Schweser QBank 2017 04 standards of professional idance duties to clients

Standards of Professional Conduct & Guidance: Duties to
Clients
Test ID: 7426164

Question #1 of 49

Question ID: 412416

An analyst meets with a new client. During the meeting, the analyst sees that the new client's portfolio is heavily invested in
one over-the-counter stock. The analyst has been following the stock and thinks it will perform well in the long run. The analyst
arranges through a brokerage firm to simultaneously sell a large number of shares of the stock via a series of cross trades
from the new client's portfolio to various existing clients. He arranges the trades to be executed at a price that approximates
the current market price. This action is:
ᅚ A) not in violation of the Standards.
ᅞ B) a violation of Standard III(A), Loyalty, Prudence, and Care.
ᅞ C) a violation of Standard III(B), Fair Dealing.
Explanation
There is no violation. It is in the best interest of the client to be diversified and selling via a series of cross trades will likely
reduce price impact costs when compared to selling directly into the market. The analyst appears to have reasonable basis for
putting the securities in the accounts of other clients.

Question #2 of 49

Question ID: 412456

Standard III(E), Preservation of Confidentiality, applies to the information that an analyst learns from:
ᅞ A) current clients and former clients only.
ᅞ B) current clients and prospects only.
ᅚ C) current clients, former clients, and prospects.
Explanation
According to Standard III(E), Preservation of Confidentiality, an analyst must preserve the confidentiality of information

communicated by clients, former clients, and prospects.

Question #3 of 49

Question ID: 412409

Which of the following is least likely required of fiduciaries who are responsible for pension plans?
ᅞ A) Acting solely in the interest of plan participants.
ᅞ B) Judging investments in the context of the total portfolio.
ᅚ C) Supporting the sponsor's management during proxy fights.
Explanation
Under Standard III(A) Loyalty, Prudence, and Care, fiduciaries must evaluate management's proposals during proxy fights to
see if they are in the best interest of the plan participants. If management's ideas are justifiable and reasonably ensure plan


participants' betterment, then fiduciaries can support them. If management is only trying to further its own objectives,
especially at the cost of plan participants, then fiduciaries must vote against management in proxy fights.

Question #4 of 49

Question ID: 472458

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with
Canadian Brokerage. Canadian provides Calaveccio with soft dollars to purchase research. He uses these soft dollars to get
research reports from Canadian's research department regarding the issues currently held in the small cap portfolio, and also
for firms he is contemplating adding to the portfolio. By using soft dollars in this manner, Calaveccio has:
ᅞ A) violated the Code and Standards by acquiring research on issues
contemplated for purchase but not by acquiring research on currently held
issues.
ᅞ B) violated the Code and Standards by acquiring research on issues that the fund

already holds but not by acquiring research on issues contemplated for purchase.
ᅚ C) not violated the Code and Standards.
Explanation
"Soft dollars" are the property of the client (in this case the holders of the shares of the Small Cap Venture Fund). Standard
III(A) Loyalty, Prudence, and Care delineates the member's responsibilities. Since he is clearly using the soft dollars to obtain
research that is directly applicable to his professional duties, there is no violation of the Standard.

Question #5 of 49

Question ID: 412440

The O'Douls (husband and wife) have decided to work with Jane Mack, CFA, to have her recommend an investment portfolio
for them. The O'Douls are novice investors and Mack has determined their asset allocation model falls into the conservative
category. After researching various investment options for the O'Douls, Mack has made a recommendation that they divide
their account on a 25%/75% basis between shares of a computer peripherals manufacturing company her brokerage firm is
underwriting and investment grade corporate bonds. The O'Douls are not aware that Mack's firm is underwriting an offering of
the company in question. Which CFA Institute Standard(s) has Mack violated given her actions?

ᅞ A) Standard V(A), Diligence and Reasonable Basis, and I(D), Misconduct.
ᅞ B) Standard III(B), Fair Dealing, and III(A), Loyalty, Prudence, and Care.
ᅚ C) Standard VI(A), Disclosure of Conflicts, and III(C), Suitability.
Explanation
Mack is obliged to disclose the conflict of interest regarding her company's IPO and to consider both the appropriateness and
the suitability of the investment for her client. She has apparently failed in both respects.

Question #6 of 49

Question ID: 412431

Kim Lee manages a variety of accounts at Superior Investments. Some are permitted to invest in tax-exempt issues only;

others may not invest in a stock unless it pays dividends. Lee is researching a biotech firm specializing in the analysis of "mad


cow" disease. While touring company facilities and meeting with management, she learns that they believe they may have
found a way to reverse the disease. Moreover, one manager conjectured, "Suppose that we reversed the disease in someone
who didn't even have it? We might then be able to boost that individual's IQ into the stratosphere!" Lee returns to her office
and buys shares for all accounts under her supervision. This action is:
ᅞ A) appropriate given the obvious potential of the therapy.
ᅞ B) a violation of the Standard concerning fiduciary duties.
ᅚ C) a violation of the Standard concerning appropriateness and suitability of investment
actions.
Explanation
Given the variety of accounts under her supervision, it is not likely the shares of a speculative biotech firm would be suitable
for all accounts. Placing such shares in all accounts indicates that she has failed to consider the appropriateness and suitability
of the investment for each account, and this places her in violation of Standard III(C).

Question #7 of 49

Question ID: 412417

An investment advisor goes straight from a research seminar to a meeting with a prospective new client with whom she has
never been in contact. The advisor is very excited about the information she just received in the seminar and begins showing
the prospect the new ideas her firm is coming up with. This is most likely a violation of:
ᅚ A) both of these.
ᅞ B) Standard III(B), Fair Dealing.
ᅞ C) Standard III(C), Suitability.
Explanation
It is a violation of Standard III(B) because the advisor should act first on behalf of existing clients whose needs and
characteristics she already knows. It is a violation of Standard III(C) because she has never met the prospect and does not
know if the new ideas are appropriate for the prospect. Thus, "both of these" is the best response.

