CFA 2018 Quest bank 09 Guidance for Standards I VII

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Test ID: 7440168

Guidance for Standards I-VII

Question #1 of 142

Question ID: 461245

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Question #2 of 142

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ᅞ B)

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Question #3 of 142

Marc Feldman, CFA, is managerofcorporateinvestorrelationsfora high-tech startup, zippy.com, inBoise, Idaho. Feldman learnsthat Larry Smith, controller, isaltering theaccounting records. Hedecidesthatany ramificationsfrom such activity is Smith's problem anddoesnotreportthisfact. According totheCFAInstituteCodeandStandards heshouldorisrequiredto doall ofthefollowing EXCEPT:

determine legality, consulting counsel if necessary. reporttheactivity tothe FASBorotherrelevantregulatory body. urgeSmith toceasealtering theaccounting records.

Explanation

As perthe Standards of Practice Handbook "The CodeandStandardsdonotrequirethat membersreport legal violationsto theappropriate governmental orregulatory organizations, butsuch disclosure may be prudentincertaincircumstances." In thisinstance, he would likely be betteroffdiscussing the matter with thefirm's legal counsel andSmith'ssuperiors.

Greg Allenisasecurity analystand visits David Dawson, the Chief Financial Officerof Edmonds Company. Dawsonrevealsa greatdeal ofnonmaterial financial datato Allen, datathat Dawsonroutinely revealstoall security analysts who visit him. From thisdataandotherindustry information, Allenconjecturesthat Edmondsis likely to makeatenderofferforanothercompany intheindustry, afactthatiftrue would beconsidered material tothe valueofthecompany. Allen:

must not disseminate the information or use it for trading purposes until the tender offer is announced.

shouldsendacopy ofthereportto Dawsonfor verification beforedisseminating the reporttoclients.

can publish hisconclusioninaresearch report.

Explanation

Whiletheinformationthat Allenreceivedfrom the Edmonds CEO may benon-public, wearealsotoldthatitisnon-material. Because Allen hasreached hisinvestmentconclusionthrough ananalysisof publicinformationtogether with itemsofnon -material non-publicinformation (ie. "mosaictheory"), publishing thisconclusionisnota violationofthe CodeandStandards.

Mike Lang Case Scenario

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prominent banker who left herasizableestate.

Damon, age 80, has littletolerancefor volatility anddoesnot liketoinvestinsmall-cap stocks. However, if her portfoliofailsto advanceat least 10% ina given year, shecalls Lang and yellsat him, then writescomplaint lettersto various Welshire Capital officers. Damon'scomplaint letters usually end up onthedesk of CynthiaSilk, CFA, senior portfolio managerforStonebridge, whooverseesthe work of Lang andadozenother money managers. Atarecent meeting, Silk remindedall portfolio managers thatcompany policy isto manageagainst predetermined benchmarksandall exceptionsshould beclearedfirst with her. Last year, Damon's portfolio lost 25% forthe year, versusa 38% declinefortheS&P 500 Index, the benchmark Welshire Capital usesforall ofits portfolios. Lang triedtoexplainto Damonthatthe market hadanextremely bad year, andthe portfolio beatthe benchmark by a wide marginin large measure because Lang primarily selected large-cap stocksfor Damon's portfoliothatoutperformedthe market. Damonsaidthatshedidnotcareto listentotheseexcusesand wasnot concernedaboutthe marketreturn, only her portfolio'sreturn.

The mostrecentcomplaint letter was particularly ruthless, with Damoncalling into question Lang'scompetenceand

threatening to move heraccounttoanotherfirm. Damon, long-time presidentofthe Nassau County Council, further vowedto persuadefour local businessmento movetheiraccountsas well. Intotal, Damonandthe businessmenshe planstoinfluence represent morethan 20% of Welshire Capital'sassets under management.

Inanefforttofix hisrelationship with Damon, Lang decidestotakefouractions:

1. Set up a meeting at Damon's home, at which time he will explain how important her businessisto Welshire Capital and discusschangesto herinvestment policy statement.

