers andcompetitors,dates ofcompany visits, and his computerdiskette

containingmuch of his quantitative analysis. Fox's client needs this report tomorrow. In a panic, Foxcalled New London's vice

president offinance and was faxed a copy of the company's most recent financial projections. Foxremembered that his own

analysis showed that management's estimates were too high. He didnot remember the exact amount, so he revised New London's figures downward10%. Fox also incorporated some charts andgraphs on New Londonfrom a research report he hadreceived last weekfrom a small regional research firm andused some informationfrom a Standard&Poor's reference work. With the helpof his secretary, a Xeroxmachine, and some creative wordprocessing, Foxgot the report done in time for

the evening Fedexpickup. On the way home from the office that night, Fox wondered if he hadviolated any CFA Institute

Standards ofProfessional Conduct. Fox has:

violated the requirement to have a reasonable basis for a recommendation, the prohibition against plagiarism, and the requirement to maintain appropriate records.

violated the requirement to have a reasonable basis for a recommendation and the

prohibition against plagiarism. violatednone of the Standards.

Explanation

New London's report is potentially self serving, so Foxdidnot exercise diligence or have an adequate basis for his

recommendation. In addition, Foxdidnot acknowledge his source of the charts andgraphs. Finally, he didnot maintain

adequate records.

An analyst has found an investment with what appears to be a great return-to-riskratio.The analyst double-checks the data

for accuracy,keeps careful records, and is careful tonot make any misrepresentations as he simultaneously sends an e-mail to all his clients with a "buy" recommendation.According toStandard V(A), Diligence andReasonable Basis, the analyst has:

fulfilled all obligations.

violated the Standard if he does not verify whether the investment is appropriate for all the clients.

violated the Standard by communicating the recommendationvia e-mail.

Explanation

Question #11 of 42

Question ID: 412536

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ᅚ B)

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Question #12 of 42

Question ID: 461219

ᅞ A) ᅚ B) ᅞ C)

Question #13 of 42

Question ID: 412534

ToddGable,CFA, was attending a noon luncheon when he overheard two software executives talking about a common vendor, Datagen, about how wonderful they thought the company was, and about a rumor that a major brokerage firm was

preparing to issue a strong buy recommendationon the stock.Gable returned to the office,checked a couple ofonline sources, and thenplaced anorder topurchase Datagen in all of his discretionary portfolios.The orders were filled within an

hour.Three days later, a brokerage house issued a strong buy recommendation and Datagen's share price went up20%. Gable thenproceeded togatherdata on the stock andprepared a report that he dated the day before the stockpurchase. Gable has:

violated the Standards by using the recommendation of another brokerage firm in his report.

violated the Standards by not having a reasonable basis formaking the purchase of

Datagen.

violated the Standards by improperuse of inside information.

Explanation

Standard V(A)requires members to have a reasonable and adequate basis for taking investment actions. Overhearing a

conversationdoes not provide adequate basis. It is not improper touse overheardconversations that donot include inside information,nor is it improper toreference anotherfirm's report to substantiate adequate basis, if the otherreport is justified.

An analyst has constructed an investment policy statement (IPS) and a portfoliofor a new client,Stephanie Sasser. He has alsoprovided writtenguidelines on the processes used tomake investment management decisions.Sixmonth later,Sasser

questions the analyst about several portfolio holdings. Due to a large allocation infinancial services stocks during a severe

market downturn, herportfolio has underperformed the benchmark by a large margin.Although the analyst remembers

discussing the over-allocation with Sasser, andreceiving her approval, he is unable tofind supportingdocuments. Which of

the followingStandards has the analyst mostlikelyviolated?

Standard V(A) Diligence and Reasonable Basis. Standard V(C)RecordRetention.

Standard V(B)Communications with Clients andProspective Clients.

Explanation

Standard V(C)RecordRetentionrequires analysts todevelopandmaintain "...records to support their investment analysis, recommendations...with clients andprospective clients." The analyst is unable todocument the over-allocation with respect to

the benchmark; this is most likely aviolationofStandard V(C).