Question #8 of 49

Question ID: 412415

Which of the following would be a violation of Standard III(B), Fair Dealing?
ᅚ A) Trading for regular accounts before discretionary accounts.
ᅞ B) Having well defined guidelines for pre-dissemination.
ᅞ C) Limiting the number of employees privy to recommendations and changes.
Explanation
Do not discriminate against a client when disseminating investment recommendations. If the firm offers different levels of
service, this fact must be offered and disclosed to all clients. The other choices are necessary parts of the Standard. The
Standard actually says to have published personal guidelines for pre-dissemination, which implies that the guidelines be welldefined.


Question #9 of 49

Question ID: 454909

According to Standard III(C) Suitability, which of the following is least likely to be considered a relevant factor in determining
the appropriateness and suitability of investment recommendations or actions for each portfolio or client?
ᅚ A) Best interests of the investment professional.
ᅞ B) Needs and circumstances of the portfolio or client.
ᅞ C) Basic characteristics of the total portfolio.
Explanation
Determining appropriateness and suitability focuses on the portfolio or client, not on the investment professional. Investment
professionals should take particular care to ensure that their goals in selling products or executing security transactions do not
conflict with the best interests of the client.

Question #10 of 49

Question ID: 412449

Nancy Korthauer, CFA, has launched a new hedge fund called the Korthauer Tautology Fund and is actively soliciting clients
from competitor's firms. Client presentations are necessarily brief and often take place with the prospective client's current
investment advisor in the room. The Code and Standards require that:
ᅚ A) member or candidate provide (on request) additional detail information which
supports the abbreviated presentation.
ᅞ B) a prospective client's current investment advisor not participate in meetings.
ᅞ C) all client presentations provide a thorough review of all elements of the investment
management process. Abbreviated presentations are forbidden.
Explanation
See Standard III(D). When presentations are brief, additional detail which supports the abbreviated presentation information
must be provided on request. Best practice dictates that the member or candidate should make reference to the abbreviated
nature of the presentation.

Question #11 of 49

Question ID: 412405

An analyst with his own money management firm trades on behalf of several large pension funds. The analyst now performs
all trades through a particular brokerage firm because the brokerage provides his firm with a no-interest line of credit if paid
within 60 days. The line of credit is available to all brokerage clients. The brokerage provides the analyst with personal account
privileges that he would not otherwise be eligible for. The brokerage also provides the analyst with free research reports on
many companies. Which of these benefits are violations of Standard III(A), Loyalty, Prudence, and Care?
ᅞ A) Neither of these.
ᅞ B) The research reports.
ᅚ C) The personal account privileges.
Explanation

The personal account privileges are clearly a violation. The no-interest line of credit could be a violation if the analyst does not
factor in the benefits when determining the fees of the clients, but it is not a per se violation. Research reports are least likely
to be a violation.

Question #12 of 49

Question ID: 464688

In order to comply with Standard III(A), Loyalty, Prudence, and Care, an analyst needs to:
ᅚ A) comply with applicable fiduciary duty.
ᅞ B) perform both of the actions listed here.
ᅞ C) liquidate his personal holdings of all stocks that his client owns.
Explanation
To comply with Standard III(A), the analyst must use reasonable care and exercise prudent judgment, always act for the
benefit of clients, and determine and comply with applicable fiduciary duty.

Question #13 of 49

Question ID: 412420

In securing the shares for all accounts under her management, Linda Kammel of Northwest Futures purchased three blocks of
shares at three different prices. She then allocated these shares by placing shares from the first block in accounts with
surnames beginning with A-G. The second was allocated over accounts H-P, and the third over Q-Z. This action is:
ᅞ A) permissible only if the clients are informed of the allocation procedure.
ᅞ B) consistent with her responsibilities under the Code and Standards.
ᅚ C) not permissible under the Code and Standards.
Explanation
Standard III(B) requires a member to deal fairly with all clients when taking investment actions. Since she knew at the outset
that she was going to place shares in all accounts, regardless of the first letter of the surname, all accounts must participate on

a pro-rata basis in each block in order to conform to the Standard. Her actions constitute a violation of the Standard
concerning fair dealing.

Question #14 of 49

Question ID: 470999

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. Calaveccio places a trade with
Quantco Brokerage. While Calaveccio's part of the transaction was conveyed correctly to Quantco, there was a trading error
made in Calaveccio's account due to a slip up within Quantco. Calaveccio realizes that the error has taken place, and informs
his contact at Quantco. Calaveccio allows Quantco to cover the error, with no cost to TrustCo. This is:
ᅚ A) permissible under CFA Institute Standards.
ᅞ B) a violation of Calaveccio's fiduciary duties.
ᅞ C) a violation of Calaveccio's duty to his employer.


Explanation
The issue is similar to an allocation of soft dollars. Clearly, if the broker absorbs the loss, they expect to make up the
difference in some way. However, since the error was on the part of Quantco Brokerage, Calaveccio is under no obligation to
cover the cost of the trading error. Moreover, no reasonable observer expects that there exists any implied future allocation of
trades to Quantco in return for correcting their own mistake. There is no violation of Standard III(A), Loyalty, Prudence, and
Care.