2. Prepare quarterly andannual reportsthatincludetherationalefor purchasing each stock.

3. Defend himselfagainst herattack on hiscompetence by discussing the grueling studiesanddifficultexaminationsrequired toearnthe CFA charterandassure herit gives herevery reasontoexpectthe portfolio will perform betterinthefuture. 4. Explainto herthatdespitethefactthattwoofthe mutual fundsin her portfolio pay referral feestoStonebridge, hefeels

both fundsareexcellentinvestments.

Lang furtherdecidesto begin using adifferent benchmark for Damon's portfolio, onethat betterreflectsthenatureofthe investmentsinthe portfolioandcreatesa moreaccurate perceptionof portfolio performance.

While Lang is moving tosortout hisdifferences with Damon, Silk, hissupervisor, takesactionofadifferentsort. Silk serves with Damononthe Nassau County Council, which takes up aconsiderableamountofSilk'stime, andconsiders Damonto bea personal friend. Shealso knowsabout Damon's volatiletemperandirrational expectations. She has historically triedtoresolve any animosity Damon hastowards Lang.

Thistime, Silk isconcernedthat Damon will make goodon herthreattotake businessaway from Stonebridge. Ina phonecall to Damon, Silk saysshe understands Damon's unhappiness with the poor performanceand promisestodiscussthesituation with Lang andtakeappropriateactionifnecessary. Shealso promises Damonsharesona prorata basisinan upcoming equity offering thecompany is handling assuming thestock issuitablefor Damon's portfolio.

Laterthatday, Silk reviewstransactionsin Damon's portfolioanddeterminesthat Lang's poorassetallocationreducedthe portfolio'sreturns by aconsiderableamount. Shethencalls Lang into heroffice. During thatclosed-door meeting, Silk criticizes Lang's handling ofthe portfolioandtells him sheis giving the portfoliotoanotheranalyst with moreexperience. Beforedismissing Lang, shecallstheotheranalyst, John Van Zant, andtells him that he will betaking over Damon's portfolio immediately, adding the warning thatifthe portfoliodoesnot perform better, Van Zant will not get his bonusthis yearand he must make up the past under-performance.

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ᅚ A) ᅞ B) ᅞ C)

Question #4 of 142

Question ID:461240

Question #

5 of 142

ᅚ A)

violated the Code and Standards when she threatened Van Zant. didnot violatethe CodeandStandards.

violatedthe CodeandStandards whenshecriticized his managementof Damon's portfolio.

Explanation

Thethreats by thesupervisorcouldeasily inducethe managerto makedecisionsthatarenotsuitablefortheclientandtake excessiverisk hoping to make up for perceived poor past performance. Thesupervisorisineffectsetting up incentivesthat leadtoinappropriateactions.

(Study Session 2, LOS 3.b)

Steve Copper has workedasanindependentconsultantforthe pastten yearsadvising companieson various waysto increasetheirinternal efficiency andthereby increasethefirm'sstock priceas well. Copperrecently accepteda job offerfrom anequity research firm asaseniorstock analyst. Oneofthefirms he will beresponsibleforresearching, Johnson Machine Tools (JMT), isalsooneof hisconsulting clients. Coppercurrently hasacontract with JMT to provideconsulting servicesfor anothersix months which he plansto honoreventhough thereareno penaltiesinthecontractforearly terminationon his part. According to CFA InstituteStandardsof Professional Conduct, which ofthefollowing isthemostappropriateactionfor Coppertotake? Coppershould:

disclose the arrangement only if he plans to renew the contract in six months. terminatethecontract with JMT priortoissuing any research onthecompany. disclosetheconsulting arrangementtoclientsconsidering JMTasaninvestment.

Explanation

StandardVI(A)-DisclosureofConflictsrequires membersandcandidatestoinform clients, prospects, andtheiremployersof any situationthat may impairtheirindependenceandobjectivity orinterfere with dutiesowedtothesame groups. The Standardnotesthat best practiceistoavoidconflictsofinterest when possible. This best practicerecommendationis

consistent with StandardI(B)-Independenceand Objectivity, which requiresthatindependenceandobjectivity be maintained. Theconsulting arrangement with JMT, acompany about which Copper will writeresearch reports, divides his loyalty between JMTandtheclients purchasing Copper'sresearch onthesamecompany. Thisisaclearconflictofinterest which must be disclosedtoclients, prospects, andCopper'semployeriftheconflictcannot beavoided. However, thereisno penalty for ending theconsulting relationship and best practice woulddictatethatCopperterminatethecontract with JMT.

