Volume II behavioral finance, individual investors, and institutional InvestorsCFA level 3finquiz item set questions, study session 1, reading 2

Reading 2

Guidance for Standards I-VII

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CFA Level III Item-set - Question
Study Session 1
June 2018

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Reading 2

Guidance for Standards I-VII

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FinQuiz Item-set ID: 10528
Questions 1(10529) through 6(10535) relate to Reading 2

Mark Webber Case Scenario
Mark Webber, CFA is a research analyst serving Holler and Brookes Associates, a
brokerage/dealer firm situated in the U.S. The firm conducts its brokerage business on a national
level. The firm specializes in the trading of debt and equities of distressed firms. However, in
addition to distressed securities, the firm executes trade orders for conventional domestic and

international securities (i.e. equity and fixed income securities).
Webber is currently conducting research on Y.T. Automobiles, a small automobiles
manufacturer, which is rumored to be the target of a takeover by a larger automobiles
manufacturer. Webber is invited to Y.T. Automobiles’ production site where he engages in
discussions with company management and factory employees. His visit to the productions site
leads him to conclude:
Y.T. Automobiles’ production activities have been halted due to an insufficient number of
orders. It is uncertain when production activities will resume.
The manufacturer’s production technology is considerably outdated in contrast to the
technology used by competing manufacturers.
Factory worker’s salaries are low in contrast to those paid by competitors, which have been
one of the sources contributing to employee resignations.
Following his visit, Webber decides to acquire further information on automobile industry
practices with respect to salaries paid; production levels, technologies used, and industry
participants’ financial health. After discussion with a number of industry experts as well as
representatives from different manufacturers, Webber arrives at the following conclusion:
“The automobile industry has in general suffered from the slowdown in demand for automobiles
across the country. However based on comparisons between individual industry participants and
Y.T. Automobiles and between the industry and Y.T. Automobiles, the latter manufacturer is
either at risk of being acquired in a takeover or could potentially file for bankruptcy. Thus the
manufacturer is in dire need of external support which may steer the firm onto recovery.”
Holler and Brookes Associates maintains an inventory of distressed company stocks which it
terms the ‘distressed fund’. Corporations included in the distressed fund are mainly those
requiring potential investors to take active equity positions and contribute to firm recovery. The
liquidity of the constituent stocks is low. In order to improve the liquidity and enhance the
depressed value of the fund’s stocks portfolio manager, Guy Bridges, transfers a percentage of
the stocks to the ‘developed equity fund’, a fund comprising of securities from developed
countries, to subsequently repurchase the stocks following a six-month period. As a component
of the latter fund, Bridges believes the demand for the stocks will rise, leading to an increase in
stock values.

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Guidance for Standards I-VII

Reading 2

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To encourage investment in the distressed fund, Bridges recommends 30% of his existing clients
invest in the fund (the circumstances of the clients highlighted below).
Exhibit
Breakdown of Bridges’ clients
Client
Category

Circumstances

Percentage of
Bridges’ Clients

Recommendation
Issued?

A

• Short-term time
horizon
• Significant liquidity

requirements
• Below average risk
tolerance

5%

Yes

B

• Intermediate term
time horizon
• Significant liquidity
requirements
• Average risk
tolerance

15%

Yes

C

• Long time horizon
• Moderate liquidity
requirements
• Above average risk
tolerance

30%

No

D

• Long time horizon
• Low liquidity
requirements
• Above average risk
tolerance

40%

E

• Intermediate term
time horizon
• Low liquidity
requirements
• Below average risk
tolerance

10%

No

Yes

Samuel Emerson is a Level III candidate who has recently transferred from Denver Associates, a
brokerage firm. Emerson will be managing client portfolios under the supervision of Webber.

Unbeknownst to Emerson, the human resource department at Holler and Brookes Associates has
prepared an advertisement, which has been circulating amongst clients, that:

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Reading 2

Guidance for Standards I-VII

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identifies Emerson’s achievements at Denver Associates as being achieved at Holler and
Brookes Associates.
identifies Emerson as being ‘a CFA Program Level III candidate who will attain a
completion status following the upcoming June examinations.’

FinQuiz Question ID: 10529

1. In context of Webber’s research activities conducted and his subsequent conclusion, he has
most likely:
A. complied with the CFA Institute Codes and Standards of Professional Conduct.
B. violated the standards, II (A) Material Nonpublic Information and V (A) Diligence and
Reasonable Basis.
C. violated the standard, II (A) Material Nonpublic Information.
FinQuiz Question ID: 10530

2. With respect to the transfer of stocks from the ‘distressed fund’ to the ‘developed equity
fund’, Bridges has most likely:
A. complied with the CFA Institute Codes and Standards of Professional Conduct.

B. violated the standards, II (B) Market Manipulation and III (C) Suitability.
C. violated the standard, II (B) Market Manipulation.
FinQuiz Question ID: 10531

3. By recommending the distressed fund’s stocks to 30% of his clients, Bridges has most likely
violated standard(s):
A. III (B) Fair Dealing and III (C) Suitability.
B. III (B) Suitability only.
C. III (B) Fair Dealing only.
FinQuiz Question ID: 10532

4. In context of the breakdown of Bridges’ clients, which of the following clients should not
have received a recommendation?
A. A and E
B. A and B
C. All three clients.
FinQuiz Question ID: 10533

5. The advertisement circulated by Holler and Brookes Associates has least likely violated:
A. III (D) Performance Presentation
B. V (C) Record Retention
C. VII (B) Reference to CFA Institute, the CFA Designation, and the CFA Program

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Reading 2

Guidance for Standards I-VII

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FinQuiz Question ID: 10534

6. Holler and Brookes Associates have recently hired a compliance officer to aid the firm with
complying with the CFA Institute Standards of Professional Conduct and Code of Ethics.
Which of the following ethical codes will the officer least likely recommend?
A. Investment professionals must act in an ethical manner in their relationships with clients,
prospective clients, employers, and global market participants.
B. Investment professionals must exercise diligence, independence, thoroughness and
independence when analyzing investments, making recommendations or taking
investment actions.
C. Investment professionals must use reasonable care and exercise independent professional
judgment when engaging in professional activities.

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Guidance for Standards I-VII

Reading 2

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FinQuiz Item-set ID: 10542
Questions 7(10543) through 12(10548) relate to Reading 2

Memchuk Investment Associates (MIA) Case Scenario
Memchuk Investment Associates (MIA) is a small asset management firm located in Eringdale, a
developing country. The firm is host to wide array of local clients including individuals and

institutions. Its institutional clients base primarily include three major clients: The pension plan
of Grace Incorporated, a surgical equipment manufacturer; The Hortwitz Trust, a foundation
whose main purpose is to provide education to unprivileged children in the country’s rural areas;
The Senior Citizen Endowment, a non-governmental organization providing housing and
medical care facilities to the country’s senior citizens.
Yuri Peltier, CFA is one of the portfolio managers serving MIA. He is responsible for managing
the investment portfolio of Grace Incorporated’s pension plan. The plan’s portfolio is indexed to
a large-cap international index invested in the securities of stable companies. The pension plan’s
investment policy stresses industry diversification, stability, and avoidance of growth stocks as
critical. Peltier is exploring three large-cap stocks as potential investments for inclusion in the
plan’s investment account.
Exhibit
Potential Stocks
P/E ratio
P/B ratio
Dividend yield
Projected EPS
growth
Industry
Classification

Stock A
11.2
13.4
2.3%

Stock B
4.5
3.6
0.0%

Stock C
3.8
13.6
0.7%

22.4%

- 5.6%

4.4%

Technology

Medical
Equipment
Supplier

Automobile
Manufacturing

Based on the data gathered, Peltier allocates stocks B and C to the pension plan’s investment
account.
Cassandra Lawson is another portfolio manager serving the firm. She is responsible for
managing the portfolios of individual clients. The development of Eringdale’s economy and the
provision of grants to help local companies compete on international levels, by the government,
have been two factors which have contributed towards the increasing trend of local companies
seeking public listing. Trent Engineering Corporation is the latest corporation to seek a public
listing of its shares. The high level of demand and limited supply for its shares has forced
Lawson to allocate 80% of the purchased shares to suitable client accounts. She decides to hold

back 20% of the purchased shares and deposit them in her personal account. The shares will be
held in her account for an eight-month time period after which they will be allocated to the

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Reading 2

Guidance for Standards I-VII

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accounts of those clients who have exhibited an interest in the shares at the time of the 80%
allocation. During the eight-month period, she expects these stocks to appreciate in value.
The recent investment craze for IPO-listed firms amongst the local market investors has
significantly increased the values of stocks such as that of Trent Engineering Corporation.
Tyrone Schmidt, Lawson’s biggest client, has requested that Lawson allocate 40% of the 20%
shares, held in her personal account, to his investment account. If Lawson agrees to do so,
Schmidt has promised her a round trip cruise to the Bahamas. Lawson is unsure of whether to
accept or decline the offer but she has informed MIA inwritten of the offer.
Francisco Brewer is a Level III candidate and a junior portfolio manager serving the firm.
Outside office hours, Brewer has arranged to meet his long time friend at a local restaurant.
While waiting for his friend, Brewer overhears the conversation of two individuals. He gathers
that the two individuals are retired and prior to their retirement were working at a software
development corporation. The two retirees discuss a software development problem present in
the corporation’s largest products prior to their retirement. They move on to discuss that a flaw
in the source code of the corporation’s largest software product line may lead to a drop in the
product line’s forecasted revenues. Brewer shares this piece of information with his friend, upon
his arrival, and decides to inform a fellow portfolio manager who manages the software
development corporation’s stocks for his clients’ accounts.

As MIA’s junior portfolio manager, Brewer has been tasked with managing the investment
account of The Senior Citizen’s Endowment under the supervision of Peltier. The endowment is
relatively new and has a small asset base. The endowment’s investment policy exclusively
mandates the inclusion of socially responsible companies in its investment account. Apart from
this requirement, the investment policy provides no further guidance. The endowment’s chief
investment officer has complained to Brewer of a recent allocation of emerging market socially
responsible companies introducing significant risk to the endowment’s portfolio.

FinQuiz Question ID: 10543

7. By allocating stocks B and C to Grace Incorporated pension plan’s investment account, has
Peltier violated the CFA Institute Standards of Professional Conduct?
A. No.
B. Yes with respect to stock B.
C. Yes with respect to stock C.

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Guidance for Standards I-VII

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FinQuiz Question ID: 10544

8. By allocating 80% of Trent Bridge Corporation’s stocks to his clients and retaining 20% of
the stocks for his personal account, respectively, has Lawson violated any standard(s)?

A.

B.
C.

Allocating 80% of the stocks to his
clients?

Allocating 20% of the stocks for his
personal account?

No standards have been violated

III (B) Fair Dealing and VI (B) Priority of
Transactions

III (C) Suitability

III (B) Fair Dealing

III (A) Loyalty Prudence and Care
and III (B) Fair Dealing

No standards have been violated

FinQuiz Question ID: 10545

9. If Lawson allocates 40% of the 20% Trent Bridge Corporation’s stock, held in her personal
account, to Schmidt’s investment account and accepts the round trip cruise offer she will
most likely be violating all of the following standards except for:

A. I (B) Independence and Objectivity
B. III (B) Fair Dealing
C. IV (B) Additional Compensation Arrangements
FinQuiz Question ID: 10546

10. Brewer has most likely violated the standard, II (A) Material Nonpublic Information, by
sharing information on the software development corporation with:
A. neither of the two.
B. his friend and the fellow portfolio manager.
C. the fellow portfolio manager only.
FinQuiz Question ID: 10547

11. By recommending emerging market socially responsible companies for the investment
account of The Senior Citizen’s Endowment, has Brewer violated any Standards of
Professional Conduct?
A. Yes, Brewer has violated III (C) Suitability
B. Yes, Brewer has violated III (B) Fair Dealing
C. No.

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Reading 2

Guidance for Standards I-VII

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FinQuiz Question ID: 10548

12. As Brewer’s supervisor, has Peltier violated any standards?
A. Yes, he has violated IV (C) Responsibility of Supervisors.
B. Yes, he has violated III (C) Suitability and IV (C) Responsibility of Supervisors
C. No.

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Reading 2

Guidance for Standards I-VII

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FinQuiz Item-set ID: 10556
Questions 13(10557) through 18(10562) relate to Reading 2

Rice & Helmore Associates Case Scenario
Rice & Helmore Associates is a regional firm which provides investment banking and
investment counseling/management services to individual clients. The firm generates a
significant proportion of its annual revenues from its investment counseling department. CEO
and senior compliance officer, Radolph Herrera, ensures the two divisions are segregated and
interact as little as possible. Herrera is working on developing additional procedures to ensure
greater compliance with the CFA Institute Standards of Professional Conduct.
G&J is a medium-sized local food wholesaler. The wholesaler is an important client of the firm’s
investment banking division and is the firm’s most prized client. In order to expand its consumer
base, the wholesaler is planning to launch its own clothing line. However in order to implement
this plan it will need to hire designers and arrange for the necessary financing. Feral Sutton, an
investment banking employee in charge of the wholesaler, recommends it arranges 40% of its
financing by issuing equity and 60% of its financing by issuing 10-Year Corporate BBB-rated

bonds.
Brent Mullins is an investment analyst serving Rice & Helmore Associates. Mullins and Sutton
studied together and now work at the same firm. They are close friends and frequently spend
time with each other during lunch hours. Mullins is closely following the food wholesale
industry, including G&J. To avoid the appearance of any conflicts, Mullins avoids discussing
any information acquired during his research activities. Sutton, who is unaware that Mullins is
covering the wholesale industry, discusses with Mullins G&J’s expansion plans.
Following the discussion with Sutton, Mullins returns to his department and informs Herrera of
this valuable piece of information. Herrera, aware of the wholesaler’s plans, tells Mullins to
ensure he concludes his report with a buy recommendation. Contrary to Herrera’s instructions,
Mullins analysis of G&J indicates that the company’s plan may not prove to be successful due to
the clothing line being too expensive for its consumers. Mullins is yet to arrive at a conclusion.
Mighty-You Inc. is a sports equipment manufacturer and retailer which is locally based and
operates on a global scale. The manufacturer/retailer targets a small market segment by
producing fitness equipment for an older age bracket, 55-85 years. Mighty-You Inc. solely uses
the firm’s investment counseling services. Salvatore Delgado, CFA is the investment counselor
managing the manufacturer’s investment portfolio. Mighty-You Inc. has requested Delgado to
locate a new broker for directing its trades since it is unsatisfied with the current’s performance.
Delgado conducts a broker search for his client using factors such as fees charged, execution
speed and price, access to global research, and broker skills amongst others to screen the
potential broker-candidates. His screening process leaves him with two potential brokers: Mace
Brokerage and Harold & Haroon Associates. Mace Brokerage is situated in a different country,
charges a fee which is substantially higher than the existing broker, provides a relatively higher

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Reading 2

Guidance for Standards I-VII

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execution speed, and access to research conducted by local and global firms. Harold & Haroon
Associates is a local broker charging fees lower than the existing broker, offering access to
research conducted by local firms, but executing transactions at a poor execution speed.
The country’s national market has exhibited considerable volatility over the previous six months.
As a result, investment counselors of the firm forecast the risk of their clients’ securities may
increase substantially. In order to offset these risks, a senior investment counselor serving at the
firm recommends the use of derivatives for a six-month period. Due to the firm’s inexperience
with the asset class, it implements the derivative strategy for a portion of its clients’ portfolios.
The derivative strategy will be subject to a trial period of one month during which it will be
evaluated. If the strategy proves to be successful, the firm will implement the strategy for the rest
of the client portfolios and issue a formal written notification to all existing and potential clients.
In order to comply with the CFA Institute Standards of Professional Conduct CEO and
compliance officer, Herrera, has decided to implement a number of policies which will enhance
its outlook in the investment industry. He has drafted three of these policies.
Policy 1:

The firm should ensure that its investment banking division and investment
research division are separated by an invisible firewall structure and any
unsupervised communications between the two departments is allowed once the
investment research department has issued the research report.

Policy 2:

Any proxy votes must be cast in line with the management’s votes and subject to
a cost-benefit analysis. In the event proxy voting is costly relative to the firm’s
and client’s benefits the voting process should not be conducted, irrespective of
the importance of the processes’ benefits to beneficiaries. The benefits of clients

must always be kept in mind.

Policy 3:

In conjunction with local regulations, any materials used to conduct research must
be appropriately stored in an electronic form for a period of four years after which
they may be discarded.

The high volatility present in the national markets has increased the volatility of several
securities traded the national stock market. This has resulted in considerable security selection
problems for Malcolm Strickland, a portfolio manager serving the firm who manages the
portfolios of risk-averse clients investing in these securities. To make these securities suitable for
his clients’ portfolios, Strickland purchases the securities for their portfolios and justifies his
purchase by issuing the following statement, “Although the purchased securities are presently
highly risky, the volatility is projected to fall after a six month period once the market volatility
returns to normal levels. I advise you all to be patient.”

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Reading 2

Guidance for Standards I-VII

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FinQuiz Question ID: 10557

13. In context of the discussions between Sutton and Mullins, which of the following CFA
Institute Standards of Professional conducts been least likely violated?

A. Standard III (E) Preservation of Confidentiality.
B. Standard IV (C) Responsibility of Supervisors.
C. Standard II (A) Material Nonpublic Information.
FinQuiz Question ID: 10558

14. In order to avoid violating the CFA Institute Standards of Professional Conduct, Mullins
should:
A. conclude his report with an investment recommendation based on his independent
analysis of G&J.
B. follow Herrera’s instructions and conclude his report with a buy recommendation.
C. decline continuing with the assignment and ask for another assignment.
FinQuiz Question ID: 10559

15. Which of the following potential brokers, if appointed, will most likely lead to Delgado
violating Standard III (A) Loyalty, Prudence and Care?
A. Mace Brokerage only.
B. Harold & Haroon Associates.
C. Either of the two potential brokers.
FinQuiz Question ID: 10560

16. By implementing the derivative strategy for a portion of the client portfolios (to offset
national market risks) which of the following standards will least likely be violated?
A. Standard III (C) Suitability
B. Standard V (A) Diligence and Reasonable Basis
C. Standard V (B) Communication with Client and Prospective Clients
FinQuiz Question ID: 10561

17. Which of the following drafted policies are least consistent with the provisions laid out by
the CFA Institute Standards of Professional Conduct?
A. 1 and 2.

B. 2 and 3.
C. 1 only.

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Guidance for Standards I-VII

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FinQuiz Question ID: 10562

18. By allocating the highly volatile securities to his client portfolios and justifying his
allocation, Strickland has violated:
A. Standards III (C) Suitability and V (A) Diligence and Reasonable Basis.
B. Standards I (D) Misconduct, III (C) Suitability, and III (D) Performance Presentation.
C. Standards I (C) Misrepresentation and III (A) Loyalty, Prudence and Care.

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Guidance for Standards I-VII

Reading 2

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FinQuiz Item-set ID: 10570

Questions 19(10571) through 24(10576) relate to Reading 2

Trinity Limited Case Scenario
Trinity Limited is a financial services provider composed of three distinct departments: research,
portfolio management, and financial consultancy. The firm outsources any tax consultancy
service requested by its clients. Chief executive, Oscar Meyer, CFA is a strong supporter of
ethical codes and professional standards. To support his beliefs, Meyer has implemented a
compliance system which is consistent with the standard compliance system structure adopted by
a majority of local firms in his country.
Wilson Thackeray is a Level III candidate serving as portfolio manager at the firm’s portfolio
management department. To ensure his security purchases are well-reasoned, Thackeray
purchases relevant research from the firm’s research department at a 0.20% standard fee. One of
Thackeray’s recent purchases pertains to research covering H.O. Zone, a petrochemical
manufacturer. The research report has been prepared by Isaac Howell, a research analyst
employee, rumored to have a family relation with the manufacturer’s executive director.
Thackeray has confirmed the rumors to be true and believes Howell’s buy recommendation,
based on inside sources, may be a well-reasoned recommendation and thus purchases the
manufacturer organization’s securities for his client portfolios.
Lamont Byrd is a research analyst serving the research department. His research activities focus
on analyzing local pharmaceutical and technology industries. His vast experience with both
industries has led him to conclude that the two are somewhat connected with the technology
industry supplying laboratory technology to the pharmaceutical industry. Thus any problem with
the technology industry, he notes, may be reflected in the future outlook for the pharmaceutical
industry. To aid his research analysis, Byrd has developed a model which analyzes technology
industry factors such as raw material supplies, production levels, transportation facilities and
pharmaceutical industry factors such as profitability, production levels, efficiency levels, and
annual industry revenues. This analytical model uses data from industry reports published by
local government agencies and annual industry forecasts obtained from discussions with relevant
industry experts. Byrd’s model structure was originally inspired by a model developed a former
pharmaceutical industry corporate executive. Byrd’s model has been considerably modified and

is only similar with respect to the factors being analyzed. Byrd markets the model as his own.
Janelle Terry and Gwendolyn Sosa are two Level III candidates who have been recently hired by
the firm. To advertise their new employees, Trinity Limited publishes a newsletter to be sent to
all its clients and prospects. The newsletter states:
“Janelle Terry and Gwendolyn Sosa are the latest individuals to join Trinity Limited. Both Terry
and Sosa are CFA Level III candidates with Terry expected to attain the Passed Finalist status
this coming June.”

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For his first assignment Terry has been assigned Stuart McFadden. McFadden has approached
Trinity Limited for retirement planning advice. McFadden has expressly desired the firm to
devise a strategy which will help prevent taxation effects from reducing his portfolio’s value at
retirement. Terry has assured that the financial consultancy department will provide any tax
consultancy advice McFadden needs in addition to retirement planning advice. As a starting
point, Terry recommends McFadden sell his portfolio securities which have fallen in value. The
losses generated on these securities, she states, can further be used to reduce any gains generated
on portfolio securities which have risen in value. She believes this strategy will help to reduce
the basis of taxation in the current and future years.
Sosa has been assigned as an assistant to Meyer to help him strengthen the firm’s ethical codes
and compliance with the CFA Institute’s code of ethics and professional standards. As an
assistant, Sosa will be responsible for monitoring any inconsistency in the firm’s reporting
structures and practices which may violate the ethical codes and/or professional standards and

reporting these violations to Meyer who will be responsible for taking the necessary action.
During her first day of work Sosa observes three practices which may constitute violations of the
Institute’s ethical codes and/or professional standards.
Practice 1:

A few managers from the portfolio management and research departments often
conduct meetings after office hours. Upon questioning one of these managers, the
manager openly admitted that the purpose of their meetings is to discuss the
purchase of the firm’s financial consultancy department. Sosa is the first firm
employee to be aware of such a plan.

Practice 2:

Unbeknownst to their clients, several portfolio managers have set up an
arrangement with their respective broker. Under this arrangement, managers refer
client portfolio trades to their broker in exchange for high quality research which
will benefit these managers in portfolio management activities.

Practice 3:

Research analyst, Lamont Byrd’s resume quotes experience with the
pharmaceutical and technology industries of 20 and 15 years, respectively.
However after discussions with competing analysts and a noteworthy financial
magazine editor, Sosa discovers Byrd’s resume has incorrectly stated his
experience with the two industries. Byrd’s actual experience with the former and
later industries is 25 and 20 years, respectively.

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Reading 2

Guidance for Standards I-VII

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FinQuiz Question ID: 10571

19. In context of the publication of Howell’s research report and Thackeray’s purchase of H.O.
Zone securities, have Howell and Thackeray violated any standards?
A. Yes, Howell has violated standard VI (A) Disclosure of Conflicts while Thackeray has
violated standard V (A) Diligence and Reasonable Basis.
B. Yes, Howell has violated standards VI (A) Disclosure of Conflicts and II (A) Material
Nonpublic Information while Thackeray has violated II (A) Material Nonpublic
Information.
C. No.
FinQuiz Question ID: 10572

20. With respect to Byrd’s analysis of the pharmaceutical and technology industries, he:
A. has violated I (C) Misrepresentation with respect to his analytical model and should only
cite the use of annual industry forecasts in his research report.
B. has not violated any standards with respect to his analytical model but should cite the use
of government agency industry reports and annual industry forecasts used in his research
report.
C. has violated I (C) Misrepresentation with respect to his analytical model and should cite
the use of government agency industry reports and annual industry forecasts in his
research report.
FinQuiz Question ID: 10573

21. Trinity Associates has most likely violated VII (B) Reference to CFA Institute, the CFA

Designation, and the CFA Program with respect to its reference to:
A. Terry and Sosa.
B. Terry only.
C. Sosa only.
FinQuiz Question ID: 10574

22. With respect to her meeting with McFadden, Terry has most likely violated standard(s):
A. I (D) Misconduct, II (B) Market Manipulation, and III (A) Loyalty Prudence and Care.
B. I (C) Misrepresentation and II (B) Market Manipulation.
C. I (C) Misrepresentation

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Guidance for Standards I-VII

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FinQuiz Question ID: 10575

23. Based on Sosa’s observations of the firm’s practices, the individual(s) in question has most
likely:
A. violated standards IV (A) Loyalty and VI (A) Disclosure of Conflicts in the case of
practice 1 and standard IV (B) Additional Compensation Arrangements in the case of
practice 2.
B. violated standard VI (A) Disclosure of Conflicts in the case of practice 1 and standard III
(A) Loyalty, Prudence and Care in the case of practice 2.
C. not violated any standards in the case of practice 1 and standard VI (C) Referral Fees in

the case of practice 2.
FinQuiz Question ID: 10576

24. In context of practice 3, which of the following standards has Byrd most likely violated?
A. I (C) Misrepresentation
B. III (D) Performance Presentation
C. V (C) Record Retention

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Guidance for Standards I-VII

Reading 2

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FinQuiz Item-set ID: 10584
Questions 25(10585) through 30(10590) relate to Reading 2

Riku Associates Case Scenario
Riku Associates is a small branch of the Riku-Tadashi Corporation, a family firm which was
established by the two Ezakiya brothers, Riku and Tadashi. Unlike its parent organization
situated in Osaka, Japan, the branch is located in the neighboring country of Shimauta. Riku
Associates provides research and investment management services to the local Shimautanian
market.
The Shimautanian laws are considerably lax especially with regard to the enforcement of
corporate rules and regulations. As a result, many local investors have complained of the lack of
attention paid to their interests by portfolio managers serving the asset management firms. Riku
Associates, however, plans to revolutionize the current state of affairs and emerge as one of the

first corporations with a strong corporate governance system and sound ethical principles in the
industry. Senior portfolio manager Masuyo Sayuki advises that the firm will need to restructure
the corporation’s infrastructure and policies to attain such a level. Sayuki advises the firm to
commence the restructuring plan early next year.
Japanese laws prohibit all resident firms from employing individuals, who have violated national
securities and/or trading laws, as either portfolio managers or research analysts. On the other
hand, Shimautanian laws permit resident firms to employ individuals with past infractions of
national securities and/or trading laws provided they have not been guilty of violating such laws
on more than two counts.
Ronald Smith is one of Riku Associates’ clients. His investment portfolio has been managed by
Sayuki for the past two years. Due to his growing responsibilities, Sayuki has now decided to
shift Smith’s portfolio to Antwon Lowery, a portfolio manager serving the firm. Sayuki transfers
Smith’s investment policy details to Lowery and instructs Lowery to conduct a review of the
portfolio after every 18 months. He tells Lowery, “The relative illiquid and passive nature of the
portfolio securities requires infrequent updates to Smith’s portfolio. To save unnecessary
evaluation and review costs, conducting a portfolio review after every 18 months is thus
justified.” Lowery manages Smith’s portfolio as instructed.
Lowery has discovered that one of the stocks held in Smith’s portfolio is far riskier than his
stated risk appetite. However, the stock belongs to a corporation which is owned by Smith’s
close family friend. Despite Lowery’s insistence, Smith has refused to sell the stock due to his
loyalty to the corporation. Lowery decides to contact Smith’s family friend and urge him to
convince Smith to remove the stock from his portfolio as the stock may prove to be disastrous
for Smith’s portfolio.
Furniture Ltd is a multinational furniture retailer and manufacturing organization which is based
in Shimauta. The local lumber industry is one of the chief suppliers to the organization. A

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Reading 2

Guidance for Standards I-VII

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number of supplier firms from the industry have withdrawn their supplier contracts with the
organization in response to an extended delay in the receipt of payments for their supplies.
Furniture Ltd. has always purchased its raw materials on credit.
Douglass Conway, CFA is one of Riku Associates’ senior research analysts and is covering
Furniture Limited. Conway has been invited by its chief executive to the organization’s head
office in Shimauta. In a discussion between Conway and the chief executive concerning the
organization’s future plans, the executive shares with him that the organization is planning to
shut down its luxury furniture line and sell the affiliated factory assets (exclusively used for the
product line). The proceeds from the asset sales will be used to pay the organization’s
disgruntled suppliers. Upon returning to his firm Conway shares this previously undisclosed
information with Sayuki.
Yoko Fukui and Taiki Gifu are two junior portfolio managers and colleagues working at Riku
Associates. Both managers have been considering migrating to Australia for better employment
opportunities and quality of life. Fukui sends her resume to Howell S. Erwin Associates and
participates in an online interview arranged by the firm for overseas interview candidates. During
the interview she learns that the firm will initially employ her as an internee and convert her
status to a permanent employee eight months following her induction after which she will be
entitled to remuneration. With little savings to support her during the internship period, she
decides to decline the offer. She does not inform her supervisor of this offer. Gifu sends his
resume to A. Carl Investment Limited and also participates in an online interview. After
returning from his interview, Gifu decides to resign from Riku Associates and join A. Carl
Investment Limited. He submits his resignation letter to Sayuki and returns all firm documents
stored in his workstation and a laptop which was given by the firm for office use purposes but
retains backups of past firm information stored on his home computer. He believes the
information is now obsolete and need not be returned.

Following her trip to Australia, Fukui has been tasked with a new client. Fukui is extremely
enthusiastic about managing the client’s portfolio as the client has invited her to visit his
underwater farm if Fukui achieves a portfolio return greater than 10% over a six-month period.
However, Fukui fails to achieve the minimum target and instead achieves a portfolio return of
9.8% at the end of the six-month period. Desperate not to miss the client’s offer, Fukui increases
the portfolio return to 10%. Fukui announces to her client that she has achieved a 10% return on
his portfolio and informs her supervisor of the offer by describing the location of the underwater
farm.

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FinQuiz Question ID: 10585

25. When employing individuals with past infractions of securities and or/trading laws which of
the following policies should Riku Associates undertake in order to avoid violating the
guidelines laid out by the CFA Institute Standards of Professional Conduct?
A. Riku Associates may employ individuals with past infractions of securities and/or trading
laws as portfolio managers and/or research analysts provided the infractions do not
exceed the two count limit.
B. Riku Associates may not employ individuals with past infractions of securities and/or
trading laws as portfolio managers and/or research analysts.
C. Riku Associates may employ individuals with past infractions of securities and/or trading
laws as portfolio managers and/research analysts irrespective of the violation counts.

FinQuiz Question ID: 10586

26. With respect to the transfer of his responsibilities to Lowery and Sayuki’s subsequent
instructions to Lowery have any standards been violated?
A. Sayuki has violated IV (C) Responsibility of Supervisors and both managers have
violated III (C) Suitability.
B. Sayuki has violated IV (C) Responsibility of Supervisors but Lowery has not violated any
standards.
C. Sayuki has not violated any standards but Lowery has violated III (A) Loyalty, Prudence
and Care.
FinQuiz Question ID: 10587

27. By contacting Smith’s family friend, Lowery has most likely:
A. complied with the CFA Institute Professional Standards of Conduct.
B. violated III (A) Loyalty, Prudence and Care.
C. violated III (E) Preservation of Confidentiality.
FinQuiz Question ID: 10588

28. By sharing Furniture Limited’s plans with Sayuki has Conway violated any standards?
A. Yes, he has violated II (A) Material Nonpublic Information.
B. Yes, he has violated III (E) Preservation of Confidentiality.
C. No.
FinQuiz Question ID: 10589

29. With respect to their responses to their employment offers, have Fukui and Gifu,
respectively, violated IV (A) Loyalty?
A. Yes and Yes.
B. Yes and No.
C. No and Yes.

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Guidance for Standards I-VII

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FinQuiz Question ID: 10590

30. Which of the following standards has Fukui least likely violated when managing her new
client’s portfolio?
A. I (B) Independence and Objectivity
B. III (D) Performance Presentation
C. IV (C) Additional Compensation Arrangements

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Guidance for Standards I-VII

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FinQuiz Item-set ID: 10598
Questions 31(10599) through 36(10604) relate to Reading 2

Greenwich Limited Case Scenario

Greenwich Limited is a medium-sized asset management partnership founded and run by the
O’Hara siblings, Jacquelyn and Allen. The partnership firm is established in Nairobi, Kenya and
caters the African and Asian markets from the Kenyan capital. Both Jacquelyn and Allen
supervise the research activities of the firm’s employees. Jacquelyn is responsible for supervising
the research activities pertaining to the African markets with Allen supervising the activities
conducted with respect to the Asian markets.
The recent political violence in some African countries has not been received optimistically by
investors who have responded to the crisis by dissolving their equity investments in those
countries. The heavy sales activity, as a result, has triggered a downward movement in these
countries’ equity securities. Kenya is the latest country to be affected by political violence. The
severity of the crisis is considerably lower than the crises in fellow African nations and the cause
of the crisis different. Unlike recent crises, investors have not yet responded to the Kenyan
political crisis. Ahmet Youssef, a research analyst covering the African markets, has been closely
following the situation and after considerable research and analysis has arrived at the following
recommendation:
“Similar to its fellow nations, the Kenyan political crisis will grow in intensity, triggering a
foreseeable bear equity market. Presently, selling your Kenyan equity investments is the most
apposite course of action.”
While reviewing his recommendation, Jacquelyn asks Youssef what he means by ‘foreseeable’.
Youssef responds by informing her that he has used surveys and quotations obtained from two
analysts’ reports, both of whom follow the Kenyan market. Additionally, he informs her that he
has created an online database which contains all the material used to create his report. Within
the database, he has attributed the analytical data using the statement, “Analysts’ reports,
surveys, and quotations have been used to create the report and formulate its conclusions.” The
database is freely available to particular investor categories while available to the remainder
investors at a nominal fee.
Due to a major breakdown in one of the firm’s communications channels, Youssef has not been
able to release his report. The firm has promised that the problem will be solved in two days’
time. During this period, Youssef decides to issue his recommendation, using his own
communication channel.

Nathaniel Hanson is a Level III candidate and a junior research analyst serving the firm. Lately,
Hanson has been convincing his fellow analysts to enroll in the CFA Program by stating, “The
CFA Program will help enhance your analytical skills while ensuring that a high level of ethical

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Reading 2

Guidance for Standards I-VII

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standards is maintained at all times.” He tells his fellow employees that the CFA Program is
quite challenging and only individuals that are apt enough for the Program should participate.
Hanson is covering Janseng Training Limited (JTL), located in Malaysia. JTL conducts training
for individuals seeking employment opportunities in the aviation industry. JTL has hired
Greenwich Limited to conduct research on the training firm. The training firm hopes the research
firm’s report and conclusion on its future prospects will be positive. Hanson has temporarily
shifted to Malaysia where he is expected to stay for the next two months so that he may
effectively conduct his research assignment. To ensure Hanson’s stay is comfortable, JTL has
arranged a fully paid modest accommodation and provided him with a car so that he may
commute to the training firm’s headquarters, which is half an hour away from his residence. Due
to his heavy workload, Hanson has not yet informed his employer of the transportation and
residence provided but accepts any residential allowances provided by his firm. He intends to
return the allowances to his employer upon his return to Nairobi in two month’s time.
During his stay in Malaysia, Hanson has been requested to cover a steel manufacturer. Hanson
has accepted the assignment and will be paid a flat fee for preparing the research report. During a
discussion with one of the steel manufacturer’s executives, Hanson has stated that he works as an
independent analyst in Nairobi.

Local Kenyan laws require research firms to be well informed on corporate and securities trading
laws prior to establishing a firm. While Jacquelyn and Allen have carefully studied the local
corporate laws, prior to commencing their firm practice, they have not fully studied local trading
laws.

FinQuiz Question ID: 10599

31. In context of the recommendation statement, has Youssef violated any CFA Institute
Standards of Professional Conduct?
A. No.
B. Yes, he has violated I (C) Misrepresentation.
C. Yes, he has violated V (B) Communication with Clients and Prospective Clients.
FinQuiz Question ID: 10600

32. With respect to his online database, Youssef has most likely violated all of the following
standards except for:
A. V (C) Record Retention
B. III (B) Fair Dealing
C. I (C) Misrepresentation

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Guidance for Standards I-VII

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FinQuiz Question ID: 10601

33. By issuing his research recommendation only, has Youssef complied with the CFA Institute
Standards of Professional Conduct?
A. No, he should have published the research report and recommendation simultaneously.
B. No, he should limit the time lag between the recommendation and research report from
two days to one.
C. Yes.
FinQuiz Question ID: 10602

34. In context of his comments pertaining to the CFA Program, has Hanson violated any
professional conduct standards?
A. No.
B. Yes with respect to his statement, “The CFA Program will help enhance your analytical
skills while ensuring that a high level of ethical standards is maintained at all times.”
C. Yes with respect to his comments concerning the eligibility criteria required to participate
in the CFA Program.
FinQuiz Question ID: 10603

35. While covering JTL, has Hanson violated any standards?
A. Yes, he has violated I (B) Independence and Objectivity.
B. Yes, he has violated IV (A) Loyalty.
C. No.
FinQuiz Question ID: 10604

36. With respect to covering the steel manufacturer, Hanson has least likely violated:
A. I (B) Independence and Objectivity
B. IV (A) Loyalty
C. VI (A) Disclosure of Conflicts

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Guidance for Standards I-VII

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FinQuiz Item-set ID: 10612
Questions 37(10613) through 42(10618) relate to Reading 2

Ashcroft Associates Case Scenario
Ashcroft Associates is a multinational investment advisory firm which is based in and operates
from the U.S. The advisory firm caters to a multinational client base, which are geographically
dispersed.
Estella Russet, CFA is the firm’s senior investment advisor. Russet has recently taken in interest
in the stocks of emerging market nations. Russet believes that the low correlations of emerging
market stocks with international stocks will provide risk diversification to all its client portfolios
(risk tolerant and risk averse client portfolios). He instructs his portfolio managers to select
emerging stocks which accordingly meet the return objectives of client portfolios and conduct a
suitability analysis prior to purchasing these stocks for the portfolios. The suitability analysis
involves analyzing client factors such as risk and return objectives; current wealth; liquidity
needs; investment time horizon; and unique circumstances. These factors are analyzed and
revised on a quarterly basis for those clients situated in countries with rapidly developing
markets and revised on an annual basis for clients in stable markets.
In addition to international securities, Ashcroft Associates invests in crude oil commodity futures
for the purposes of earning active returns through speculation. These commodity futures
investments are primarily undertaken for those clients who can endure the highest level of risks
and are held in large quantities in their portfolios. A majority of the future investments are now
close to expiration. Portfolio manager, Norberto Green, has been tasked with rolling the futures

contracts into newer contracts. Green times the trades to coincide with a downward crude oil
commodity futures curve. The rolling of the futures contracts turns out be more profitable than
expected due to the liquidation of the large futures positions depressing the crude oil futures
price and producing a significantly large positive roll return upon rolling into the new contracts.
Anika Sanchez is one of Russet’s clients. Sanchez is experiencing personal bankruptcy. To make
the necessary payments associated with her bankruptcy, Sanchez has withdrawn large sums of
money from her portfolio. In order to improve her client’s situation and avoid losing Sanchez,
Russet consults a banking consultant and informs the consultant of Sanchez’s present situation.
She believes the consultant may be able to help her client. Sanchez has requested Russet
liquidate any commodity futures investments held within his portfolio. Russet, however, does not
believe liquidating the investments is necessary as she is optimistic about Sanchez’s
circumstances improving. Russet does not roll the expiring futures contracts into newer
contracts.
Bennet Cooper is a junior portfolio manager serving the firm. He believes the stock of L-See
Pharmaceuticals Manufacturers will be a valuable addition to his client’s portfolios. The
pharmaceutical manufacturer has recently undertaken a secondary offering of its shares. The
attractiveness of its stock has made this issue the latest investment craze in the equity market

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