Question #15 of 49

Question ID: 454914

Stephen Rangen, a broker, has three accounts consisting of unsophisticated, inexperienced individual investors with limited
means. One of these accounts is an elderly couple. The clients want to invest in safe, income-producing investments. They
rely heavily on Rangen's advice and expect him to initiate most transactions in their respective accounts. In managing their

accounts, Rangen pursues the following strategies: (1) buys U.S. treasury strips and non-dividend paying over-the-counter
(OTC) stocks recommended by his firm's research department, (2) uses margin accounts, and (3) concentrates the equity
portion of their portfolio in one or two stocks. Rangen's approach leads to extremely high turnover rates in all three accounts.
Which of the following statements about Rangen's conduct is most accurate? Rangen's conduct:

ᅚ A) does not meet the requirements of the Code and Standards because his
investment strategy is inconsistent with his clients' objectives.
ᅞ B) meets the requirements of the Code and Standards because his clients are aware of
the risks that he is taking in managing their accounts.
ᅞ C) meets the requirements of the Code and Standards because his firm's research
department recommended the U.S. Treasury strips and non-dividend paying stocks.
Explanation
Rangen's actions are inconsistent with Standard III(C) Suitability because his investment actions are neither appropriate nor
suitable for each client. Even if his clients were aware of the risks, the portfolios that he constructed are inconsistent with their
financial needs. Although Rangen relies upon recommendations from his firm's research department, he cannot shift blame to
his employer because he must follow recommendations that are in the best interests of his clients.

Question #16 of 49

Question ID: 412445

A money manager is meeting with a prospect. She gives the client a list of stocks and says, "These are the winners I picked
this past year for my clients. Their double-digit returns indicate the type of returns I can earn for you." The list includes stocks
the manager had picked for her clients, and each stock has listed with it an accurately measured return that exceeds 10%. Is
this a violation of Standard III(D), Performance Presentation?
ᅚ A) Yes, unless the positions listed constitute a complete presentation (i.e., there
were no stocks omitted that did not perform in the double digits).
ᅞ B) No, because the manager had the historical information in writing.
ᅞ C) Yes, because the manager cannot reveal historical returns of recent stock picks.
Explanation

Standard III(D) requires fair representations concerning past and potential future performance. Unless the list of the "winners"
includes all the positions that the firm held, the manager is misrepresenting past performance. The following statement is
questionable: "Their double-digit returns indicate the type of returns I can earn for you," but the action of submitting a partial
list is clearly a violation. The manager should have information on past performance in writing.

Question #17 of 49

Question ID: 412406

Which of the following is a possible breach of fiduciary duties by a CFA Institute member who manages assets on behalf of a
client?
ᅚ A) Voting all proxies of stocks the client owns.
ᅞ B) Using directed brokerage.
ᅞ C) Neither of these breach fiduciary duties.
Explanation
Proxies have economic value to the client. To comply with Standard III(A), the analyst is obligated to vote proxies in an
informed and responsible manner. A cost benefit analysis may show that voting all proxies may not benefit the client, so voting
proxies may not be necessary in all instances. Directed brokerage occurs when the client requests that a portion of the client's
brokerage be used to purchase services that directly benefit the client. Although, this may prevent best execution, it does not
violate the Standards as it was directed by the client, not the brokerage firm.

Question #18 of 49

Question ID: 412454

Greg Stiles, CFA, CAIA, has recently liquidated most of a client's portfolio because the client is planning to buy a house. Stiles
informs one of the brokers in his office who has his real estate license about the plans of his client. With respect to Standard
III(E), Preservation of Confidentiality, this action:

ᅞ A) is appropriate since Stiles keeps the information in the firm.
ᅞ B) is appropriate since Stiles only tells a licensed salesman.
ᅚ C) violates the Standard unless the client asks Stiles to tell the licensed salesman.
Explanation
According to Standard III(E), Preservation of Confidentiality, Stiles must keep client information confidential and limit the
information to those people directly related to servicing the client. Merely working in the same firm does not qualify a person
for learning about the client of a fellow analyst.

Question #19 of 49

Question ID: 412452

Greg Stiles, CFA, may withhold from CFA Institute information about a client acquired in the regular performance of his duties:
ᅚ A) for neither of the reasons listed.
ᅞ B) only if Stiles is a relative of the client.
ᅞ C) only if Stiles has a special confidentiality agreement with the client.


Explanation
According to Standard III(E), Preservation of Confidentiality, Stiles may not withhold information under any of the listed
reasons. The reason is that CFA Institute will keep the information confidential.

Question #20 of 49

Question ID: 412404

An independent analyst has only one client. One of the client's largest holdings is a brokerage firm. Because of the large
holding by his client, the brokerage firm recently began allowing the analyst to tap into the firm's computer network to use the
firm's research facilities. This is allowable as long as the analyst:
ᅞ A) discloses the relationship to the client.

ᅞ B) uses the resources to help manage the client's account.
ᅚ C) does both of the actions listed here.
Explanation
According to Standard III(A), Loyalty, Prudence, and Care, the analyst must put the client first and inform the client of any
possible conflicts of interest. The analyst must channel any benefits derived from his service to the client, back to the client,
and inform the client of the benefits.

Question #21 of 49

Question ID: 412450

Trude Front, CFA, is a portfolio manager and works extensive hours. To give her a more flexible work environment, she often
works from home on her personal computer and keeps client account information there – in violation of company policy. While
away on travel, her home is burglarized and her computer is taken. Rather than disclose the policy violation, she does not
notify her company or her clients of the contents of her computer files. Two months later the client account information is used
to commit identity theft, costing her clients a total of $58,000 in fraudulent charges. Front is most likely:
ᅞ A) not in violation of any Standard because the disclosure of confidential
information was accidental and unavoidable.
ᅞ B) not in violation of any Standard because the confidential information was stored on
her personal computer for use for work during her personal time.
ᅚ C) in violation of Standard III(E) "Preservation of Confidentiality" for failing to follow
company policies and procedures relating to electronic information and security
resulting in accidental disclosure of confidential information.
Explanation
Front violated Standard III(E) "Preservation of Confidentiality" by failing to follow company policies and procedures relating to
electronic information and security resulting in accidental disclosure of confidential information.