ChuckDaniels has just been hiredto manageasecurity analysis group forAaronAsset Management. Daniels performedasimilar

functionatanotherfirm andfindsthecompliancesystem atAaroninadequate. Hedevelopsasystem that hefeelsisappropriate, but

senior managementtells him he will haveto waitsix monthstoimplementthesystem. Danielsshould:

decline in writing to accept supervisory responsibility until a satisfactory compliance

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ᅞ B) ᅞ C)

Question #6 of 142

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Question #7 of 142

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protestin writing thedelay, listing the potential dangersthatcanoccur.

resign his positionimmediately.

Explanation

According totheStandardonsupervisory responsibilities, Danielsshoulddeclinein writing toacceptsupervisory responsibility until a

satisfactory compliancesystem is putinto place.

Paul Drakeisemployed by acompany to provideinvestmentadviceto participantsinthefirm's401(k) plan. Company stockis oneoftheinvestmentoptionsinthe plan. Drakefeelsthatthestockistoorisky foremployeestoownintheir401(k) planand startsadvising them to pull outofthestock. TheTreasurerofthecompany callsDrakeandtells him that he will befiredif he continues making such advice because heis violating hisfiduciary duty tothecompany. Drakeshould:

continue to advise employees to sell their stock.

makesell recommendations but pointoutthatthecompany Treasurer hasadiffering and valid pointof view.

tell employeesthat hecannot provideadviceoncompany stock becauseofaconflict ofinterest.

Explanation

Although Drakeis paid by thecompany, hisfiduciary duty istothe plan participants. Hisadvicecannot becompromised by businessconsiderations, otherwise he will be violating theStandardon loyalty, prudence, andcare.

One yearago, Karen Jason lefttheemploymentasa portfolio managerof HoweAdvisors. Thedeparture wascontentiousand both parties

threatened legal action. Asaresult, both partiessignedasettlementin which Jason was paida prorated bonus, butagreednotto work

onthe portfoliosofany existing Howeclientfortwo years. Thetermsoftheagreement werethat both partiesagreedtokeep all aspects

oftheagreementconfidential, including thefactthatthere was hostility surrounding thedeparture. Jasonnow worksforTorreAdvisors,

who hastheSteinCompany asanew client. Atthetime Jason left Howe, Stein wasaclientof Howe, although Jasondidnot personally

workontheStein portfolio. Jason'ssupervisoratTorre wants Jasonto workontheStein portfolio. Jasonshould:

informher supervisor that she cannot work on the portfolio because of a legal

agreement,but cannot tellhimwhy.

workonthe portfolio becauseshedidnot personally workonthe portfolio whenshe wasat

Howe.

inform hersupervisorthatshecannot workonthe portfolio becauseofanon-compete

agreement.

Explanation

Jason mustinform hersupervisoroftheconflict, butshecannot violatethetermsoftheconfidentiality agreementandshecannot workon

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Question #8 of 142

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Question #

9 of 142

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Questions #10-1

5 of 142

Steve Wynn, CFA, isaninvestmentadvisorand JenniferCarey has beenaclientof hisforthree years. Carey hasshownaninterestin

international stocks, sothey agreetoconsider putting a portionofCarey's portfolioinforeignstocks. Wynn makessurethatCarey is

awareofthecurrency and political risksinherentinforeigninvesting before proceeding. They jointly agreeto purchaseasmall portfolioof

stocksinthecountry ofBellagio becauseoneofthe brokerage housesthat Wynnuses hasa greatdeal offundamental research on

companiesdomiciledthere. Six months lateritisrevealedinthenews mediathatBellagio has hadsevereinsidertrading problems which

havecontributedtothe lossonthe portfolio. Wynn has:

violated the Standards by not informing Carey about the insider trading risks,but not

by contributing to the problem of insider trading.

not violatedtheStandards.

violatedtheStandards by notinforming Carey abouttheinsidertrading risksandcontributing

tothe problem ofinsidertrading.

Explanation

Wynnshould haveknownabouttherisksandshould haveinformedCarey oftherisks. However, merely investing ina marketin which

insidertrading is prevalentisnota violationoftheStandards.

