CFA 2018 Quest bank 07 Standards of Professional ...nce Conflicts of Interest

Question #1 of 25

Question ID: 412576

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Question #2 of 25

Question ID: 412601

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Question #3 of 25

Question ID: 412563

ᅞ A) ᅚ B) ᅞ C)

Standards of Professional Conduct & Guidance

:

Conflicts of

I

nterest

Test ID:7440159

Will Lambert, CFA, isafinancialanalystfor Offshore Investments. Heispreparing apurchaserecommendationonBurch Corporation. According toCFA InstituteStandardsofProfessionalConduct, which ofthefollowing statementsaboutdisclosure ofconflictsismostcorrect? Lambert would havetodisclosethat:

he has a material beneficial ownership of Burch Corporation through a family trust.

both ofthesechoicesrequiredisclosure.

his wifeowns2,000 sharesofBurch Corporation.

Explanation

Standard VI(A)requiresthat MembersandCandidatesfully discloseallmatters which may impairtheirindependenceor objectivity orinterfere with theirdutiestotheiremployer, clientsandprospects.

WesSmith, CFA, refersmany of hisclientstoBillTowers, CPA, foraccounting services. Inreturn, Towersperformsroutine servicesforSmith, such as histax returns, fornocharge. Towers has just becomeamemberofCFA Institute. With this development, Towersmust:

reveal to the prospects referred by Smith that he performs services for Smith, alongwith the estimated value of those services.

only revealtotheprospectsreferred by Smith that heperformsservicesforSmith. discontinue hisservicesforSmith.

Explanation

According to VI(C), Referral Fees, asamemberofCFA Institute, Towersmusttell hisclientsaboutthepaymentin kindto Smith along with anestimateofthe valueofthoseservices.

Lee Hurst, CFA, isanequity research analystforalong-terminvestmentfund. Hisannual bonusislinkedto quarterly trading profits. Underanew policy, the quarterly assessmentperiodisswitchedtoamonthly assessmentperiod. According tothe CodeandStandards, bestpracticesdictate:

keeping the policy change private as a trade secret. updating disclosures whenthepolicy changeisimplemented.

Question #

4

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Question ID: 412586

ᅞ A)

ᅚ B)

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Question #5 of 25

Question ID: 461226

ᅚ A)

ᅞ B)

ᅞ C) Explanation

Standard VI(A) "DisclosuresofConflicts" recognizesthispolicy asapotentialconflictofinterestasmembersandcandidates could beincentivizedtofavorshort-termtrading gainsoverlong-term valuecreation. Bestpracticesdictateupdating

disclosures whenthepolicy changeisimplemented. Thelong-terminvestorsshould know how membersandcandidatesare compensated, especially whenthereisthepotentialforconflictsofinterest.

Ananalyst hastheopportunity tooffer hisclientssharesina "hotnew issue." Oneoftheanalyst'sclientsis his brother. When thenew issuecomesout, forthoseclients hedeemsit would beappropriate, heoffersthemanequalshare. Heincludes his brotherinthat group. With respecttoStandard VI(B), Priority ofTransactions, thisis:

congruent with the Standard even if he has a direct personal interest in his brother's account.

congruent with theStandardaslong as hedoesnot haveadirectpersonalinterestin his brother'saccount.

congruent with theStandardif his brotherisnota 'coveredperson'.

Explanation

Clientaccountsthat belong tofamily membersshould betreatedlikeany otheraccountsolong asthereisnodirectinterest onthepartoftheanalyst. Inother words, thesetypesofaccountsshouldnot beatadisadvantagerelativetootherclient accounts whenthereisnodirectinterestonthepartoftheanalystoverseeing theaccount.

Questions 1 through 18 relate to Ethical and Professional Standards.

Ralph Reed, CFA, isaportfoliomanager whoinvestsin U.S. equities. Reedrefersclients with aninterestininternational equitiestoGlobalAdvisorsandreceives $1,000 foreach referral. Which ofthefollowing statementsbestdescribesthe disclosures Reedmustmaketoclients?

At the time he makes a referral to Global,Reed must disclose the referral arrangement with Global and the amount of the referral fee he receives from Global.

Atthetime hemakesareferral, Reedmustdisclosethat he willreceiveareferralfee fromGlobal.

Reedmustdisclosethearrangement with Globalonly toaclient herefers whoopens anaccount with Global.

Explanation

Standard VI(C) Referral Feesrequiresthatmembers whoexpecttoreceiveanything of valuefrommaking areferraldisclose thatfactandtheamountandnature (one-timepayment, ongoing fee)ofany referralfeesothatpotentialandexisting clients canmaketheirowndeterminationof how thereferralarrangementmay affectthemember'sobjectivity.

Question #

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Question ID: 461225

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Question #

7

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Question ID: 412583

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Question #

8

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Question ID: 461223

Toni Florence, CFA, CAIA, leasesofficespaceto her bestfriend, Tom Rigs. Florenceisanindependentinvestmentadvisor specializing in high net worth clientsand Rigsisalicensedrealestate broker. Inlieuofpaying rent, Rigsrefers hisrealestate clientsto Florence, butonly with theclients' permission.

Forclientsreferred by Rigs, Florence:

need not disclose the referral fee if Rigs discloses the lease arrangement to the clients first.

neednotdisclosethetermsoftheleasearrangement because Rigsobtainedthe clients' permissionforthereferral.

mustdisclosethetermsoftheleasearrangement.

Explanation

Standard VI(C), Referral Fees, requiresmemberstodisclosetoclientsandprospectsany considerationor benefitreceived by thememberordeliveredtoothersfortherecommendationofany servicestotheclientorprospect. Florence hasdelivereda benefit (freerent)to Rigs, which must bedisclosedtotheclientsreferred by Rigs. Florencemustnotrely on Rigstomakethe disclosure.

Ananalyst, whoisaCFA Institutemember, managesa high-grade bondmutualfund. Thisis hisonly professional responsibility. Whentheanalystcomesacrossaspeculativestock investmentthat hefeelsisa goodinvestmentfor his personalportfolio, theanalyst:

is in violation of Standard IV(A),Loyalty to Employer,by spending time analyzing stocks when he should only analyze bonds.

may investinthestock becausetheanalyst wouldnotpurchasethestock forthe bond portfolio hemanages.

mustnotify hissupervisoraboutthestock according toStandard VI(B), Priority of Transactions, toseeifitisappropriatefortheportfoliothat hemanages.

Explanation

Theproblemsaystheanalyst "cameacross" thespeculativestock investment. Wedonot know iftheanalystneglected his duties. Sincesuch aninvestmentisclearly notappropriatefora high-grade bondfund, theanalystmay investinthestock withoutany restrictionsrelating tothefund.

ᅞ A) ᅞ B) ᅚ C)

Question #9 of 25

Question ID: 412577

ᅚ A) ᅞ B) ᅞ C)

Question #1

0

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Question ID: 412581

ᅞ A) ᅞ B)

ᅚ C)

Question #11 of 25

Question ID: 412591

Standard III(B) -Fair Dealing.

Standard V(B) - Communication with ClientsandProspectiveClients. Standard VI(A) - DisclosureofConflicts.

Explanation

Standard VI(A)requiresthatmembersfully discloseallpotentialconflictsofinterest, including ownershipofstock incompanies thatthememberrecommendsorthatclients hold. Standard III(B), Fair Dealing, forbidsmembersandCandidatesfrom discriminating againstany clients whendisseminating recommendationsortaking investmentaction. Standard V(B),

Communication with ClientsandProspectiveClients, requiresthatmembersdisclosethe generalprinciplesoftheinvestment processesused, anddistinguish betweenopinionsandfacts.

PhilTrobb, CFA, ispreparing apurchaserecommendationonAneas Lumberfor hisresearch firm. Allofthefollowing are potentialconflictsofinterest EXCEPT:

Trobb's cousin repairs machines for Aneas.

Aneas hiresTrobb asaconsultanttoanalyzeAneas' financialstatements. Trobb'sresearch firm hasalargestakeofownershipinAneas Lumber.

Explanation

Standard VI(A)defines whatconstitutesaconflictofinterest with regardtoclients, prospectiveclients, andemployers. Allof theserepresentpotentialconflictsofinterest with theexceptionofthecousin working forAneas Lumberina job thatis unrelatedtotheAneas' financing.

Abner Flome, CFA, is writing aresearch reportonPaulsenGroup, aninvestmentadvisory firm. Flome's brother-in-law holds sharesofPaulsenstock. Flome hasrecently interviewedforaposition with Paulsenandexpectsasecondinterview. According totheStandards, Flome'smostappropriateactionistodiscloseintheresearch report:

his brother-in-law's holding of Paulsen stock.

his brother-in-law's holding ofPaulsenstock andthat heis being consideredfora job atPaulsen.

that heis being consideredfora job atPaulsen.

Explanation

ᅞ A) ᅚ B) ᅞ C)

Question #12 of 25

Question ID: 412592

ᅞ A) ᅞ B) ᅚ C)

Question #13 of 25

Question ID: 412578

Gordon McKinney, CFA, worksinthetrustdepartmentofa bank. The bank'strustaccount holdsalarge block ofaparticular company. McKinney learnsthatthiscompany is going to buy back onemillionsharesata15% premiumtothemarketpriceon afirst-come-first-served basis. McKinney immediately tells hismother-in-law totender hershares but waitsuntiltheendofthe day totenderthetrust'sshares. McKinney hasmostlikely violated:

Standard IV(A),Loyalty to Employer. Standard VI(B), Priority ofTransactions. Standard II(A), Material Nonpublic Information.

Explanation

Standard VI(B), Priority ofTransactions, applies. Ifananalystdecidestomakearecommendationaboutthepurchaseorsale ofasecurity, hemust give hiscustomersoremployeradequateopportunity toactonthisrecommendation beforeacting on hisown behalf. Personaltransactionsincludethosemadeforthemember'sownaccountandfamily accounts. Here, McKinney violatedStandard VI(B) by acting on hismother-in-law's behalfandthen waiting untiltheendoftheday toacton his

employer's behalf.

Explanationsforotherresponses:

Standard IV(A), Loyalty to Employer, doesnotapply. Thisstandardconcernsamembercompeting with his/heremployer (independentpractice), forexampleamember whoengagesinoutsideconsulting.

Standard II(A), Material Nonpublic Information, doesnotapply. The questiondoesnotindicatethattheinformationisnot public.

Ananalystlikestotradeoptionsin herownaccount. Shedoesnotdeemany of herclientaccountssuitableforoptiontrading. Whenshefindsafavorableoptionsposition, inaccordancetoStandard VI(B), Priority ofTransactions, sheshould:

first tell her clients about it before actingherself. refrainfromacting untilshenotifies hersupervisor. actoniton herown behalfassheseesfit.

Explanation

Thisisnota violationofStandard VI(B), Priority ofTransactions, becausetheinvestmentisnotsuitablefor herclients. Ifthe analyst believesthatnoneof herclientsshouldtradeoptions, sheisnotobligatedtoadvisetheminthisinstance.

Thefollowing scenariosinvolvetwoanalystsat DupreeAsset Management, asmall New York-basedcompany with about $150 millioninassetsundermanagement. Dupreerestrictspersonaltrading ofstocksanalyzed, corporatedirectorships, trusteepositions, andotherspecialrelationshipsthatcouldreasonably beconsideredaconflictofinterest with their responsibilitiestotheiremployer.

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Question #1

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Question ID: 412590

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Question #15 of 25

Question ID: 412589

ᅞ A) ᅞ B) ᅚ C)

trusteesandendowmentcommittee. Boltdidnotinform Dupreeof hisinvolvement with Midwest University.

Wanda Delvecco, acandidateintheCFAProgram, isa juniorinvestmentanalyst. Sherecently wrotearesearch reporton AvecoCommunicationsandrecommendedthestock for Dupree's "buy" list. Delvecco bought200 sharesofAvecostock for herpersonalaccount12months beforeshe wrote herresearch report. Overthepast12months, thestock'sprice has beeninthe $20-42pricerange. Delvecco hasnotinformed Dupreeof herownershipofAvecostock.

According toCFA InstituteStandardsofProfessionalConduct, which thefollowing statementsaboutBoltand Delvecco's actionsisCORRECT?

Delvecco violated the Standards,but Bolt did not. NeitherBoltnor Delvecco violatedtheStandards. Both Boltand Delvecco violatedtheStandards.

Explanation

Standard VI(A), DisclosureofConflicts, requiresthatBoltinform Dupreeof hisinvolvement with Midwest University giventhat Bolt'snew rolecan beexpectedto betimeconsuming andpossibly affect hisresponsibilitiesat Dupree. Delveccoisrequired todisclose herownershipofAvecostock beforeconducting theresearch report becausesuch ownershipcould bias her objectivity inmaking arecommendation. Sheshould havediscussedowning thestock with hersupervisor before beginning to writetheresearch reportonAveco.

Afirmproducesregularproprietary research reportson variouscompanies. According toStandard VI(B), Priority of Transactions, which ofthefollowing would bean "accessperson?"

A person working in the mail room.

Anindependentauditor with accesstomaterial, non-publicinformationonacompany being analyzed.

Asupervisory analyst whoreviewsallresearch reportspriortodissemination.

Explanation

Persons with accesstoinformationduring thenormalpreparationofresearch recommendationsaresubjecttoStandard VI(B). Anindependentauditorisnotinvolvedinthenormalpreparationofresearch recommendations.

Standard VI(B), Priority ofTransactions, appliestotransactionsananalysttakeson behalfof:

his clients. hisemployer. both ofthese.

Explanation

Question #1

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Question ID: 412596

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Question #1

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Question ID: 412598

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Question #1

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Question ID: 412584

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personalaccounts.

Standard VI(C), Referral Fees, requiresthemembertodoallofthefollowing EXCEPT:

disclose to the referred client how much the referral source was paid to refer the client.

disclosetothereferredclientthepercentageofthemember's businessthatcomes fromreferrals.

makerequireddisclosurestothereferredclient beforeanagreementismadeto provideservicestothereferredclient.

Explanation

TheapplicableStandard, VI(C), doesnotrequireamembertodisclosethepercentageoftheir businessthatcomesfrom

referrals.

Standard VI(C)states, "Membersshalldisclosetoclientsandprospectsanyconsiderationorbenefitreceivedbythemember ordeliveredtoothersfortherecommendationofanyservicestotheclientorprospect."Appropriatedisclosuremeanstelling theclientorprospect, beforeagreeing toperformservices, ofany benefit givenorreceivedforrecommending themember's services.

IfaCFAcharterholderreceivesareferralfee, hemust:

disclose the fee to the supervisor, in written form, as an additional benefit. disclosethenatureofthefeearrangementtotheclient beforeentering intoaformal agreement.

consult with thefirm'scomplianceofficer, andfollow hisor herinstructionsconcerning disclosure.

Explanation

According toStandard VI(C), thenatureas wellasthe valueofthefeemust bedisclosedtotheclient beforeentering intoa formalagreement. Thecomplianceofficerand/ortheemployee'ssupervisorshould becontactedforconsultation.

Ananalystroutinely hastheopportunity tooffer hisclientstheopportunity topurchase "hotnew issues." Hetells hisclientsthat he willdistributeeach issueequally among thoseinterested, with himselfincludedinthedistribution. Theclientsdonotobject tothis. With respecttoStandard VI(B), Priority ofTransactions, this:

ᅞ B) ᅚ C)

Question #19 of 25

Question ID: 412574

ᅞ A) ᅚ B) ᅞ C)

Question #2

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of 25

Question ID: 412571

ᅞ A) ᅞ B) ᅚ C)

cannot bea violation becausetheclients know ofthepracticeandagree.

may bea violationdespitetheclients' approval.

Explanation

Just becausetheclients know ofapracticedoesnotmakeitright. Theanalystmustputtheclientsfirst. Itisa violationforthe

analysttoparticipateina "hotnew issue" which canlowertheallocationtoany givenclient below whatthatclient wouldprefer.

Thisistantamounttoputting theanalyst'sinterestsaheadoftheclients' interests.

Whenananalystmakesaninvestmentrecommendation, which ofthefollowing statementsmust bedisclosedtoclients?

An employee of the firm holds a directorship with the recommended company.

Both ofthesestatementsmust bedisclosedtoclients.

Thefirmisamarketmakerinthestock oftherecommendedcompany.

Explanation

Both oftheseitemsareexplicitly listedinthediscussionofStandard VI(A), DisclosureofConflicts.

Dwight Dawson, aCFAcharterholderandportfoliomanageratAscott Investments, wasrecently appointedtotheinvestments

committeeatBrightwoodCollege. He willreceivenocompensationfromBrightwoodforserving onthiscommittee. Another

personatAscottmanagespartofBrightwood'sendowment. DawsondoesnotinformAscott'scomplianceofficeof his involvement with Brightwood, because hedoesnot believedoing soisnecessary.

Brenda Hamilton, aCFAcandidate, also worksforAscottasaninvestmentanalyst. ProceduresestablishedatAscottprohibit

personaltrading insecuritiesanalyzedorrecommended by Ascott. Oneofthesesecuritiesis Horizon, atelecommunications

firm. Hamilton buys10 sharesof Horizonfor herinfantson'strustaccount. She believesthatreporting thispurchaseto

Ascott'scomplianceofficerisunnecessary becausetheamountofthetransactionissmallandisnotfor herownpersonal account.

Did Dawsonor Hamilton'sactions violateCFA InstituteStandardsofProfessionalConduct?

Dawson:No,Hamilton:Yes. Dawson: No, Hamilton: No. Dawson: Yes, Hamilton: Yes.

Explanation

Dawson violatedStandard VI(A), DisclosureofConflicts, by failing toinformAscottof herinvolvement with BrightwoodCollege. Dawsoncouldreasonably beexpectedto beinvolved with investmentpolicy decisionsatBrightwoodthatcouldaffectAscott becauseAscottmanagesaportionofBrightwood'sendowment. Hamiltonalso violatedStandard VI(A), becausesheignoreda

directiveof heremployer. Herpurchaseof Horizonstock hasanappearanceofimpropriety. Hamiltoncoulddiscussthe

purchaseof Horizonstock with herfirm'scomplianceofficerandrequestanexceptiontotheprohibitionagainstpersonal

Question #21 of 25

Question ID: 434182

ᅞ A) ᅞ B) ᅚ C)

Question #22 of 25

Question ID: 412566

ᅞ A) ᅚ B) ᅞ C)

The following scenarios refer to two analysts who are employed at GlobalSecurities, alarge brokerage firm.

Paula Linstrom, CFA, is instructed by her supervisor to write a research report on Delta Enterprises. Delta's stock is widely held by

institutionaland individualinvestors. Although Linstrom does not ownany of Delta's stocks, she believes that one of her friends may own10 shares of Delta. The stock currently sells for $25per share. Linstrom does not believe that informing her employer about her

friend's possible ownership of Delta shares is necessary.

Hershel Wadel, amember ofCFA Institute, is asked by his supervisor to write a research report onGammaCompany. Wadel's wife

inherited 500 shares ofGammaCompany from her father when he died five years ago. Gamma stock currently sells for $35per share. Wadel does not believe that informing his employer about his wife's ownership ofGamma shares is necessary.

According to CFA Institute Standards ofProfessionalConduct, which the following statements about Linstromand Wadel's conduct is

mostaccurate?

Both of these analysts must disclose a potential conflict of interest.

Neither of these analysts must disclose apotentialconflict ofinterest.

Only one of these analysts must disclose apotentialconflict ofinterest.

Explanation

Thepossibility that Linstrom'sfriendmay ownsharesof Delta'sstock doesnotcreateaconflictofinterestfor Linstrom, who hasno beneficialinterestintheseshares. Ontheother hand, Wadel hasa beneficialinterestin his wife'sownershipof Gammashares. Standard VI(A) DisclosureofConflictsrequiresthat Wadeldisclosethisinformationsothat hisemployercan

maketheproperdetermination.

Will Lambert, CFA, isafinancialanalystfor Offshore Investments. Heispreparing apurchaserecommendationonBurch

Corporationforinternaluse. According totheCFA InstituteStandardsofProfessionalConduct, which ofthefollowing statementsaboutdisclosureofconflictsisnotrequired? Lambert would NOTneedtodiscloseto hisemployerthat:

his wife owns 2,000 shares of Burch Corporation.

Offshoreisan OTCmarketmakerforBurch Corporation'sstock.

heisa beneficiary ofapensionplanof hisformeremployerthatownsalargenumber ofsharesofBurch'sstock.

Explanation

Standard VI(A), DisclosureofConflicts, requiresmemberstodisclosetotheiremployerallmatters, including beneficial

ownershipofsecurities, thatreasonably could beexpectedtointerfere with theirduty totheiremployerorability tomake unbiasedandobjectiverecommendations. Disclosureofanemployer'sowninvolvement with thesecurity isnotnecessary in thisinstance. Ifthereport had beenforexternaluse, it would have beennecessary tomakeallofthedisclosures givenas

Question #23 of 25

Question ID: 412573

ᅞ A) ᅚ B)

ᅞ C)

Question #2

4

of 25

Question ID: 412570

ᅞ A)

ᅚ B)

ᅞ C)

Question #25 of 25

Question ID: 412600

ᅞ A)

Bill Valley has been working forAdvisors, Inc., forseveral years, and he just joinedCFA Institute. Valley routinely writes research reportsonPharmaceuticalfirms. Valley hasrecently beenaskedtoserveonthe boardofdirectorsofanorganization thatpromotesthesearch foracureofacertaincancer. Serving onthe boardisanunpaidposition withoutany direct benefits otherthanmeeting new peopleandpotentialclients. Tocomply with Standard VI, DisclosureofConflicts, Valley needsto:

do nothing.

both disclosethepositiononthe boardto hissupervisoranddescribe his responsibilitiesonthe board.

only disclosethepositiononthe boardto hissupervisor.

Explanation

Valley could beaffected by hispositiononthe board because hemay tendtofavorinvestmentsinfirmsthatdocancer research. Tocomply with Standard VI(A), DisclosureofConflicts, Valley mustinform hissupervisorofthisrelationshipand describe hisresponsibilitiesonthe board. Evenif hissupervisordoesnotfindtherelationshiptroublesome, any subsequent

actionthatcouldleadtoaconflictofinterestshould bediscussed with thefirm'scomplianceofficer.

Arthur Harrow, CFA, isapharmaceuticalsanalystat DominionAsset Management. Hissupervisordirects himtoprepare separateresearch reportson Miracle Drug Company and Wonder Drug Company. Harrow'sformercollegeroommateand

closefriendisthepresidentof Miracle. Harrow owns2000 sharesof Wonder, which currently sellsfor $25ashare. Harrow's supervisorisunawareofthesefacts. According toCFA InstituteStandardsofProfessionalConduct, which ofthefollowing

action, ifany, is Harrow requiredtotakeif he writestheresearch reports?

Harrow must disclose to Dominion his ownership of shares in Wonder but not his relationship with the president of Miracle.

Harrow mustdiscloseto Dominion both hisrelationship with thepresidentof Miracle

and hisownershipofsharesin Wonder.

Harrow mustdiscloseto Dominion hisrelationship with thepresidentof Miracle butnot hisownershipofsharesin Wonder.

Explanation

Standard VI(A)requiresthat Harrow discloseto Dominionconflictsthatreasonably could beexpectedtointerfere with his independenceandobjectivity. Both Harrow'srelationship with thepresidentof Miracleand hisownershipofasubstantialdollar

amountof Wonder'ssharesrepresentapotentialconflictrequiring promptdisclosureto Dominion.

Ananalyst whoisamemberofCFA Institute hascomposedanintroductory informationpacketfor hernew clients, which includesinformationonfeesshereceivesforreferring clientstootherprofessionalsandthoseshepaysfor having clients referredto her. With respecttoStandard VI(C), Referral Fees, thisaction:

ᅚ B)

ᅞ C)

may notsatisfy theStandardifsuch informationisonly providedafterthereceiversof

theinformation have becomeclients.

exceedstherequirementoftheStandard becauseshedoesnotneedtorevealthe

feesshepaystothosethatreferclientsto her.

Explanation

Standard VI(C)saysthatamembermustrevealinformation both onfeesshereceivesforreferring clientstoother

professionalsandthoseshepaysfor having clientsreferredto her beforeaprospect becomesaclient. Thisallowsthe