ᅞ A) ᅚ B) ᅞ C)

Question #14 of 42

Question ID: 412552

ᅞ A)

ᅚ B)

ᅞ C)

Question #1

5

of 42

Question ID: 412532

Industries' proposed secondary stockoffering. Without mentioning that the firm is seeking the mandate, she asks Jack Dawson toanalyze Wings common stockandprepare aresearch report.Afterreasonable effort, Dawsonproduces a favorable report on Wings stock.Afterreviewing the report,Plumb thenadds afootnote describing the underwriting

relationship with Wings anddisseminates the report to the firm's clients.According toCFA Institute Standards ofProfessional Conduct, these actions are:

a violation of Standard V(A), Diligence and Reasonable Basis. not aviolationofany Standard.

aviolationofStandard VI(A), Disclosure ofConflicts.

Explanation

The fact that the firm is seeking the mandate does not preclude the research department fromperforminganalytical workon the security.As longas the final recommendation is baseduponreasonable facts,not the desire toobtain the mandate, there is noviolation.

Rhonda Meyer,CFA, is preparingaresearch report on Moon Ventures, Inc. In the course of herresearch she learns the following:

Moon had its credit ratingdowngraded by aprominent ratingagency 3 years agodue to sales pressure in the industry. The rating was restored3months later when the pressure resolved.

Moon's insider trading has been substantial over the last 3months. Holdings of Moon shares by officers,directors,and key employees were reduced by 50% during that period.

In Meyer's detailedreport makinga buy recommendationfor Moon, both the credit ratingdowngrade and the insider trading were omittedfrom the report.

Meyer has:

violated the Code and Standards by not including the insider trading information and by not including the credit rating downgrade in her report. violated the Code andStandards by not including the insider trading information in her report.

not violated the Code andStandards in herreport.

Explanation

Standard V(B),Communication with Clients andProspective Clients,requires analysts touse reasonable judgment regarding the inclusionor exclusionofrelevant factors in theirresearch reports. It wouldnot be unreasonable to exclude the temporary credit downgrade from3 years earlier.

ᅞ A) ᅚ B) ᅞ C)

Questions #16-21 of 42

Question #16 of 42

Question ID: 461211

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ᅞ B)

ᅞ C)

violated the Standard by not testing the model himself. complied with the Standard.

violated the Standard by including quantitative details inareport.

Explanation

Including quantitative details inareport is not aviolationof the Standard.The analyst has more ofanobligation togive an

opinionon the accuracy of the model than withhold such anopinion.Although the analyst shoulduse reasonable care toverify information included inareport,retestingmodels developed by the research department ofafirm is not explicitly required.

LMSSecurities is a boutique broker-dealer specializing inprivate placements for technology companies.The firmalso

provides aftermarket support for the companies that gopublicafterprivate rounds offinancing.This support includes market

makingandresearch coverage.

Susan Jones,CFA, is ananalyst at LMSSecurities.She is responsible fora subset of the companies for which LMSoffers research coverage.She recently received herannual CFA Institute Professional Conduct statement, but has not yet filled it out and turned it in.Steve Brown is ananalyst whodirects the due diligence process for LMSSecurities' private placements. Brownpassed the Level II examfive years ago,and has registeredfor the Level III exam every year since then, but has never taken it. He is registeredfor the Level III CFA examnext June, but nobody at the office believes he will actually take the test. Sunrise Technologies is a longtime client of LMSSecurities. LMSarrangedfour levels ofprivate financing,forSunrise, providing in-depth business consultingas well as handlingall of the private placements.Sunrise went public 90days agoand is currently tradingat $14per share.

Kenneth Karloff,CEO of LMSSecurities, instructed Jones to write afavorable research report onSunrise Technologies right before the company went public, settingaprice target ofat least $30per share. Jones has developedanumberofalternative cash flow projections forSunrise Technologies.She picks anoptimistic scenario tojustify a $30price target and issues a positive report using those projections.

AfterSunrise Technologies has gone public, Karloffdecides to help Jones to write amore-detailedresearch report on the company. Karloffprovides Jones with informationabout the product pipeline and sensitive patent litigation that was given to

him inconfidence by Sunrise executives while the company was private.Given the product pipeline and legal outlook, Jones revises hercash flow models toreflect greatergrowth, then writes apositive report andadvises LMS's clients to buy the stock. LMSSecurities has anarrangement with Clampett Securities,an investment adviser,under which the investment manager uses its client brokerage toobtain LMS's research.Clampett manages accounts for wealthy individual investors.About halfof Clampett's clients have agrowth objective, while the rest seek income.

Inorder toremainanactive memberofCFA Institute, Jones must annually:

submit her completed Professional Conduct Statement and pay applicable membership dues.

submit hercompletedProfessional Conduct Statement,pay applicable membership dues,andcomplete forty hours ofcontinuing education.

Question #17 of 42

Question ID: 461212

ᅞ A)

ᅚ B)

ᅞ C)

Question #1

8

of 42

Question ID: 461213

ᅞ A) ᅚ B) ᅞ C)

Question #1

9

of 42

Question ID: 461214

Explanation

Toremainanactive member, Jones must agree toabide by the Code andStandards and the Professional Conduct Program. This is accomplished by completing the Professional Conduct Statement onanannual basis. Inaddition, Jones must pay annual membershipdues.Continuing education is encouraged but not required toremainanactive member. (Study Session 1, LOS2.a,b)

Which of the following statements regarding the research report onSunrise Technologies after the company went public is CORRECT?

Jones has violated the misrepresentation Standard withher aggressive growth prediction for Sunrise Technologies; Karloff has violated the plagiarism Standard by disseminating information he received in confidence. Jones is incompliance with the objectivity Standard because she made her recommendation basedfacts,not conjecture; Karloff has violated the Standard regarding the use ofmaterial nonpublic information.

Jones has violated the Standardonresearch reports because she failed todistinguish betweenfact andopinion; Karloff is incompliance with the supervisory-responsibilities Standard because he is keepingup with Jones' actions and ensuring herreport is accurate.

Explanation

Jones' secondresearch report made reference to hardfacts,and heranalysis andrevisionof the cash flow projections seems thorough andreasonable.This time, Karloffdidnot press her to express acertainopinion,and she found the information about the company compelling.She projected highergrowth incash flow forSunrise, but nowhere is it said that she guaranteeda hard target. Jones is incompliance with the misrepresentation,objectivity,reasonable-basis,andresearch -report Standards. Karloffviolated the insider-tradingStandard because the information was given to him inconfidence. He

may also have violated his fiduciary duty toSunrise, which probably kept the informationprivate forareason. (Study Session 1, LOS4.a)

According toCFA Institute Standards concerningfairdealing, Jones is required todo which of the following?

Disseminate new investment recommendations to all clients at the same time. Disclose toall clients whetherdifferent levels of service are offered.

Ensure that accounts belonging to her immediate family purchase securities only after

otherclients have had the chance to buy.

Explanation

ᅞ A) ᅚ B) ᅞ C)

Question #20 of 42

Question ID: 461215

ᅞ A) ᅞ B) ᅚ C)

Question #21 of 42

Question ID: 461216

ᅞ A)

ᅚ B)

ᅞ C)

Which of the following statements couldBrownput on his resume without violatingStandard VII(B): Reference toCFA Institute, the CFA Designation,and the CFAProgram?

I am a Level III CFA and should become a chartered financial analyst next year. If I pass the Level III test, I may be eligible formy CFAcharter late next year.

I ama Level III CFAcandidate eligible toreceive my charter in November2005.

Explanation

This statement is quite literally correct,andcomplies with the Standards. "Level III CFA" is not anacceptable use of the CFA

mark.Candidates shouldnot offerapredictionabout the time they will earn theircharter. While Brown is not likely to take the test,as longas he is registered, he may refer to himselfas acandidate. (Study Session1, LOS2.a,b)

InorderforClampett Securities toclaimcompliance with CFA Institute Soft DollarStandards, the company must:

comply with all recommended provisions of the Soft Dollar Standards. sendall purchasedresearch to the client whose brokerage was used topay for it. re-evaluate mixed-use research at least once a year.

Explanation

Mixed-use research must be evaluatedat least annually.Companies that claim soft-dollarcompliance must follow the

mandatory provisions, but canforgo some of the recommendedprovisions. Ifresearch only benefits some clients, it is acceptable touse just their brokerage topay for it.The Standards donot require sendingresearch toclients. (Study Session 1, LOS3.b)

When Jones produced the research report onSunrise Technologies before it went public, she violated:

Standard V(B): Communication with Clients and Prospective Clients by leaving relevant facts out of the report, but not Standard III(A):Loyalty, Prudence, and Care because the CEO cannot pass his fiduciary duty on to her.

Standard V(A): Diligence andReasonable Basis because herresearch report was not thorough,andStandard I(B): Independence and Objectivity because of herobedience to herCEO.

Standard I(B): Independence and Objectivity because of herobedience to herCEO, andStandard II(A): Material Nonpublic Information because of Karloff's involvement.

Explanation

Jones' research was not thorough,and herreport did leave out salient facts.Thus, she violatedStandards V(A)and V(B). Her

Question #22 of 42

Question ID: 412533

ᅞ A) ᅚ B)

ᅞ C)

Question #23 of 42

Question ID: 461222

ᅞ A)

ᅚ B) ᅞ C)

Question #24 of 42

Question ID: 412549

ᅚ A) ᅞ B) ᅞ C)

Ananalyst receives aresearch report fromacolleague.The colleague's report has an elaborate table with performance data

onpublicly traded stocks.The colleague says the data in the table consists ofmeasures provided by Standard&Poor's.The analyst finds the table auseful reference forareport she is writing.She uses several pieces ofdatafrom the table.The analyst is potentially inviolationof:

Standard I(C), Misrepresentation, concerning the use of the work of others. Standard V(A), Diligence andReasonable Basis, if she does not first verify the data in the table is accurate.

noparticular standard because this is appropriate activity.

Explanation

Since the data in the table supposedly comes fromStandard&Poor's,arecognizeddata source, the analyst does not have to

cite the source of the data. However, the analyst needs touse reasonable care andverify that the data is accurate by going back to the source. Had the analyst printed the table prepared by hercolleague without acknowledgement, the analyst would have violatedStandard I(C), Misrepresentation.

Fourmonths ago Lance Tuipuloto,CFA,analyzed three equity securities for Janet Scadden. However,Scaddendecided to

invest in bonds instead.Tuipulotonow wants todestroy the records from the stockanalysis. Is this action incompliance with Standard V(C)?

Yes. Tuipuloto does not need to keep the records because his advice was not followed.

No.

Yes.Tuipulotoonly needs tokeep the records for 90days.

Explanation

According toStandard V(C),RecordRetention, the files should be not be destroyed.The CFA Institute recommends keeping all records forat least 7 years.

In the preparationofaresearch report,aCFA Institute membermay emphasize certainmatters, touch briefly onothers,and

omit some altogether:

provided that the analyst has a reasonable basis for his or her actions. undernocircumstances.

provided that the analyst both has areasonable basis and is unconstrained by the Mosaic theory.

Explanation

Question #2

5

of 42

Question ID: 461221

ᅚ A) ᅞ B) ᅞ C)

Question #26 of 42

Question ID: 412530

ᅞ A) ᅚ B)

ᅞ C)

Question #27 of 42

Question ID: 412544

with clients andprospects .The Mosaic theory does not apply here.

Ten years ago Lance Tuipuloto,CFA,met with Horace and Nichole Scadden todiscuss potential investments, but these prospects never became clients.Tuipulotonow wants todestroy the records from the meeting with the prospective clients. Is this action incompliance with Standard V(C)?

Yes; A sufficient number of years have passed since the meeting. No.

Yes; the prospects never became clients.

Explanation

According toStandard V(C),RecordRetention, the files may be destroyed.The CFA Institute recommends keepingall records forat least 7 years.Given that more than7 years have passed since Tuipuloto's meeting with the Scaddens, it is not against Standard V(C) toget ridof the records from that meeting.

Several years ago, HiltonandRoss,afull service investment firm,managed the initial publicofferingof eCom, Inc. Now, eCom

wants HiltonandRoss tounderwrite its secondary publicoffering.A seniormanagerat HiltonandRoss asks Brent Whitman, CFA,one of its equity analysts, to write afavorable research report on eCom to helpmake the underwritinga success. Whitmanconducts a thorough analysis of eComandconcludes that the company has serious problems that donot suggest a favorable financial outlook. Nevertheless, Whitman writes afavorable report because he is fearful of losing his job. Hiltonand Ross publicly distribute areport that only contains a buy recommendationanda briefdescriptionof the basiccharacteristics of eCom. Whitman has violated:

Standard I(B) Independence and Objectivity, only.

Both Standard I(B) Independence and Objectivity andStandard V(A) Diligence and Reasonable Basis.

Standard V(A) Diligence andReasonable Basis only.

Explanation

WhitmanviolatedStandard V(A) Diligence andReasonable Basis because he didnot have areasonable andadequate basis for issuingafavorable recommendation. WhitmanviolatedStandard I(B) Independence and Objectivity because he didnot act independently in issuing his recommendation but instead was influenced by seniormanagement at HiltonandRoss.