Jessica French isanindividual investmentadvisor with 200clientsandclaimssheconformstoGlobal Investment Performance Standards (GIPS). French includesall oftheclientson her books. Oneofthoseclientsis herfather, to whom shechargesno fee. However, she managesthat portfoliousing thesame processesassheusesfor her paying clients. Anotherclientincluded inthecompositeis John Randolph, a wealthy entrepreneur. Randolph istheonly client whodoesnot give herdiscretionover theassetsand makesevery decision himself, getting suggestionsfrom French andusing hertoimplementdecisions. French:

conforms to GIPS, if disclosures are made about the non-fee-paying account. has violatedGIPS becauseitincludes herfather'saccount, butnot becauseitincludes Randolph'saccount.

has violatedGIPS becauseitincludes Randolph'saccount, butnot becauseitincludes herfather'saccount.

Explanation

Non-fee-paying clientscan beincludedinthesamecompositeasfee-paying clientsas long asitisdisclosed. Nondiscretionary clientsshouldnot beincludedinthecompositeastheclients wouldnotadheretotheinvestmentstrategy used by the

investmentadvisor.

MichaelPennington Case Scenario

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Question #10 of 142

Question #11 of 142

inBelgium and providesinvestment managementservicesto high net workindividuals. Penningtonisalsoa Level III CandidatefortheCFAdesignation.

Oneof Pennington'sclientsisthe Flandersfamily. Pennington hada long relationship with Helmut Flanders. Before Flanders's untimely death, he gave Penningtonfull discretionover his portfolio basedonaninvestment policy statementthat had been refinedcontinuously overthe years.

Flanders wasthe presidentofa publicly traded manufacturing company, Allux, and20% of his portfolio'sassets were investedinAllux equity. Hiscontract with Allux prohibitedselling hisAllux shares while he wasemployed.

Flanders had little liquidity needs. Hischildren were grown, and hissalary atAllux wassufficienttocover hisannual expendituresas well ascontributeto hisinvestment portfolio.

Aformeraccountant, Flanders had beenextremely knowledgeableandcomfortable with theinvestmentdecision-making process.

Penningtonowns10,000sharesofAllux andservesonAllux's board.

Pennington played golf with Flandersonaregular basisand, with Flanders's help, developed many clientrelationships from theseoutings.

AIA hasanagreement with a local brokeragefirm, FirstBrokerage, owned by Pennington'ssisterto placeall AIAtrades through FirstBrokerage.

Flandersagreedin writing thatall tradesin his portfolio would bedirectedto FirstBrokerage.

Pennington purchasednew carpetsfor hisoffice with softdollars. He believesthat his managers make betterinvestment decisions whentheirenvironmentis pleasantandcomfortable.

Penningtonattendedanindustry conferenceintheBahamas with softdollars. The program isdevotedtoimproving managementoftheinvestmentadvisory firm. He believesthata well-runfirm makes betterinvestmentdecisions. Penningtonconsistently usessoftdollarsto purchaseresearch reportsfrom anindependentresearch firm thatdoes in-depth analysisofacompany'sfinancial reporting. Several of his managers havecommentedonthe quality andusefulness ofthesereportstotheiranalysisanddecision making.

Pennington hasanappointmentto meet with Flanders's widow, Elise, who, asanartist, left managementoftheirfinancial assetsto her husband. Sheis meeting with Penningtonto betterunderstand herfinancial position.

Which ofthefollowing Standardsismostrelevantregarding Pennington's meeting with Elise? Standard III(C), Suitability.

StandardIII(E), PreservationofConfidentiality. StandardIII(A), Loyalty, Prudence, andCare.

Explanation

StandardIII(C), Suitability, ismostrelevantfor Pennington's meeting with Elise. ThisStandardrequires Penningtonto makea reasonableinquiry into Elise'sfinancial situation, investmentexperience, andinvestmentobjectives priorto making any recommendationsabout her portfolio. Pennington mustalsoconsidertheappropriatenessoftheexisting portfolioand investment policy statementfor Elise. StandardIII(A)also hassomerelevancesince Penningtonisina positionoftrust with respectto Elise, and Pennington mustensurethat hisandAIA's goalsdonotconflict with Elise's. (Study Session1, LOS2.a,b)

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ᅞ A) ᅞ B) ᅚ C)

Question #12 of 142

Question ID:484921

Question #13 of 142

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securitiesofotherinvestments, thatcould beexpectedtoimpairthe member'sability to makeunbiasedandobjective recommendations. Which ofthefollowing matters wouldleastlikely bedisclosedto Elise?

