CFA 2018 Quest bank 03 Standards of Professional ...egrity of Capital Markets

Question #1 of 23

Question ID: 412379

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ᅞ B) ᅚ C)

Question #2 of 23

Question ID: 412374

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Question #3 of 23

Question ID: 412400

ᅞ A) ᅞ B)

Standards of Professional Conduct & Guidance

:

I

ntegrity of

Capital Markets

Test ID:7440144

Regardingnon-publicinformation, which oneofthefollowingstatementsis NOTcorrect?

Disclosing material non-public information would have an impact on the price of a security or be of interest to a reasonable investor.

Ananalystmayusesometypesofnon-publicinformation.

Amembercan besummarilysuspendedfor havingreceivedmaterialnon-publicinformation.

Explanation

Allofthesearetrueexceptthatamembercan besuspendedfor havingreceivedmaterialnon-publicinformation.Themembercan receivesuch informationaspartoftheirregulardutiesor byaccident. Neitherispunishableinandofitself, andpenaltiesonlyapplyifthe membertradesorcausesotherstotradeontheinformation.Themembermay havecertainduties, such astryingtodisseminatethe informationafterreceivingit.Ananalystmayusenonmaterialnon-publicinformation.

Theterm "material" inthephrase "materialnonpublicinformation" referstoinformationthatislikelytoaffectsignificantlythemarketprice oftheissuingcompany'ssecuritiesorthat:

is acquired by the financial analyst from a special or confidential relationship with the issuing company.

islikelyto beconsideredimportant byreasonableinvestorsindetermining whethertotradea particularsecurity.

isderived bythefinancialanalystfromdirectcommunication with anissuingcompany's management.

Explanation

Anitemofinformationismaterialifitsdisclosure would belikelyto haveanimpactonthepriceofasecurity, orifreasonableinvestors would wanttoknow theinformation beforeinvesting.

Steve Waters, aCFA Level I candidate, hasdecidedtoenterintoalongpositionof Farmcostock.Since Farmcoisthinly

traded, Watersisconcernedtheorder willoverwhelmtheliquidityof Farmcoandtheprice willsurge. Watersengagesina

seriesof blocktradesinordertoaccomplish thepurchase.AccordingtoStandard II(B), MarketManipulation, Waters has

engagedin:

both transaction-based manipulation and information-based manipulation.

ᅚ C)

Question #

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Question ID: 412372

ᅞ A) ᅚ B)

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Questions #5

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Question #5 of 23

Question ID: 461175

ᅞ A) ᅞ B) ᅚ C)

neithertransaction-basedmanipulationnorinformation-basedmanipulation.

Explanation

WatersisnotinviolationofStandard II(B), MarketManipulation.Transaction-basedmanipulationincludes, butisnotlimitedto,

transactionsthatartificiallydistortpricesorvolume. Information-basedmanipulationincludes, butisnotlimitedto, spreading falserumorsaboutafirminordertoinduceotherstotrade.

Which ofthefollowingstatementsregardingStandard II(A), Material, Nonpublic Information, isleastaccurate?

Material, non-public information regarding a tender offer may not be traded on. Informationreceivedfromaninsider whoisnot breaching hisfiduciaryresponsibility may betradedon.

Ifyoureceivetheinformationinapublicforum, it has beendisseminated, andyoucan

tradeonit.

Explanation

Iftheinformationismaterialandnonpublic, theMemberorCandidatecannottradeorcauseotherstotrade. Itdoesnotmatter iftheinsiderdidnot breach hisfiduciaryresponsibility.Theinsideinformationisstillmaterialandnonpublic.