Question #22 of 49

Question ID: 412453

Greg Stiles, CFA, keeps a list of his clients' birthdays and has personally sent them a birthday card each year at the
appropriate time. With respect to this action, which of the following may be a violation of Standard III(E), Preservation of


Confidentiality?
ᅚ A) Hiring a company outside the firm to perform the task.
ᅞ B) The mere act of sending a birthday card each year.
ᅞ C) Sending a gift along with the card.
Explanation
According to Standard III(E), an analyst should limit the number of persons who have access to clients' personal information.
Allowing a company outside the firm to send birthday cards could be a violation. Sending a birthday card is not a violation, nor
is sending a gift of reasonable value.

Question #23 of 49

Question ID: 412407

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with
River City Brokerage. River City provides Calaveccio with soft dollars to purchase research. River City also deals in municipal
bonds, some of which Calaveccio holds in his personal portfolio. He periodically uses the soft dollars to request research
reports on various small cap stocks and also on the status of the municipal bond market and issues that he holds. These
actions are:
ᅞ A) not in violation of the Code and Standards.
ᅞ B) in violation of his fiduciary duties regarding both the small cap research and the
municipal bond research.
ᅚ C) in violation of his fiduciary duties regarding the municipal bond research but not so
regarding the research on the small cap issues.
Explanation
The issue at hand is the member's fiduciary responsibilities in handling "soft dollars" which are technically the property of the

client. Standard III(A), Loyalty, Prudence, and Care, delineates the member's fiduciary responsibilities with regard to soft
dollars. Since municipal bond research is clearly not relevant to the Small Cap Fund holders, he is clearly using the soft dollars
to obtain research for his personal benefit and is in violation of the Standard.

Questions #24-29 of 49
Chandra Patel, CFA, manages private client portfolios for QED Investment Advisers. Part of QED's firm-wide policy is to
adhere to CFA Institute Standards of Professional Conduct in the management of all client portfolios, and to this end, the firm
requires that client objectives, investment experience, and financial limitations be clearly established at the outset of the
relationship. This information is updated at regular intervals not to exceed eighteen months. The information is maintained in a
written investment policy statement for each client.
Anarudh Singh has been one of Patel's clients ever since she began managing money ten years ago. Shortly after his regular
situational update, Singh calls to inform Patel that his uncle is ill, and it is not known how long the uncle will survive. Singh
expects to inherit "a sizeable sum of money," mainly in the form of municipal bonds. His existing portfolio allocation guidelines
are for 75% to be invested in bonds. Singh believes that the expected inheritance will allow him to assume a more aggressive
investment profile and asks Patel to begin moving toward a 75% allocation to equities. He is specifically interested in opening
sizable positions in several technology firms, some of which have only recently become publicly traded companies. Patel


agrees to begin making the changes to the portfolio and the next day begins selling bonds from the portfolio and purchasing
stocks in the technology sector as well as in other sectors. After placing the trade orders, Patel sends Singh an email to
request that he come to her office sometime during the next week to update his investment policy statement. Singh replies to
Patel, saying that he can meet with her next Friday.
A few days before the meeting, however, Singh's uncle dies and the portfolio of municipal bonds is transferred to Singh's
account with QED. Patel sees this as an opportunity to purchase more technology stocks for the portfolio and suggests taking
such action during her meeting with Singh, who agrees. Patel reviews her files on technology companies and locates a report
on NetWin. The analyst's recommendation is that this stock is a "core holding" in the technology sector. Patel decides to
purchase the stock for Singh's account, as well as several other wealthy client accounts with high risk tolerance levels, but due
to time constraints she does not review the holdings in each account. Patel does examine the aggregate holdings of the
accounts to determine the approximate weight that NetWin should represent in each portfolio.
Since Patel has very recently passed the Level III examination leading to the award of the CFA designation, QED sends a

promotional email to all of the firm's clients. The email states "QED is proud to announce that Chandra Patel is now a CFA
(Chartered Financial Analyst). This distinction, which is the culmination of many years of work and study, is further evidence of
the superior performance you've come to expect at QED." Patel also places phone calls to inform of her accomplishments
several brokers that she uses to place trades for her accounts, stating that she "passed all three CFA examinations on the first
attempt." One of the people Patel contacts is Max Spellman, a long-time friend and broker with TradeRight Brokers Inc. Patel
uses the opportunity to discuss her exclusive trading agreement with TradeRight for Singh's account.
When ordering trades for Singh's account, Patel's agreement with TradeRight for brokerage services requires her to first offer
the trade to TradeRight and then to another broker if TradeRight declines to take the trade. TradeRight never refuses the
trades from any manager's clients. Patel established the relationship with TradeRight because Singh, knowing the firm's fee
schedule relative to other brokers, asked her to do so. However, because TradeRight is very expensive and offers only
moderate quality of execution, Patel is considering directing trades on Singh's account to BullBroker, which charges lower
commissions and generally completes trades sooner than TradeRight.

Question #24 of 49

Question ID: 464693

Do QED's policies comply with CFA Institute Standards of Professional Conduct with respect to the information contained
within the client investment policy statements and the frequency with which the information is updated?
Information

Frequency

ᅞ A) No

Yes

ᅞ B) No

No

ᅚ C) Yes

No

Explanation
According to Standard III(C) Suitability, members and candidates must consider investment experience, objectives (risk and
return), and constraints before investing funds on the client's behalf or recommending investments to the client. The firm has
complied with the information content. The investment policy statement must be updated at least annually, or after significant
changes in client circumstances, however, according to the guidance statement accompanying Standard III(C). Thus the firm
has not complied with Standard III(C) in this regard. (Study Session 1, LOS 2.a,b)

Question #25 of 49

Question ID: 484913

In light of Singh's comments during his telephone call to Patel prior to his uncle's death, which of the following actions that


Patel can take comply with CFA Institute Standards of Professional Conduct?
ᅚ A) Patel must adhere to the existing portfolio strategy until she meets with Singh
to develop a new portfolio strategy based upon updated financial information
but may place trades which are consistent with the existing strategy.
ᅞ B) Patel must not place any trades in the account until she meets with Singh to develop a
new portfolio strategy based on the updated information.
ᅞ C) Patel may change the current portfolio strategy and begin trading based upon Singh's
expectations because he advised her to do so.
Explanation
According to Standard III(C) Suitability, Patel must observe the written investment objectives now in effect as determined in
cooperation with the client and may trade only on that basis. Because the anticipated change in Singh's financial condition was

subject to an event of indeterminable timing, she should continue to honor the existing written investment objectives until a
change (1) is warranted by an actual increase in the client's total financial assets and (2) has been agreed upon with her
client.

Question #26 of 49

Question ID: 484914

According to CFA Institute Standards of Professional Conduct, may Patel reallocate Singh's portfolio toward technology stocks
after his Uncle dies but before the meeting with Singh?
ᅞ A) No, because Patel must wait until the next annual meeting to reallocate.
ᅞ B) Yes, because the total value of the municipal bonds received into the account will be
too large relative to the other assets in the portfolio.
ᅚ C) No, because Patel and Singh must meet and revise the investment policy statement
and portfolio strategy before reallocating.
Explanation
According to Standard III(C) Suitability, investment recommendations and actions must be consistent with a client's written
objectives and constraints (usually in the form of an investment policy statement (IPS)). Because Singh's written IPS would not
allow the large allocation to technology stocks prior to receiving the inheritance, the IPS must be updated by Singh and Patel
prior to taking any actions that deviate from the original IPS. Patel will violate Standard III(C) by reallocating the portfolio before
meeting with Singh.

Question #27 of 49

Question ID: 484915

Did Patel violate any CFA Institute Standards of Professional Conduct when she purchased the NetWin stock for Singh's
portfolio or for the other clients' portfolios?
Singh's
portfolio

Other portfolios

ᅞ A) No

Yes

ᅞ B) No

No

ᅚ C) Yes

Yes


Explanation
According to Standard III(C) Suitability, Patel must analyze the appropriateness and suitability of NetWin.com stock on a caseby-case basis before buying it. This will necessarily consider the basic characteristics of the security and how these will affect
overall portfolio characteristics relative to the existing investment strategy for each portfolio. Patel has not analyzed the effect
that the stock will have on any of the individual portfolios in question and has thus violated the Standard. Patel cannot look at
aggregate measures to determine the appropriate weight that the security should represent in the individual portfolios because
the portfolios are being managed individually, not in aggregate.

Question #28 of 49

Question ID: 484916

Which of the following is least accurate regarding the promotional announcement of Patel passing the Level III exam?
ᅞ A) The promotional announcement uses the letters "CFA" as a noun and hence is
an improper use of the designation.

ᅞ B) The announcement violates the Code of Ethics because it implies that obtaining a
CFA charter leads to superior performance.
ᅚ C) The fact that a promotional announcement was made violates the restrictions on
misrepresenting the meaning of the CFA designation.
Explanation
An announcement that a member of a firm has received the right to use the CFA® designation is not a violation of the Code or
Standards. However, Standard VII(B) requires that any reference to the Charter must not misrepresent or exaggerate the
meaning or implications of the CFA designation. A Charterholder cannot claim that holding a Charter leads to superior
performance results. The letters "CFA" can only be used as an adjective (never a noun, as in "he is a CFA"). Finally, passing
all three exams does not give one the right to use the designation. All criteria must be met (e.g., experience requirements)
before Patel can use the designation.

Question #29 of 49

Question ID: 484917

With respect to the choice of broker, did Patel violate any CFA Institute Standards of Professional Conduct?
ᅞ A) Yes, since Patel failed to properly notify Singh that using TradeRight would
lead to higher commissions and opportunity costs.
ᅞ B) Yes, since Patel is obligated to seek the best possible price and execution for all
clients.
ᅚ C) No.
Explanation
Since Singh directed Patel to use TradeRight, this should be considered client-directed brokerage. While Patel should inform
Singh of the implications of that choice, Patel has no option but to follow the client's direction according to Standard III(A)
Loyalty, Prudence, and Care. Singh was fully aware of the fees charged by TradeRight relative to other brokerage firms and
elected to use TradeRight anyway. Investment managers are obligated to seek the best price and execution in the absence of
client direction.

Question #30 of 49

Question ID: 412446


A money management firm has created a new junk-bond fund. When the firm advertised the new fund at its issuance, they
used care to accurately compute the returns from the past 10 years for all assets in the fund. The firm used the current
portfolio weights to determine an average annual historical return equal to 18% and claim an 18% annual historical return in
their advertising literature. With respect to Standard III(D), Performance Presentation, this is:
ᅞ A) a violation because the Standard prohibits computing historical returns on
risky assets like junk bonds.
ᅚ B) a violation because the advertisement implies the firm generated this return.
ᅞ C) in compliance.
Explanation
Reporting the historical returns of all assets now in the fund introduces a survivorship bias. Also, the advertisement is
misleading because the fund just came into existence and has no historical record. Thus, the firm has misled the public as to
their performance history.

Question #31 of 49

Question ID: 412451

While servicing his clients' accounts, an analyst who is a CFA charterholder, determines that one client is probably involved in
illegal activities. According to Standard III(E), Preservation of Confidentiality, the analyst may NOT do which of the following?
ᅞ A) Contact CFA Institute about the determination.
ᅚ B) There are no exceptions in this list.
ᅞ C) Contact the appropriate governmental authorities about the determination.
Explanation
Standard III(E) allows an analyst to reveal information about a client to CFA Institute since CFA Institute will keep the
information confidential. If the analyst is reasonably certain a law has been violated, an analyst may have an obligation to
report the activities to the appropriate authorities. Therefore, neither of the listed actions are exceptions from the analyst's

options.

Question #32 of 49

Question ID: 412418

Which of the following statements is least accurate regarding being a part of Standard III(B), Fair Dealing?
ᅞ A) Shorten the time between decision and dissemination.
ᅞ B) Maintain a list of clients and their holdings.
ᅚ C) At the same time notify clients for whom an investment is suitable of a new investment
recommendation.
Explanation
All of these are part of Standard III(B) except notifying clients at the same time. Standard III(B) states that clients for whom the
investment is suitable should be notified at approximately the same time.


Question #33 of 49

Question ID: 464699

While servicing his clients' accounts, an analyst who is a CFA charterholder, determines that one client is probably involved in
illegal activities. According to Standard III(E), Preservation of Confidentiality, the analyst may NOT do which of the following?
ᅞ A) Both contact CFA Institute and governmental authorities.
ᅚ B) There are no exceptions in this list.
ᅞ C) Contact CFA Institute about the determination.
Explanation
Standard III(E) allows an analyst to reveal information about a client to CFA Institute since CFA Institute will keep the
information confidential. If the analyst is reasonably certain a law has been violated, an analyst may have an obligation to
report the activities to the appropriate authorities. Therefore, none of the listed actions are exceptions from the analyst's
options.

Questions #34-35 of 49
A broker was sanctioned for unsuitable recommendations and excessive trading involving three accounts under his care.
These clients were unsophisticated, inexperienced individual investors with limited means.

Question #34 of 49

Question ID: 464690

In this situation, all of the following would be components of an effective compliance process EXCEPT:
ᅚ A) using margin accounts.
ᅞ B) diversifying portfolios where appropriate.
ᅞ C) educating clients in the basics of investment characteristics.
Explanation
Using margin accounts would be inappropriate in this situation because it would increase the risk of loss and require clients to
pay interest on the margin loan, adding to the cost to maintain the account. Trading on margin is inappropriate for
unsophisticated, inexperienced individual investors with limited means.

Question #35 of 49

Question ID: 464691

In this situation, which of the following would NOT be a component of an effective compliance process?
ᅚ A) Use concentrated portfolios consisting of only a few assets because this
approach reduces trading costs.
ᅞ B) Examine risk tolerance carefully because risk tolerance is an important element in
determining an appropriate investment policy statement.
ᅞ C) Educate clients on how to select investments because this can help clients accomplish
their investment policy statement goals.
Explanation

In this case, the broker increased the risk of loss for the clients beyond that consistent with the client objectives by


concentrating much of their equity in particular securities. A component of an effective compliance process would be to
develop diversified portfolios to reduce portfolio risk.

Question #36 of 49

Question ID: 412439

Carol Hull, CFA, is an investment advisor whose prospective client, Frank Peters, presents special requirements. To construct
an investment policy statement for Peters, Hull inquires about Peters' investment experience, risk and return objectives, and
financial constraints. Peters states that he has a great deal of investment experience in the capital markets and does not wish
to answer questions about his tolerance for risk or his other holdings. Under Standard III(C), Suitability, Hull:
ᅚ A) is permitted to manage Peters' account without any knowledge of his risk
preferences.
ᅞ B) must decline to enter into an advisory relationship with Peters.
ᅞ C) may accept Peters' account but may only manage his portfolio to a benchmark or
index.
Explanation
Hull would not violate Standard III(C), Suitability, by managing Peters' account without knowledge of his risk preferences. She
made a reasonable inquiry into Peters' investment experience, risk and return objectives, and financial constraints, as the
Standard requires. If a client chooses not to provide some of this information, the member or candidate can only be
responsible for assessing the suitability of investments based on the information the client does provide.

Questions #37-42 of 49
Joni Black, CFA, works for a portfolio management firm. Black is a partner of the firm and is primarily responsible for managing
several large pension plans. She also is in a supervisory position with several research analysts reporting directly to her. Dave
Wood is a research analyst who has worked under Black for the last six years. Wood recently completed the Level III CFA
exam and is anxiously awaiting the results. As a display of confidence, Black shows Wood a box of business cards that have

already been printed up for Wood with the initials "CFA" after his name. She locks them away in a file cabinet and promises to
deliver them on the day they get the news of his passing the exam.
Black and Wood have been working closely to service a number of clients. Wood knows that Black recently met with a
prospect named John Talbert. Black says that she received Talbert's paperwork and made a recommendation to Talbert to
which he agreed. Black tells Wood to execute the trade. Wood has not seen the final paperwork, but from what he knows, the
trade is congruent with Talbert's situation. Wood also knows the recommendation is generally a sound one.
Black is on the board of directors for ATX Corporation. She was asked to write a research report for ATX Corporation.
Because of her relationship with ATX, she assigned Wood to write the report instead. Black is Wood's supervisor and requires
Wood to show all of his work to her for final approval. As Wood begins writing the report, he remembers that the trust fund of
his children, left to them by the parents of Wood's wife, has a sizable investment in ATX.
Black manages a pension fund for Evergreen International. The management of Evergreen International has just requested
that Black increase the portion in international equity funds to 30 percent of total assets from its current position of 10 percent
of total assets. The management of Evergreen International believes the potential for growth in international markets is much
greater than the domestic market and would like to see the pension fund managed more aggressively. Wood watches as Black
immediately acts upon the recommendation of Evergreen International. Black allocates some of the fund's assets to a few
stocks in foreign countries. One of the stocks immediately goes up in price and volatility, and Black sees an opportunity to earn


some extra income by selling a covered call on that particular stock. She sells the call on behalf of the pension fund. Wood
asks Black if the pension fund's charter allows derivative strategies. Black says she does not know, but says she only sells
covered calls when she sees a really good opportunity and none of her clients have ever complained even when they have
specified that no options shall be used. "Covered calls can never cost a client anything, and they always earn income for the
client," Black points out to Wood.
Despite his close relationship with Black, Wood has been preparing to start his own money management firm. He has turned a
spare bedroom in his house into an office with new furniture and computer. He has the room wired with the latest Internet
service upgrades. He has subscribed to financial news services and opened a trading account in the name of his proposed
company. He has told an old friend about his plans. His friend has a large portfolio being managed at another brokerage firm.
The friend had met Black, and told Wood that he did not like her and could not let them handle his portfolio despite their
friendship. If Wood was on his own, however, the friend had told Wood that he would want Wood to manage his portfolio.
Wood also contacts a cousin, who recently inherited a large portfolio. The cousin says that he would like to get some help

managing the portfolio as soon as possible. Wood instructs the cousin to use futures contracts to, in effect, hedge the value of
the portfolio cost-free until Wood sets up his business, and Wood can then take his cousin on as a client. He sends each of
them a copy of his resume where in his credentials he places after his name "CFA (expected 200X)."

Question #37 of 49

Question ID: 464682

With respect to Black's instruction to execute the trade for Talbert, according to the Standards, Wood should:
ᅚ A) execute the trade immediately.
ᅞ B) execute the trade only after consulting the firm's legal counsel.
ᅞ C) not execute the trade because he has not met Talbert himself.
Explanation
Since Black is Wood's supervisor and has the CFA designation and Wood sees nothing wrong, Wood has no reason to take
any intermediate action. (Study Session 1, LOS 2.a,b)

Question #38 of 49

Question ID: 464683

With respect to the report on ATX Corporation that Black asked Wood to write, which of the following must Wood include in the
report?
ᅞ A) Wood does not have the CFA designation and that Black is on the board of
ATX.
ᅚ B) Black is on the board of ATX and the position of ATX in the trust fund of Wood's
children only.
ᅞ C) Wood does not have the CFA designation and the position of ATX in the trust fund of
Wood's children.
Explanation
This question is related to Disclosure of Conflicts, Standard VI(A). Black's relationship with ATX Corporation must be disclosed

in the research report because it could impair Black's ability to make an unbiased judgment. Under the same standard, the
position of ATX in the children's trust fund must be mentioned because it is beneficial ownership that could reasonably impair
Wood's judgment. Even though Wood is the one writing the report, both potential conflicts need to be disclosed since Black is
supervising Wood. The fact Black requires Wood to get her approval, which is congruent with Standard IV(C), is simply a
routine firm policy that does not need reporting. It is not required to mention that an analyst does not have the CFA
designation. (Study Session 1, LOS 2.a,b)


Question #39 of 49

Question ID: 464684

With respect to the pension fund for Evergreen International, Black's fiduciary duty is:
ᅞ A) primarily to the management and stockholders of Evergreen International.
Black should follow management's direction to potentially increase the value of
the company.
ᅞ B) to the participants, beneficiaries, and management of Evergreen International.
Therefore, Black should increase the portion in international equities as long as it is
within policy statement guidelines.
ᅚ C) owed to the participants and beneficiaries of Evergreen International. Therefore, Black
should continue to manage the fund in their best interest regardless of the
management's request.
Explanation
This question relates to Standard III(A), Loyalty, Prudence, and Care. Black's fiduciary duty is to the participants and
beneficiaries of the pension plan according to ERISA. Black should act in their best interest in managing the funds. (Study
Session 1, LOS 2.a,b)

Question #40 of 49

Question ID: 464685

With respect to the pension fund for Evergreen International, after Wood notices Black's actions concerning the management's
instructions, he should:
ᅞ A) report Black's activities to the police.
ᅞ B) do nothing because he knows what Black said about the covered call properties and
her record is true.
ᅚ C) try to distance himself from Black's activities.
Explanation
According to Standard I(A), Knowledge of the Law, members and candidates must know the law and not knowingly assist in
breaking the law. When questionable activities occur like Black's option trading, the best course of action for an associate is
distance him/herself and seek legal counsel. (Study Session 1, LOS 2.a,b)

Question #41 of 49

Question ID: 464686

With respect to Wood preparing to set up his own business, Wood violated the Standards:
ᅞ A) by setting up trading accounts in the name of his company.
ᅞ B) in his communication with his friend.
ᅚ C) in his communication with his cousin.
Explanation
Wood violated Standard IV(A), Loyalty to Employer by contacting his cousin and advising him because the cousin could
potentially be a client for his current firm. Since the friend had said he would not do business with Black, and Wood gave him
no instructions, that was not a violation. Note that Standard IV(A) covers competing with an employer, not preparing to
compete. Preparing to compete by setting up an office and other related activities are not a violation of the Standards. (Study


Session 1, LOS 2.a,b)

Question #42 of 49

Question ID: 464687

Violations with respect to the use of the CFA designation occurred with:
ᅞ A) the printing of the business cards by Black but not the letters sent by Wood to
his friend and cousin.
ᅚ B) the letters sent by Wood to his friend and cousin but not with the printing of the
business cards by Black.
ᅞ C) both the printing of the business cards by Black and the letters sent by Wood to his
friend and cousin.
Explanation
Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program, limits the use of the CFA designation
to those who have passed all three levels of the CFA Program, have received their charters, and are charter holders in good
standing. Wood may not put "CFA (expected 200X)" following his name because it is a violation of the Standard. However, he
may state that he is a Level III candidate in the CFA program if he wishes. The printing of the business cards was not a
prudent move, but since they are taking care not to distribute them until the appropriate time, no violation has occurred. In
some sense, it is like a research report written in advance of an anticipated event. As long as the report is not released until
after the event, no violation has occurred. (Study Session 1, LOS 2.a,b)

Question #43 of 49

Question ID: 454913

Lance Tuipulotu, CFA, manages investments for 400 individuals and families and often finds his resources stretched. When
his largest investors petition him to include a 5% to 7% allocation of non-investment-grade bonds in their portfolios, he decides
he needs additional help to meet the request. He considers various independent advisors to use as submanagers, but
determines that the most qualified advisors would be too expensive. Reasoning that a lower-cost provider would enable him to
pass the savings along to his clients, he chooses that provider to invest the new bond allocation. Tuipulotu has violated:
ᅞ A) Standard III(C) Suitability by failing to consider the appropriateness of the noninvestment-grade bonds.
ᅞ B) Standard V(A) Diligence and Reasonable Basis by letting fee structure determine the

selection of the submanager.
ᅚ C) Both Standard III(C) Suitability and Standard V(A) Diligence and Reasonable Basis.
Explanation
Both Standard III(C) Suitability and Standard V(A) Diligence and Reasonable Basis were violated. Tuipulotu must perform a full
IPS review to determine the appropriateness of the new portfolio allocations. Submanagers should not be selected by cost
structure alone, as the quality and appropriateness of the submanager is Tuipulotu's responsibility.

Question #44 of 49

Question ID: 412419

A money management firm has the following policy concerning new recommendations: When a new recommendation is made,
each portfolio manager estimates the likely transaction size for each of their clients. Clients are notified of the new


recommendation in the order of their estimated transaction size-largest first. All clients have signed a form where they
acknowledge and consent to this allocation procedure. With respect to Standard III(B), Fair Dealing, this is:
ᅞ A) not a violation because the clients are aware of the policy.
ᅚ B) a violation of the standard.
ᅞ C) not a violation because the clients have signed the consent form.
Explanation
Such a policy is a violation of the Standard and client acknowledgement and/or consent does not change that fact.

Question #45 of 49

Question ID: 412413

Jason Reynolds meets Jack Parker, CFA, at a social engagement and asks for some "hot stock tips." Parker declines, but sets
up an appointment to review Reynolds' risk and return objectives and financial constraints. At the conclusion of their
appointment, Parker recommends three securities he has thoroughly researched: ACK, D-Wing, and Ophus-Littbinger. Parker

is least likely:
ᅞ A) in violation of Standard III(A) "Loyalty, Prudence, and Care" for failing to make
a reasonable inquiry into the client's investment experience.
ᅚ B) not in violation.
ᅞ C) in violation of Standard III(A) "Loyalty, Prudence, and Care" for failing to consider the
three securities in the context of the whole portfolio.
Explanation
Standard III(A) "Loyalty, Prudence, and Care" requires Parker to make a reasonable inquiry into the client's investment
experience, risk and return objectives, and financial constraints. Investment decisions must be made based on a total portfolio
approach, rather than the quality of an individual investment in isolation.

Question #46 of 49

Question ID: 412436

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value.
One of the clients gets married and the assets of the new spouse and the client are combined. With the larger portfolio of the
now married client, Hatfield determines that they can assume a higher level of risk and begins a change in the policy
concerning that portfolio. Which of the following would violate Standard III(C), Suitability?
ᅞ A) Assess the time horizon of the newly married client and his spouse.
ᅚ B) Implement a similar policy for the other client who did not just get married.
ᅞ C) Assess the return objectives of the newly married client and his spouse.
Explanation
According to Standard III(C), Suitability, the analyst must assess the time horizon, return objectives, tax considerations, and
liquidity needs of a client before changing an investment policy. The analyst must notify the client of the new policy.
Implementing the policy for the other client may be a violation of the Standard unless that client's needs are totally reassessed
and determined to be identical to the needs of the newly married client.


Question #47 of 49

Question ID: 461183

An analyst thinks that a major change in the tax law will benefit holders of utility company stocks. She immediately begins
calling all her clients and telling them of the upside potential of investing in such assets now. Based upon this information, this
is most likely:
ᅞ A) a violation of Standard V(A), Diligence and Reasonable Basis.
ᅞ B) congruent with Standard V(A), Diligence and Reasonable Basis.
ᅚ C) a violation of Standard III(C), Suitability.
Explanation
According to Standard III(C), the analyst needs to determine the suitability of an investment for each client. It is doubtful that all
her clients are identical in their needs. According to the information, the analyst mentions the upside potential but does not
mention the downside risk. Although the information says that she thinks that the change in the tax law will benefit holders of
utility company stocks and says nothing of how she arrived at this conclusion, we do not know if she has or has not made her
decision on a reasonable basis.

Question #48 of 49

Question ID: 412447

While it would be customary to report both five-year and ten-year performance data, Seminole Equity Partners has been in existence for
only eight years. Because of this, Kurt Dambach does not report ten-year data but reports for both five years and since the inception of
the fund. This he notes in a footnote at the bottom of the information sheet. This action is:

ᅞ A) a violation of the Standard concerning performance presentation.
ᅚ B) in accordance with the Code and Standards since he has indicated the basis in a footnote.
ᅞ C) a violation of the Standard concerning prohibition against misrepresentation.
Explanation
Members who communicate performance information must ensure that the information is fair, accurate, and complete. Seminole Equity's
presentation meets this standard.

Question #49 of 49

Question ID: 412402

While trading on behalf of a pension account, an analyst receives special research reports from the brokerage firm with whom
she is doing the trades. Such an activity is:
ᅚ A) not in itself a violation of Standard III(A), Loyalty, Prudence, and Care, nor the
Code of Ethics.
ᅞ B) a violation of only The Code of Ethics.
ᅞ C) a violation of both Standard III(A), Loyalty, Prudence, and Care, and the Code of
Ethics.
Explanation


An analyst can receive research from a brokerage firm with whom she is trading on behalf of a client. The analyst should
inform the client of the arrangement. The analyst is more likely to violate Standard III(A) by obtaining non-research services or,
worse yet, personal benefits from the brokerage firm.