Pennington owns shares in Allux.

AIA hasasoftdollararrangement with a brokeragefirm owned by Pennington'ssister. Pennington played golf with Helmut Flandersonaregular basisanddevelopedclient relationshipsfrom those golfoutings.

Explanation

Pennington playing golf with Elise's husband Helmut Flandersisnotaconflict with respectto hisrelationship with Elsieand he neednotdiscloseto herthat he played golf with Flanders. Flanders was hisclientatthetimeandthere wasfull disclosurethat Penningtondevelopednew clientrelationships. Al theother matters must bedisclosed. (Study Session1, LOS2.a,b)

Which ofthefollowing bestdescribes Pennington'scompliance with theCFAInstituteStandardsregarding hisuseofsoft dollars? The purchaseof:

research reports is an allowable use of soft dollars.

both research reportsandcarpeting areallowableusesofsoftdollars.

research reportsandattending theconferenceareallowableusesofsoftdollars.

Explanation

Brokerageiscommission generatedfrom tradesandisanassetoftheclientnottheinvestment manager. Softdollarsisthe useof brokerageto purchaseresearch servicesthat benefittheclientintheinvestmentdecision-making process. The investment manager hasanongoing responsibility toseektoobtain bestexecution, minimizetransactioncosts, anduseclient brokerageto benefitclients. Consequently, contingentondisclosureofasoftdollararrangementtoclients whose portfolios might beaffected, theCFAInstituteStandards permitclient brokerageonly to beusedto purchaseresearch; thatis, goods andservices, the primary useof which directly assiststheinvestment managerintheinvestmentdecision making processand notinthe managementofthefirm. (Study Session1, LOS2.a,b)

Pennington would liketocontinuetodirecttradesfrom Elise's portfolioto hissister's brokeragefirm. Inordertocontinue with thisarrangementandcomply with theCFAInstituteStandards, which ofthefollowing disclosuresarerequired?

Pennington must disclose policies with respect to all soft dollar arrangements and receive written consent fromElise that she understands the consequences if he is not seekingbest price and execution throughFirst Brokerage.

Pennington mustclearly disclosethat hisduty astheinvestment manageristo continuetoseektoobtain bestexecution.

Pennington mustdisclosethatdirected brokeragearrangementsthatrequirethe investment managertocommitacertain percentageof brokerage mightaffect his ability toseektoobtain bestexecution.

Explanation

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Question #14 of 142

Question #1

5 of 142

Prudence, andCare, requires Penningtontoseek best priceandexecution with histradesandif hedirectstradesthrough a brokerin which he may notreceive best priceandexecution he must geta writtenstatementfrom hisclientsthatthey are awarethat heisnotseeking best priceandexecutionandtheconsequencesfortheiraccounts. (Study Session1, LOS2.a,b)

Afterdetermining Elise'sriskandreturnobjectives, liquidity needs, tax considerations, anduniquecircumstances, Pennington hasdecidedthe he mustreduce Elise's holding ofAllux shares. He hasseveral otherclients, whom he metthrough Flanders, whoalso havesignificant holdingsinAllux. Pennington hasalsodecidedtoreduce hisown holdingsinAllux since histerm asa directorofAllux will beup in June. Hedoesnot plantoseekreappointment, butasa memberoftheauditcommittee, heis privy toinformationaboutatenderoffer. Penningtonrealizesthisisacomplex situation.

Ofthefollowing Standards, determine which wouldleastlikely help Penningtondecide whatactions with respecttoselling sharesofAllux would beincompliance with theCFAInstituteStandardsof Practice.

Standard III(C), Suitability. StandardIII(B), FairDealing.

StandardVI(A), DisclosureofConflicts.