Hunter Harrison, CFA, ispresidentandchiefinvestmentofficer (CIO)of Ironclad Investments, aninvestmentadviserand pensionconsultantformediumandlargecorporatepensionclients. Ironcladrecently hiredacomplianceofficertoupdateits compliancemanual, which followstheCFA InstituteCodeandStandards. Harrisonservesasadirectoronseveralnon-profit

andcorporate boardsofdirectors, someof which havetheirpensionassetsmanaged by Ironclad. Harrisonoversees Ironclad'sresearch analystsandportfoliomanagers, includingMichelleMyers, whopassed Level II oftheCFAexamination lastyearandplanstosignupfornextyear's Level III examassoonasregistrationopens.Myersisaportfoliomanager who regularlymeets with clientsandprospects.Myersisalsoapartnerinasoftwarecompanythatsellsretirementand benefit

administrationservicestoinstitutionalclients, someof which arealsoclientsof Ironclad. During hercorrespondence with prospectsandclients, Myersincludesreferenceto herstatusasa "Level III CFAcandidate" in her biographical backgroundto increase herprominenceintheindustry.

RegardingMyers' referencesof herstatusasacandidateintheCFAprogram, whatStandardgovernstheseactionsandis sheincompliance?

Standard I: Professionalism. Compliance:No. Standard III: DutiestoClients. Compliance: No.

Standard VII: ResponsibilitiesasaCFAMemberorCFACandidate. Compliance: No.

Question #

6

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Question ID: 461176 Standard IV (B.5)-PreservationofConfidentiality.

Explanation

StandardVI(B)-PriorityofTransactionsmostlikelydoesnotapplytoMyers' participationinthesoftwarecompany.Standard VI(B)coverspriorityovertransactionsinsecuritiesorotherinvestmentsforclientsandemployerstopreventanyinstancesof "front-running" forthe benefitofthemember.Myers' software businessisnottransaction-oriented, andthereisnoinformation thatdescribesanyinstancesofthesoftwarecompany havingpriorityinsecuritiestransactionsover Ironcladoritsclients. (StudySession1, LOS2.a,b)

Aspartof Ironclad'sportfoliomanagementactivitieson behalfofclients, HarrisonandMyersmaintainrelationships with third partysoftdollarprovidersandcommissionrecapture brokers.

BetterTradingBrokerage ("BetterTrading"), oneof Ironclad'stopten brokersandsoftdollarproviders, hasoffered

cannotaccepttheofferfromeitherBetterTradingor Worldwind.

canaccepttheofferfrom Worldwind, butcannotaccepttheofferfromBetterTrading.

Explanation

Question #8 of 23

Question ID: 472457

ᅞ A)

ᅚ B) ᅞ C)

Question #

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Question ID: 461179

benefitsreceivedfortheirservicesinadditionthoseprovided bytheiremployer. Harrisonisobligatedtodisclosetheofferand abide byanyfurtherrequirementssetforth by Ironcladpriortoacceptingthetickets. (StudySession1, LOS2.a,b)

Myers hasdisclosed herpartnershipinterestinthesoftwarecompanyto Harrison, includingthepotentialforadditional compensationandthepossibleconflictsofinterest.

OneofMyers' softwareclients, Breakthrough Pharmaceuticals ("Breakthrough"), isapublicly-tradedcorporationthatis also heldinportfoliosof Ironclad'sclients. Inthecourseoftheir businessrelationship, Breakthrough'schiefexecutive officer (CEO)informsMyersthatthecompany has beenexperiencingproblemsmakingretirement benefitpayments, and itspensionplan hasrecentlygonefrom "overfunded" to "significantlyunderfunded" asaresultofmarketconditions. Breakthrough'sCEO indicatestoMyersthat heisattemptingtosourceadditionalshort-termfinancingtomakeretiree benefitpaymentsand willdisclosethesignificant "underfundedstatus" ofthepensionplanintheupcomingfinancial statements.

Myers, concernedabout Ironcladclients holdingstockofBreakthrough giventheimpactonearningsfromthecurrent pensiontroublesandshort-termliquidityissues, informs Harrisonoftheimpendingdisclosure.

Ironcladsells1,800,000 sharesofBreakthrough forclients, causingthepricetodrop $4 pershare. Upondisclosureofthepensiontroubles, Breakthrough'sstockdropped18%.

AccordingtoStandard II-IntegrityofCapitalMarkets, Myers has:

not violated the Standard by sharing information withHarrison because the information did not involve a tender offer.

violatedtheStandard.

notviolatedtheStandardsincetheinformationshared with Harrison wasusedtofulfill Ironclad'sfiduciarydutytoavoidsignificantlosses.

Explanation

Although theinformationshared byMyersmay have helped Ironclad'sclientsavoidlossesinsharesofBreakthrough, the information wasmaterialnonpublicinformation. Inthisexample, Myers' softwarecompanyowesadutyofloyaland

confidentialitytoBreakthrough. Informationis "material" ifitsdisclosure would haveanimpactonthestockorifareasonable investor would wanttoknow theinformationpriortomakinganinvestmentdecision.Materialis "nonpublic" untilit has been generallydisseminatedtothemarketplaceandinvestors have hadanopportunitytoreacttotheinformation.Theinformation aboutBreakthrough'spensiondifficulties was both materialandnonpublic, asthestockdroppedsignificantlyupondisclosure oftheinformationinthemarket.Therefore, Myers hadadutytokeeptheinformationconfidentialandnottotrade, orcause otherstotrade, ontheinformation. (StudySession1, LOS2.a,b)

Ironcladownssharesinseveralresearch andtechnologycompanies, includingapproximately 4% oftheoutstandingsharesof Advanced DSL ("Advanced"), InternetConnections ("Internet"), andapproximately 6% oftheoutstandingsharesofSpeedy ChipTechnology ("SpeedyChip")and Wavelength Digital ("Wavelength").

Harrisonservesonthe boardofdirectorsfor Internetand Wavelength, whileMyersprovidesconsultingservicesfor SpeedyChip. Harrisonreceivescash compensationandstockoptionsfor hisservices, whileMyersreceivesrestricted stockandstockoptions.

ᅞ A)

companiesduetolackofearningstransparencyandqualityofearnings, amongotherissues.

Harrisonincreases hispositionin both Internetand Wavelength citing "growth opportunities" and "consensusopinion." positionreceivetomaterialnonpublicinformation, buttherearenofactspresentedthat wouldinferMyers' receiptoruseof materialnonpublicinformation. (StudySession1, LOS2.a,b)

Harrison, asCIO, ischairmanof Ironclad'sproxyvotingcommittee, whileMyersisavotingmember. Ironclad, asa discretionaryinvestmentmanager, votesproxieson behalfofclients.

Ironcladiscurrentlyreviewingproxiesforseveralcompaniescoveredinresearch, includingtechnologycompanies Advanced DSL ("Advanced"), InternetConnections ("Internet"), SpeedyChipTechnology ("SpeedyChip")and Wavelength Digital ("Wavelength"), which haveallpresentedtheexpensingofemployeestockoptionsforvoteintheircurrentproxies. Investmentpersonnelof Ironcladrecentlyparticipatedinanindustryforuminsupportofincreaseddisclosureforcompany stockoptions, which Ironclad believesprovidesinvestors with amoreaccurateperspectiveofcorporateearnings.

Contrarytocommitteeconsensus, HarrisonandMyersvoteclientproxies "against" theexpensingofemployeestock optionsfor Internet, Wavelength andSpeedyChip.

Allofthefollowingdescribe Harrison'sactionsforcompliance with theCodeandStandardsregardingproxyvoting EXCEPT:

Harrison should vote in accordance withIronclad's policy and coordinate major proxy issues across all client accounts.

Harrisonshoulddiscardallproxieson behalfof Ironclad'sclients whenthereisa conflictofinterest.

Harrisonshouldmaintaintheconfidentialityofvotinginformationon behalfof Ironclad'sclients.

Explanation

Question #11 of 23

Question ID: 412386

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Question #12 of 23

Question ID: 461172

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treatmentofanyconfidentialinformationreceivedin hisroleontherespective boardsofdirectors. Harrisonshouldmaintain confidentialityofvotinginformationon behalfofclientsandfollow Ironclad'sproxyvotingpolicy, coordinatingmajorproxy votingissuesacrossallclientaccounts. (StudySession1, LOS2.a,b)

Astockbroker whoisaCFA Institutememberiscalledonthetelephone bytheCEO ofalargecompany.TheCEO asksto buy sharesoftheCEO'scompanyfortheaccountsoftheCEO'schildren. Inthecourseoftheconversation, theCEO saysthis will reallypayoff whentheupcomingtakeovergoesthrough.Thestockbrokerchecks hersourcesandfindsnoinformationabout thetakeover. Inthiscasethe brokershould:

only execute the order in compliance with Standard III(A),Loyalty, Prudence, and Care. Since the client is buying the stock for the children, there is not a problem.

executetheorderforallclientsasrequired byStandard III(B), Fair Dealing. doneitheroftheactionslisted here.

Explanation

Doinganyoftheseactions would beaviolationofStandard II(A), Material Nonpublic Information.MembersandCandidates mustnotactorinduceotherstoactonmaterialnonpublicinformation.

Carl Weather, CFA, isthechieffinancialofficerofTalbot Enterprises.BasedoninsideinformationaboutTalbot'sfavorable prospects, WeatherconcludesthatTalbot'scommonstockpriceissubstantiallyundervaluedinthemarket. With theapproval ofTalbot'sBoardof Directors, Weatherannouncesaprogramfor hisfirmtorepurchase $100 millionofitsownstockinthe market.Talbot'sstockpricerisesimmediatelyaftertheannouncementoftherepurchaseprogram.

Reese Winter, aCFA Institutemember, is Weather'sassistant. While waitingin Weather'soffice, Winterreadsaninternal memomarked "confidential" fromTalbot'schiefaccountantto Weather.ThememostatesthatTalbotsustainedan

unexpectedsubstantialprofitduringthepastquarter, anditsearningsprojectionsshow asubstantialincreasecompared with previousestimates. Winteruses hercellphonetocall her brotheranddisclosesthisinformationto him. Her brother

immediately buys1000 sharesofTalbot'sstock.

Didtheactionsof Weatherand WinterviolateStandard II(A): Material Nonpublic Information?

Weather Winter

No Yes

Yes No

Yes Yes

Explanation

Question #13 of 23

Question ID: 412393

ᅞ A) ᅚ B) ᅞ C)

Question #1

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Question ID: 412387

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with thefirmthematerialnonpublicinformationisabout.Asacorporateinsider, Weathercanuseinsiderinformationto benefit hisfirm'sshareholders. WinterviolatedStandard II(A) becausetheinformationis both materialandnonpublicandsheis requirednottotradeorcauseotherstotradeontheinformation.

KlausGerber, CFA, isaregularcontributortothe Internetsite WizeGuy.Thispast weekGerber has beenincorrectlyquoted asrecommendingthatinvestors buysharesinBradford, Inc. Heisunawarethatthismessage has beenplacedonthesiteas thequote wasplacedasaprank byanunknownsource.Thisisthethirdtimethis has happenedoverthepastmonth and each timethestock beingmentionedmovedinpriceaccordingtothe buyorsellrecommendation.

Fritz Fox, CFA, maintainsandupdatesthe WizeGuysiteand haslearned how todetermineifthequotes beingattributedto Gerberareactuallyvalid.Severaldayslater, heobservesaninvestmentrecommendation, postedonthesite, to buy Gresham, Inc.Theinvestmentrecommendationispurportedto befromGerber, but Fox actuallyknowsitto be bogus. He immediatelysells1,000 Greshamshortande-mailsGerbertoinform himofthe bogusrecommendation.Gerberimmediately issuesarebuttal, andGreshamfalls by14%. Fox'sactionis:

a violation of the Standard concerning fiduciary duties.

aviolationoftheStandardconcerninguseofmaterialnonpublicinformation. notinviolationoftheCodeandStandards.

Explanation

Eventhough theinformationisfalse, thisfactisknownonlyto Fox andisthusnonpublicinformation.Sincesuch

recommendations haveinthepast hadasignificantaffectonthepriceofthesecurityinquestion, theinformationisclearly material. Fox isinviolationofStandard II(A)Material Nonpublic Information.

ACFO whoisaCFA Institutememberiscarefultomake hispressreleases-someofthemcontainingmaterialandpreviously undisclosedinformation-clearandunderstandableto hisreaders. While writinganew release, heoften has hiscurrentintern proofreadrough drafts. Healsosendselectroniccopiesto his brother, an English teacher, togetsuggestionsconcerningstyle andgrammar. With respecttoStandard II(A), Material Nonpublic Information, theCFO is:

violating the standard by either showing the pre-release version to his intern or sending it to his brother.

notinviolationoftheStandard.

onlyinviolation bye-mailingthepre-releaseversionto his brother butnottheintern, becausetheinternisinessenceanemployeeofthefirm.

Explanation

Question #15 of 23

Question ID: 412373

ᅚ A) ᅞ B) ᅞ C)

Question #1

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Question ID: 412382

ᅚ A) ᅞ B) ᅞ C)

Question #1

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Question ID: 412384

ᅚ A) ᅞ B)

Andrea Watersisaninvestmentanalyst who hasaccumulatedandanalyzedseveralpiecesofnonpublicinformationthrough hercontacts with drugfirms.Although noonepieceoftheinformationshecollectedis "material," Waterscorrectlyconcluded thattheearningsofoneofthedrugcompanies would beunexpectedly high inthecomingyear.AccordingtoCFA Institute StandardsofProfessionalConduct, Waters:

can use the information to make investment recommendations and decisions.

cannotlegallyinvestormakerecommendations basedonthisinformation. mayusetheinformation, butonlyafterapprovalfromacomplianceofficeror supervisor.

Explanation

Members whocanpiecetogetheritemsofnonmaterialnonpublicinformation with publicinformationcan, baseduponthe mosaictheory, usesuch informationfortradingpurposes.

Ananalystprovidesservicesforacharitableorganizationandinreturngetsfreemembershipintheorganization.Partof her job istomanagetheliquidassetsoftheorganization, andthoseassetsincludestocks. Hersupervisorintheorganizationcalls herandtells herto buyacertainstockfortheportfolio baseduponinsiderinformationfroma boardmemberinthe

organization.Theanalystobjects, butthesupervisorsaysthisis whatthey havealwaysdoneandseesnoreasonforchanging now.Theanalystcomplies with therequest. With respecttoStandards IV(A), Loyaltyto Employer, and II(A), Material

Nonpublic Information, theanalystviolated:

only Standard II(A) that prohibits insider trading.

onlyStandard IV(A)requiringdutyofloyalty. both Standards IV(A)and II(A).

Explanation

Anemployee/employerrelationshipdoesnotnecessarilymeanmonetarycompensationforservices.Complying with the requestisaviolationof II(A) which prohibitstradingoninsiderinformation. Standard IV(A) Loyaltydeals with goinginto businessforyourself, leavinganemployerandcontinuingtoactintheemployer's bestinterestuntiltheirresignation becomes effective, and whistleblowing which meansthatthemember'sinterestsandtheirfirm'sinterestsaresecondarytoprotecting theintegrityofcapitalmarketsandtheinterestsoftheclients.

Which oneofthefollowingleastaccuratelydescribestheCFA InstituteStandardaboutusingmaterialnonpublicinformation?

An analyst using material nonpublic information may be fined by CFA Institute. Ananalystmayusenonmaterialnonpublicinformationaslongasit has been

ᅞ C)

Question #18 of 23

Question ID: 412389

ᅞ A) ᅚ B) ᅞ C)

Question #1

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Question ID: 412376

ᅞ A)

ᅚ B)

ᅞ C)

Question #2

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Question ID: 412399

AnanalystmayviolatethisStandard bypassinginformationtootherseven whenit has beenobtainedfromoutsidethecompany.

Explanation

ThereisnoprovisionforCFA Institutetoissuefinestomembers.Membersmaynotusematerialnonpublicinformationfor tradingpurposes. Nonmaterial, nonpublicinformationmay beusedtogether with analysisofpublicinformationunderthe MosaicTheory.

Ananalystisallowedtotradeoninformationthat he haspredicted, such asacorporateactionorevent, usingperceptiveassemblyand analysisofmaterialpublicinformationornonmaterial, non-publicinformation.Thisiscalledthe:

assessment theory.

mosaictheory.

deductiontheory.

Explanation

Thisdeductivereasoningislegal (doesnotconstitutetrading with insideinformation)andiscalledthemosaictheory.

A brokeragefirm hasatradingdepartmentandaninvestment-bankingdepartment. Oftentheinvestment-bankingdepartment receivesmaterialnon-publicinformationthat would bevaluableinadvisingthefirm's brokerageclients. Inordertocomply with theStandards, thefirm:

should record the exchange of information between the investment-banking department and the brokerage department.

shouldrestrictemployeetradinginsecuritiesfor which thefirmisinpossessionof materialnon-publicinformation.

mustdivestoneofthedepartments.

Explanation

Restrictingemployeetradinginstocksfor which thefirm hasmaterialnon-publicinformationisthe bestanswer. Recordingthe exchangeofinformation betweenthetwodepartmentsisnotthe bestoption becausethereshould benoexchangeof information betweenthesetwodepartments. Divestingadepartmentisnotasuitablemethodforaddressingthispotential problem.

ᅞ A) ᅞ B) ᅚ C)

Question #21 of 23

Question ID: 412391

ᅞ A)

ᅞ B)

ᅚ C)

Question #22 of 23

Question ID: 412377

ᅞ A) ᅞ B) ᅚ C)

Williamson hasengagedin:

both transaction-based manipulation and information-based manipulation. transaction-basedmanipulation, butnotinformation-basedmanipulation.

information-basedmanipulation, butnottransaction-basedmanipulation.

Explanation

WilliamsonisinviolationofStandard II(B), MarketManipulation, byengagingininformation-basedmanipulation. Information -basedmanipulationincludes, butisnotlimitedto, spreadingfalserumorsaboutafirminordertoinduceotherstotrade.

Themosaictheoryistheideathatananalystcan:

make investment recommendations on the basis of several pieces of nonpublic information as long as the aggregate information remains nonmaterial.

base hisrecommendationsonnonpublicmaterialinformationonlyfortheclientsofthe company, butnotforthegeneralpublic.

makerecommendationsortrade basedonseveralpiecesofpublicornonpublic

information, each piece byitself beingnonmaterial, but whencompiledtheinformation

becomesmaterial.

Explanation

Themosaictheorypermitsananalysttomakerecommendations baseduponseveralpiecesofpublicornonmaterial information, eventhough thecompliedresultis both materialandnonpublic.

Astockbroker whoisamemberofCFA Institute hasapart-time housekeeper whoalso worksfortheCEO of Festival, Inc. One

daythe housekeepermentionstothe brokerthatshesaw theCEO of Festival havingaconversationat his home with John Tater, whoisanationallyknowncorporatelawyerandconsultant.Thestockbrokerisrestrictedfromtradingonthis information:

only if the broker knows that the meeting is non-public information.

for both ofthereasonslisted here.

ifthe housekeepersaysthemeetingconcernedatenderofferandthe brokerknows

thatitisnon-publicinformation.

Explanation

Standard II(A), Material Nonpublic Information, states "amembercannottradeorcauseotherstotradeinasecurity whilethe

memberpossessesmaterialnonpublicinformation" Atenderoffer wouldcertainly bematerialnonpublicinformation. Knowing

thatthemeetingtookplace, andnothingelse, doesnotrestrictthe broker.Areasonableinvestor wouldneedtoknow moreto

Question #23 of 23

Question ID: 412385

ᅞ A) ᅚ B) ᅞ C)

DonBenjamin, CFA, isthecomplianceofficerforalarge brokeragefirm. He wantstopreventthecommunicationofmaterial nonpublicinformationandothersensitiveinformationfrom hisfirm'sinvestment bankingandcorporatefinancedepartmentsto

itssalesandresearch departments.Themostcommonand widespreadapproach thatBenjamincanusetopreventinsider trading byemployeesisthe:

legal list.

fire wall.

WallStreet Rule.

Explanation

Tocomply with Standard II(A), afire wallprovidesaninformation barrierthatpreventscommunicationofmaterialnonpublic