Explanation

StandardIII(C), Suitability, is least likely to provide Pennington with guidance when heconsidersselling Elise's holdingsof Allux. Thisstandarddescribes members' responsibilitiesindeveloping appropriaterecommendationsandtaking suitable actions. Toreach the point where he hasdecidedtosell Elise'sshares, Pennington wouldalready have metthese requirements. He hasdetermined Elise'sand hisotherclients' requirementsand hasrecommendedanappropriateand suitableinvestmentaction. Hisconcernis how toimplement hisrecommendationand beincompliance with theStandardsof Professional Conduct.

Pennington hasseveral problems with respecttoselling sharesofAllux from Elise's portfolioandthe portfoliosof hisother clients. First, he mustcomply with StandardIII(B)anddeal fairly andobjectively with all clientsand prospects whentaking this investmentaction. Pennington mustdisclose hisownership ofAllux toall affectedclientsaccording toStandardVI(A)and ensurethattransactionsforclientstake precedenceovertransactionson hisown behalfaccording toStandardVI(B). (Study Session1, LOS2.a,b)

Since PenningtonisadirectorofAllux anda memberoftheauditcommittee, whatadditional Standardisspecifically applicable to Pennington'sdecisiontosell hisand hisclients' sharesofAllux?

Standard IV, Duties to Employers. StandardII, Integrity ofCapital Markets.

StandardVII, ResponsibilitiesasaCFAInstitute MemberorCFACandidate.

Explanation

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Questions #16-21 of 142

Question #16 of 142

Mary Montpier, CFA, isanequity analyst locatedinthe Malaysiaofficeof WorldClassAdvisers. Thefirm providesinvestment adviceandfinancial-planning services globally toinstitutional andretail clients. The Malaysiaoffice wasopened last yearto provideadditional international investmentopportunitiesfor U.S. clients. Montpiercoverssmall-cap stocksintheregion. Montpier'ssupervisor, Rick Reynolds, CFA, worksin New York.

Jim Taylorisananalystin New York who worksat WorldClassBroker-Dealer, asistercompany of WorldClassAdvisers. Taylorcovers healthcareand biotech stocksforthefirm. Taylorrecently completed Level IoftheCFAexaminationandis registeredforthe Level IIexaminationnext year. Taylor worksfor John James, CFA.

Through herinteraction with otheranalystsin Malaysia, Montpier learnsthattheuseof material, nonpublicinformationis common practiceinanalystresearch reportsandrecommendations, which isnot prohibited by law in Malaysia. Montpier has acquired material, nonpublicinformationontheresearch pipelineofCircuitSecrets, a Malaysiansemiconductorcompany. The nonpublicinformation makesthecompany seem likeafineinvestment. Afterextensiveresearch through traditional means, CircuitSecretsappearedto befully valuedrelativetoits growth potential until Montpierfoundthenonpublicinformation. In preparationforaclient meeting, JamesasksTaylorto preparearesearch reportonattractivecompaniesinthe healthcare industry. SinceTayloris busy preparing forcompany conferencecalls, Jamestells him to "throw something together." To meet James' request, TaylorobtainsreportsonImmune Health Careand Remedy Corp., twocompaniesthat he likes, but hasnot researchedindepth. Taylortakestheoriginal reports, which were prepared by asmall brokeragefirm inthe Netherlands, addssome general industry information, incorporates WorldClass's proprietary earnings-growth model, andsubmits "strong buy" recommendationsto Jamesforthestocks. Although written proceduresrequire Jamestoreview all analystreports prior torelease, timeconstraintsconsistently prevent him from reviewing thereports priortodistribution.

Montpieris proudof herCFAcharter. Infact, sheoften boaststhatsheisoneoftheelite membersoftheCFAInstitutethat passedall threeexamsconsecutively withoutfailing. Taylorisalso proudoftheCFA program. Hetold hisfriendsandfamily theCFAdesignationis globally recognizedinthefieldofinvestment managementandresearch. Furthermore, Taylorstates that he believesthe program will enhance his portfolio managementskillsandfurther hiscareerdevelopment.

In herfreetime, Montpier has begunconsultationfor membersofa local investmentclub. Theclub isinthe processof developing anappropriatecompensation packagefor herservices, which todate haveincludedfinancial-planning activities andinvestmentresearch. Montpierinformstheinvestmentclub thatshe hasafull-time job at WorldClassAdvisers, which offerssimilarservices. Theinvestmentclub gave Montpier written permissiontoconsultforthem despite herfull-time work. To gaininsighton biotech stocks, Taylorregistersforanupcoming asthmastudy conducted by Breakthrough Corp., through which heandothers will bethesubjectoftesting fortheefficacy ofseveral new drugs. On hisapplication, longtimeasthma suffererTaylorindicatesthat he hastheappropriate medical conditionforthestudy andsignsaconfidentiality agreement. During thestudy, aresearchershowsTayloraspreadsheetdetailing the progressofBreakthrough'sresearch pipeline. Twoof thenew drugson which Breakthrough isawaiting regulatory approval haveseriousnegativesideeffectsin patienttesting. This informationconfirmssuspicionsTaylor haddevelopedafterextensiveresearch andconversations with company executives regarding nonmaterial, nonpublicinformation, though he wasnotcertainaboutthenamesofthedrugsuntil hesaw the spreadsheet. Attheconclusionofthestudy, Taylorreleasesareportdetailing thedrugs' sideeffectsandrecommendsthat clients "sell" Breakthrough Corp.

Overthenexttwo weeks, Breakthrough releasesinformationthatthedrugsin question have been heldup by aregulatory agency pending additional investigation. Thestock plunges morethan30% onthenews.

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ᅞ B)

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Question #17 of 142

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Question #18 of 142

Taylor sends out a resume referring to himself as a Level II CFA candidate and indicatinghis intention to take the Level II test in June.

James hasdinner with Taylorand promisesto provideTaylor with three weeksoffin May tostudy fortheCFAexam andoffersometest-taking tips.

Reynoldsapproves Montpier'sreportonCircuitSecretsimmediately, buttells his tradersto waita week before buying thestockthemselves.

Explanation

Animmediateapproval of Montpier'sreportimpliesthat Reynoldsdidnotcheckthefactsortalkto Montpieraboutthe recommendation, which wasdependentontheuseofinsiderinformation. Reynolds violatedtheStandardrelating to supervisory responsibilities. Side workthatisnotincompetition with theintern'sfirm isnota violationunlesstheside job interferes with her workfor WorldClass. ThestatementonTaylor'sresumeisappropriate, and James' plansto help Taylor are well withintherequirementsoftheStandards. (Study Session1, LOS2.a,b)

Which ofthefollowing statementsabout Montpier'sanalysisofCircuitSecretsisCORRECT? If Montpier prepares a research report for allWorld Class clients recommending Circuit Secrets as a "buy,"but does not reveal the nonpublic information, she has stillviolated Standard II(A)-MaterialNonpublic Information.

Montpier's bestcourseofactionistoinitiatecoverageofCircuitSecretsasa "hold," andattemptto getthecompany todisclosethenonpublicinformation.

Montpiercouldsatisfy therequirementsofStandardII(A)-Material Nonpublic Information by producing aresearch reportonCircuitSecretsfor Malaysianclients, butnot making itavailableto U.S. clients.

Explanation

StandardII(A) prohibitsnotonly therevelationofnonpublicinformation, butalsotrading onthe basisofthatinformation. The buy rating itselfisa productofthenonpublicinformation, andassuch isa violation. Montpier mustcomply with theCodeand Standardsregardlessofthe laxnessofregulationsin hercountry. If Montpier believesthestockisa buy, initiating itasa hold would beinappropriate. Analystscannot beexpectedto havearecommendationonevery stock, sofailing torecommenda potentially goodstockisnota breach offiduciary duty. (Study Session1, LOS2.a,b)

With regardtoStandardVII(B)-ReferencetoCFAInstitute, theCFADesignation, andtheCFA Program: neither Montpier nor Taylor is in compliance.

only Taylorisincompliance.

both MontpierandTaylorareincompliance.

Explanation

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Question #1

9 of 142

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Question #20 of 142

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Question #21 of 142

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ᅞ C)

Which ofthefollowing actionscouldTaylortaketoensure heisnotin violationofStandardI(C)-Misrepresentation? Just use excerpts from the original reports, rather than copying the whole

reports.

InitiatecoverageofImmune Health Careand Remedy Corp. as holds, notstrong buys, until he hastimetodofurtherresearch.

Base hisreportoninformationfrom Value LineandStandard & Poor'sreportsrather thanresearch from rival analysts.

Explanation

Value LineandStandard & Poor'sare "recognizedfinancial orstatistical reporting services," andassuch, can beusedasthe basisforreports withoutacknowledgment. Caveat:Those publicationsarecopyrighted, andcopying directly from them may be illegal insomecircumstances, evenifitdoesnottechnically violatethe plagiarism Standard. Using excerptsisstill plagiarism andchanging thestockrecommendation will notchangethatfact. Itisunlikely thataDutch research report wouldnot be protectedunder U.S. copyright, andevenifit werenot, using the material withoutattributionstill violatestheStandard. (Study Session1, LOS2.a,b)

Which ofthefollowing statementsregarding StandardIV(A)-Loyalty to EmployerisCORRECT? By accepting compensation for his role in the medical study, Taylor is violating the Standard.

NeitherTaylornor Montpierisin violationoftheStandard.

Despite getting written permissionfrom herclienttoconsult, Montpierisnotin compliance with theStandard.

Explanation

Montpierneedsto get permissionfrom both theclientand heremployer beforeshecan begintoconsult; sinceshe hasnot received permissionfrom WorldClass, sheisnotincompliance. NeitherTaylor'suseofrivals' research nor his participationin a medical study violatetheStandard. StandardIV(A)addressesoutsideincome, notresearch methods. And whilethe medical -study paymentiscertainly income, itisnotincompetition with hisfirm, andassuch doesnot violatetheStandard. (Study Session1, LOS2.a,b)

Taylor'sactionsregarding Breakthrough Corp.:

do not violate Standard II(A)-MaterialNonpublic Information because he was only confirmingwhat he already suspected.

violateStandardII(A)-Material NonpublicInformation becausetheinformation wasnot inthe publicdomain.

didnot violateStandardI(D)-Misconduct because hedidnot misappropriatethe information.

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Question #22 of 142

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Question #23 of 142

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Questions #24-2

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Taylor'suseofthe material nonpublicinformation providedto him inconfidence by aresearcherisaclear violationof StandardII(A). The professional-misconductStandard prohibitsactionsthatreflectnegativeon "professional reputation, integrity, orcompetence." SinceTaylor hassignedaconfidentiality agreement, his violationoftheagreementdefinitely says something about his honesty. Thus, heisin violationofStandardI(D). StandardIV(A)only appliesto workincompetition with theemployer. (Study Session1, LOS2.a,b)

While having aconversation with a prospectiveclient, John Henry statesthat his performanceacrossall of his pastclientsover the pastfive years wasover20%, which was200 basis points higherthan his benchmark. Hetellstheclientthat whilethe benchmark may riseorfall overtime, hisexcess performance will remainconsistent. Henry violatedtheStandardsof Professional Conduct because:

he cannot discuss performance without clearly stating that the composite does not conform to GIPS.

thestatementofexcess performanceis misleading with respecttoitscertainty. hecannotdiscuss prospectivefuture performanceinany manner.

Explanation

Guaranteeing performanceoninvestmentsthatareinherently volatileis misleading toclients.

NedBrenan managestwodozen pensionaccounts, oneof which earnedover25% during the pasttwo years. Brenantells prospectiveclientsthat basedon pastexperiencethey canexpecta25% returnontheirfunds. Which ofthefollowing statementsisCORRECT?

Brenan has violated both Standard of Professional Conduct III(D),Performance Presentation, and Standard I(C),Misrepresentation.

Brenan has violatedStandardof Professional ConductIII(D), Performance Presentation, butBrenan hasnot violatedStandardI(C), Misrepresentation. Brenan hasnot violatedStandardof Professional ConductIII(D), Performance Presentation, butBrenan has violatedStandardI(C), Misrepresentation.

Explanation

Brenan violatedStandardof Professional ConductIII(D) by using only one portfolio'sresultstocreateafalseimpressionofall the portfolios, andBrenan violatedStandardof Professional ConductI(C) by creating theimpressionthatacertainreturn was assured (heshould haveusedthe words "might" or "could" insteadof "can").

InAugust2005, thefollowing eventsoccurredrelatedtoAggregate Opportunities, Inc.: