2019 CFA level 3 qbank r 1 2 CFA ins code of ethics and standards of prof conduct standards I–VII 2 answers

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Learning Management System

Question #1 of 199
Wes Smith, CFA, works for Advisors, Inc. In order to remain in compliance with Standard V(A),
Diligence and Reasonable Basis, Smith may recommend a security in which of the following
situations?

A) For either of the reasons listed here.
B) Smith reads a favorable review of the security in a widely read periodical.
C) Advisors' research department recommends a stock.

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Explanation

(Study Session 1, Module 2.7, LOS 2-V.(A))

SchweserNotes - Book 1

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Question #2 of 199

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Smith will be in violation if he acts solely on the basis of what he read in the periodical. Use of
information within the rm can be relied upon unless the Smith has reason to believe the
source lacks a sound basis.

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Which of the following statements about a member's use of client brokerage commissions is

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NOT correct? Client brokerage commissions:

A) should be commensurate with the value of the brokerage and research services

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received.

B) may be directed to pay for the investment manager's operating expenses.
C) should be used by the member to ensure that fairness to the client is maintained.
Explanation
Brokerage commissions are the property of the client and may only be used for client bene t.
(Study Session 1, Module 2, LOS 2.a)
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SchweserNotes - Book 1

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Question #3 of 199
Dixie Miller, a Level II CFA candidate, heads the research department of a large brokerage rm.
The rm has many analysts, some of whom are subject to the CFA Institute Code of Ethics and
Standards of Professional Conduct. If Miller delegates some of her supervisory duties, which
statement best describes her responsibilities under the CFA Institute Code and Standards?

A) Miller retains supervisory responsibilities for those duties delegated to her
subordinates.
B) Miller's supervisory responsibilities do not apply to those subordinates who are not
subject to the CFA Institute Code and Standards.

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C) CFA Institute Standards prevent Miller from delegating supervisory duties to

Explanation

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subordinates.

Even though members may delegate supervisory duties, such delegation does not relieve
members of the supervisory responsibility.

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(Study Session 1, Module 2.6, LOS 2-IV.(C))
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SchweserNotes - Book 1

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Question #4 of 199

An analyst needs to inform his supervisor in writing of which of the following?

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A) An annual bonus, sent to the analyst by a client, which varies with the performance
of the client's portfolio that the analyst manages as an employee even though no
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B) Both the lunch and the bonus mentioned in the other answers.
C) A client and the analyst alternate paying for lunch at a local sandwich shop.
Explanation
Standard IV(B) requires that members disclose to their employer in writing all bene ts that
they receive in addition to their regular compensation for services they perform on behalf of
their employer. Since the bonus varies with the performance of the client's portfolio, there is
a clear link to the services of the analyst. The analyst is not required to report the lunch since
it is not linked to performance.
(Study Session 1, Module 2.6, LOS 2-IV.(B))
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Question #5 of 199
While trading on behalf of a pension account, an analyst receives special research reports from
the brokerage rm with whom she is doing the trades. Such an activity is:

A) a violation of both Standard III(A), Loyalty, Prudence, and Care, and the Code of

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Ethics.
B) a violation of only The Code of Ethics.

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C) not in itself a violation of Standard III(A), Loyalty, Prudence, and Care, nor the Code
of Ethics.
Explanation

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An analyst can receive research from a brokerage rm 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 bene ts
from the brokerage rm.

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SchweserNotes - Book 1

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(Study Session 1, Module 2.4, LOS 2-III.(A))

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Question #6 of 199

Which of the following would be a violation of Standard III(B), Fair Dealing?

A) Having well de ned guidelines for pre-dissemination.
B) Limiting the number of employees privy to recommendations and changes.
C) Trading for regular accounts before discretionary accounts.
Explanation

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Do not discriminate against a client when disseminating investment recommendations. If the
rm o ers di erent levels of service, this fact must be o ered 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
well-de ned.
(Study Session 1, Module 2.4, LOS 2-III.(B))
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SchweserNotes - Book 1

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Question #7 of 199

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After a very successful quarter of high investment returns, Judy O'Berry, CFA, receives several
gifts from grateful clients. O'Berry considers the gifts to be of novelty or sentimental value only,
but she hears rumors that several junior employees are jealous of the attention she received
for the group's e orts. She decides to consult the company's compliance rules on gifts and is

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surprised to learn her rm has no established rules. She consults the Standards of Practice
Handbook, and then submits proposed rules on gifts to her company's compliance department.
These rules should contain all of the following EXCEPT:

A) a requirement to disclose the gift.

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B) restrictions on all types business entertainment.

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Explanation

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C) a formal value limit based on local customs.

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The rules should contain a formal value limit based on local customs. Not all types of
business entertainment are forbidden. Only business entertainment which is intended to
in uence or reward members and candidates should be avoided.
(Study Session 1, Module 2, LOS 2.a)
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SchweserNotes - Book 1

Question #8 of 199

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Janet Coleman, CFA, is preparing a research report on Union Power and Light. Due to
deregulation, utility companies face increased competition. During the past year, three of the
ve utility companies in her region have cut their dividends by 50%, on average, to provide
more internal funds for investment purposes. In a discussion with Union's chief executive
o cer, Coleman learned that Union expects to have a record amount of capital expenditures
during the next year. Although Union subsequently issued a press release about its capital

expenditure plans, it did not make any public statements about a change in dividend policy.
Coleman reasons that the management of Union will be under pressure to cut its dividends
within the next year to remain competitive. Coleman issues a research report in which she
states:

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"Union Power and Light will decrease its dividend from $2 to $1 a share by the second quarter.
We expect that Union will strengthen its competitive position by using more internally

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generated funds to nance its investment opportunities. If investors buy the stock now at
around $50 a share, their total return could exceed 20% on the stock."

Based on CFA Institute Standards of Professional Conduct, which of the following statements

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about Coleman's actions is most accurate?

A) Coleman violated the Standards because she failed to separate opinion from fact in
her research report.

B) Coleman violated the Standards because she used material inside information.

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Explanation

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C) Coleman did not violate the Standards.

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Coleman is required to distinguish between facts and opinions in her research reports. Her
statement that Union will decrease its dividend from $2 to $1 a share is a prediction, not a
fact, and therefore should be distinguished clearly as an opinion.

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(Study Session 1, Module 2.7, LOS 2-V.(B))
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SchweserNotes - Book 1

Question #9 of 199

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An analyst nds a stock with historical returns that are not correlated with interest rate
changes. The analyst writes a report for his clients that have large allocations in xed-income
instruments and emphasizes the observed lack of correlation. He feels the stock would be of
little value to investors whose portfolios are composed primarily of equities. The clients with
allocations of xed income instruments are the only clients to see the report. According to
Standard V(B), Communication with Clients and Prospective Clients, the analyst has:

A) not violated the Standard.
B) violated the article in the Standard concerning facts and opinions.
C) violated the Standard concerning fair dealings with all clients.

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Explanation

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(Study Session 1, Module 2.7, LOS 2-V.(B))

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Recommending a stock whose return is uncorrelated with interest rate changes is
appropriate for the clients described in the problem. Emphasizing the lack of correlation is
appropriate as long as the analyst makes no guarantees concerning the relationship in the
future. Reporting historical correlation is a presentation of fact, and is not in violation. The
analyst is free to show the report only to investors for whom the investment is appropriate.

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SchweserNotes - Book 1

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Question #10 of 199

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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

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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:

A) not in violation of the Code and Standards.
B) in violation of his duciary duties regarding the municipal bond research but not so
regarding the research on the small cap issues.
C) in violation of his duciary duties regarding both the small cap research and the
municipal bond research.
Explanation
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The issue at hand is the member's duciary responsibilities in handling "soft dollars" which
are technically the property of the client. Standard III(A), Loyalty, Prudence, and Care,
delineates the member's duciary 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 bene t and is in violation of the Standard.
(Study Session 1, Module 2.4, LOS 2-III.(A))
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SchweserNotes - Book 1

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Question #11 of 199

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Randal Brooks is the chief economist for a large brokerage rm. In the aftermath of a national
tragedy, Brooks feels that it is very possible that the stock market will drop signi cantly and not
recover for several years. However, he does not believe that this is the most likely scenario but
merely that the risk of investing in equities has increased. He decides to write a market

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commentary to the brokerage clients that discusses the reasons why the market will remain
stable and talks about why he, as a private citizen, feels patriotic. He does not mention the
increase risk in equities. Brooks has:

A) violated the Standards by not including all of the relevant factors in the research

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report and making patriotic statements.

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B) not violated the Standards.

C) violated the Standards by not including all of the relevant factors in the research

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report, but not by making patriotic statements.
Explanation

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By not mentioning the increased risk of the market, Brooks has violated the Standard on
using reasonable judgment in a research report. However, the patriotic statements do not
violate the Standards.
(Study Session 1, Module 2, LOS 2.a)

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SchweserNotes - Book 1

Bella Brown is an experienced generalist securities analyst employed by Lang & Co., a major
U.S. brokerage rm whose clients have a high regard for her research and stock selection
abilities. She was visited recently by a Lang managing director who said, "Please take a look at
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SpecChem Inc., the specialty chemical producer. They are going to need an investment banker
soon and, because we make a market in their stock, we will be one of the rms considered for
this business. I had lunch with SpecChem's Treasurer today, who told me that their European
problems are being resolved and that earnings results are de nitely looking good. He likes us
and is expecting you to call him for details." The managing director then left Brown's o ce,
saying, "It would be great if you could rate the stock a 'Buy'."
In a subsequent hour-long telephone discussion with the Treasurer, Brown obtained some
useful information concerning recent company trends and developments as well as
SpecChem's overall view of the outlook for sales and earnings during the next several quarters.
Brown began thinking quite positively about the company and its prospects. She then reviewed

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some general source material on the chemical industry and read the Standard & Poor's Stock
Guide on SpecChem Inc. That afternoon, she wrote a report recommending purchase of the

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stock, shown below as Exhibit B. In accordance with Lang's routine procedures for predissemination review of Research Department recommendations, the report has been sent to
the rm's Director of Research, who is aware of the circumstances under which it was

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prepared.
Exhibit B

LANG & COMPANY Company Report

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Rating: Buy

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Industrial: Specialty Chemicals Equity Research

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SpecChem Inc. (NYSE: SCM)

We are initiating coverage of SpecChem Inc. with this report.
Earnings, up to 51% in the rst quarter, are expected to be up again in the quarter

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ending June 30. Higher sales, better margins, an improved geographic sales mix, and
savings from reduced pension expense are all contributing to this year's gains.
Although European production is up only modestly year-over-year, successful cost
reduction e orts are limiting the adverse e ects of weak volume and pricing. A possible
plant closure in September could improve plant utilization by 10%, accompanied by
potentially dramatic margin improvement. However, a $30 million after-tax special
charge could be taken at the time of the closure.
We expect a moderate increase in second half 2014 sales. Although management looks
for European demand to remain slow, it feels that U.S. sales could be above expectations
if auto-related demand strengthens. Management is also optimistic about receiving a
sizable U.S. government contract in the next few months.

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Based on the factors noted above, our con dence level concerning earnings levels over
the balance of the year is high.
We think SpecChem stock is undervalued and believe it can easily reach the low 100s on
the strength of continuing earnings momentum. The downside is estimated to be in the
mid-80s. There is plenty of room for upside earnings surprises if volume and prices
improve, which would take the stock up strongly. Purchase is recommended.
Analyst: Bella Brown

Research Department
This report is based upon information which we consider reliable, but we do not represent that

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it is accurate, and it should not be relied upon as such. We, or persons involved in the

the securities of the company mentioned herein.

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Question #12 of 199

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preparation or issuance of this material, may, from time to time, have long or short positions in

Under the CFA Institute Code and Standards, it is the responsibility of the Director of Research,
a CFA Institute member to:

A) exercise reasonable supervision over those subject to their supervision or authority

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to prevent any violation of applicable statues, regulations or provisions of the Code

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B) both of these.

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C) not knowingly participate or assist in any violation of laws, rules, or regulations.
Explanation

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The Director of Research, as a CFA Institute member, is bound by the Standards of
Professional Conduct. Accordingly, "members shall not knowingly participate or assist in any
violation of such laws, rules or regulations" (Standard I(A): Knowledge of the Law). This
responsibility is applicable under the circumstances. As a supervisor, the director of research
has a responsibility to exercise reasonable supervision over subordinates to prevent
violations of laws, regulations, and the provisions of CFA Institute Standards of Professional
Conduct (Standard IV(C): Responsibilities of Supervisors).
(Study Session 1, Module 2, LOS 2.a)
Related Material
SchweserNotes - Book 1

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Question #13 of 199
Under the current circumstances, the Director of Research should:

A) allow the report to be distributed, as is.
B) require the report to be redone with a neutral or hold rating pending the outcome
of the awarding of the investment banking business.
C) require the report to be redone to ensure compliance with CFA Institute Standards.
Explanation

(Study Session 1, Module 2, LOS 2.a)
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Question #14 of 199

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SchweserNotes - Book 1

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Based on the current circumstances, the supervisor (Director of Research) must not allow the
report to be distributed. In this situation the overriding responsibility is to ensure that
diligence, thoroughness, and independence be exercised in forming the investment judgment

and in preparing the research report.

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The research report, as shown, has several aspects which violate CFA Institute Standards of

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Standards?

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Professional Conduct. Which of the following is NOT an apparent violation of CFA Institute

A) The report does not adequately discuss the factors important to analysis,
recommendations, or action.

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B) The report violates guidelines on investment performance presentation.
C) The report does not distinguish between fact and opinion.
Explanation

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There is no attempt in the report to present data on the rm's performance as an investment
manager. Violations relating to the report itself include the following:
Though SpecChem's current and prospective earnings are mentioned, no real basis of
SpecChem's earnings power is discussed, nor are such factors as cash ow, operating
strength or nancial condition. Brown has violated Standard V(B): Communication with
Clients and Prospective Clients.
The report fails to disclose Lang's market-making activities with SpecChem. This
omission violates Standard VI(A): Disclosure of Con icts.
Brown is not separating fact from opinion in her comment, "There is plenty of room for
upside earnings surprises if volume and prices improve further, which would take the
stock up strongly." This is a violation of Standard V(B): Communication with Clients and
Prospective Clients. The above-noted comment could also be considered a violation of
Standard I(C): Misrepresentation.

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(Study Session 1, Module 2, LOS 2.a)
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Question #15 of 199

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SchweserNotes - Book 1

As to the process by which Brown's report in Exhibit B came into being, which of the following is

least likely a procedural error in violation of CFA Institute Standards of Professional Conduct?

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A) Brown has violated the Standard relating to the prohibition against plagiarism.

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B) Brown has violated the Standard relating to disclosure of basic characteristics.

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C) Brown has violated the Standard relating to independence and objectivity.

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Explanation

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There is nothing to indicate that a violation of the Standard on Prohibition against plagiarism
has occurred. The word "process" violations include:

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Brown's report and investment conclusions were in uenced by a senior member of her
rm. In addition, near total reliance was put on the information supplied by
SpecChem's management. She has violated Standard I(B): Independence and
Objectivity.
Brown showed a lack of diligence and thoroughness in forming her investment
decision and preparing the report. Her analysis was cursory at best; the report was not
objective nor was it based on adequate understanding of company fundamentals.
Standard V(A): Diligence and Reasonable Basis was violated by Brown.
A violation of Standard V(B): Communication with Clients and Prospective Clients has
also occurred. Brown failed to investigate SpecChem's basic investment characteristics
properly and did not communicate the company's investment characteristics through
the research report.
(Study Session 1, Module 2, LOS 2.a)

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Question #16 of 199

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SchweserNotes - Book 1

Brown has been invited to visit the world headquarters of SpecChem. Brown expects that the
information that she learns there will help her to ush out some of the ne details in her

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research on SpecChem's stock. SpecChem plans to pay for all of Brown's expenses trip,

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including meals, accommodations and lodging. In order to comply with the Code and

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Standards, which of the following actions should Brown take? Brown should:

A) Accept the reimbursement if she is con dent that her report will still be objective.

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B) Pay for all her travel expenses.
C) Accept the reimbursement but disclose the total reimbursed expense-paid trip in
the report.
Explanation
Brown's best solution to comply with Standard I(B)""Independence and Objectivity is to avoid
any perception of con ict of interest. Brown's rms should pay for all of her expenses.
Disclosing the trip is not enough to avoid a con ict of interest.

(Study Session 1, Module 2, LOS 2.a)
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SchweserNotes - Book 1

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Question #17 of 199
Brown submits her report to the Director of Research for review, as required by Lang's
procedures. Although the Director of Research supports Brown's general conclusion, he is
somewhat more optimistic about SpecChem's near-term prospects, and based on his own
thorough investigation believes that the stock could touch $150. The Director of Research
changes the report to indicate a target price somewhat higher than originally predicted by
Brown. Brown is con dent that the Director of Research's conclusion has a reasonable basis,
but thinks that $150 is on the high side of what is likely. The Director of Research adds his own

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name to the report to re ect his contribution.

report before it is disseminated?

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In order to comply with CFA standards, must Brown request that her name be taken o the

A) Yes, because the Director of Research has misrepresented his contribution.

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B) No.

C) Yes, because Brown should dissociate from the report.
Explanation

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It is natural for di erent contributors to come to di erent conclusions based on the same
data. In this case, the Director of Research appears to have a reasonable basis for his target
price that is higher than Brown's. The Director of Research is free to issue a report that
di ers somewhat from Brown's conclusions as long as there is a reasonable basis. Brown
should not put her name on a report that di ers from her opinion. However, when a report is
a group e ort, not all members of the team may agree with every aspect of the report. Brown
could ask to have her name removed from the report, but since she is satis ed that the
conclusion has a reasonable basis, she does not have to disassociate from the report.

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(Study Session 1, Module 2, LOS 2.a)
Related Material
SchweserNotes - Book 1

Question #18 of 199

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For years, John Berger, a CFA charterholder and CEO of a company, relied upon a set of
reasonable procedures for preventing violations of the Standards of Practice in the rm. The
company has recently arranged to have members of CFA Institute as mid-level supervisors
throughout the rm. With this arrangement Berger has delegated the supervision of employees
with respect to the Code and Standards to the mid-level managers. With this action Berger:

A) is relieved of his obligation to supervise the employees under the mid-level
supervisors.
B) is still responsible for seeing that procedures are in place to prevent violations of

C) has violated Standard IV(C), Responsibilities of Supervisors.

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Explanation

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the Code and Standards.

Berger has not violated any of the Standards. He has the right to delegate supervisory duties.
This delegation does not relieve him of the responsibility of making sure that procedures are
in place to prevent violations of the Code and Standards.

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(Study Session 1, Module 2.6, LOS 2-IV.(C))
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SchweserNotes - Book 1

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Question #19 of 199

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Dave Kline, CFA, is a personal investment advisor. After a dispute with a coworker on margin
policy, he formally resigns his position by giving suitable notice. However, he does not follow

his rm's established "Transition and Exit Policies" regarding discussion of the reason for his

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departure. During his nal two weeks of employment, Kline routinely discusses the margin
policy dispute, stating "...anyone who would lend that much money on securities of such low
quality does not belong in this business..." Kline's statements are in direct violation of the rm's
"Transition and Exit Policies," but he considers it a free-speech issue. Kline is most likely:

A) in violation of Standard IV(A) "Loyalty" recommended procedures for failing to
follow the employer’s policies and procedures related to termination policy.
B) in violation of Standard IV(A) "Loyalty" recommended procedures for failing to
notify regulators of the dangerous margin policy.
C) not in violation of the Code and Standards.
Explanation
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Kline is in violation of Standard IV(A) "Loyalty" recommended procedures for failing to follow
the employer's policies and procedures related to termination policy. Members and
candidates should understand and follow their employer's policies and operating
procedures. Also, members and candidates planning to leave their current employer must
continue to act in the employer's best interest.
(Study Session 1, Module 2.6, LOS 2-IV.(A))
Related Material

SchweserNotes - Book 1

Carla Tonis is an investment analyst at Target Investments, Inc (Target), an investment

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management rm that helps recent college graduates start investing in the stock market. Tonis
wants to earn the CFA designation and has passed the Level I CFA exam. She plans to take the

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Level II exam a year from now but has not enrolled in the next scheduled exam. She is also a
member of CFA Institute.

A group of graduates from one university have been so happy with Tonis's investment advice

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they made her an honorary member of their alumni association which includes nonmonetary
bene ts. They recently gave her complimentary tickets to a major athletic event of the school
and allowed her to stay at the school's alumni house for free. While at the athletic event, Tonis
overhears two alumni as they discuss plans for their rm to begin marketing a major new
product that should be very pro table for the rm. From the context of what Tonis overhears

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and knows, she concludes that this is nonpublic information. Tonis believes she is the only one

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to hear the discussion. She knows a mutual fund that has a large holding in the rm. It is a

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mutual fund that she has often recommended to her clientele.
While at Target, Tonis uses Target's computers, software, and data to develop a computer
model that she claims can predict stock market returns. She tests the model with market data

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from the previous 12 months and recommends to her supervisor that Target should use the
model to aid in the investment process for the rm's clients. However, the supervisor rejects
the use of the model because it has not been back-tested with a su cient amount of data.
Tonis believes strongly in the predictive power of her model and decides to form her own
investment rm. It is her intention to use the model as the basis of her investment advice to
her new clients. She has compiled a list of clients that had previously been rejected by Target
and begins soliciting them as her potential clients. She tells the prospects about the model and
how it performed in the back tests.

Question #20 of 199
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Which of the following statements would NOT be in violation of the Code and Standards?

A) Tonis is a member of CFA Institute and would become a CFA upon completion of all
requirements as administered by CFA Institute.
B) Tonis is a member of CFA Institute, has passed her Level I Exam of the CFA
program, and plans to take her Level II exam next year.
C) Tonis is a CFA Level II Candidate.
Explanation

(Study Session 1, Module 2, LOS 2.a)
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Question #21 of 199

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SchweserNotes - Book 1

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According to Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA

Program, a member can reference her CFA Institute membership only in a digni ed and
judicious manner. Candidates who have passed one or more levels of the exam may state so,
but they may not imply that they have achieved superior results. To state that a member is a
candidate, the member must be registered for the next scheduled exam. The designation
"CFA" should only be used as an adjective and never as a noun.

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In order to keep her CFA Institute membership status Tonis must:

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A) le a professional conduct statement every year.
B) avoid two or more public censures within any 12 consecutive months.

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C) enroll in the next scheduled CFA exam.
Explanation

Summary suspension may be imposed on a covered person for failure to complete, sign, and
return a professional conduct statement for one year. If a candidate is not enrolled in the
next scheduled CFA exam, he may not say that he is a CFA candidate but enrollment in the
next exam is not required to keep CFA Institute membership and avoid summary suspension.
Two or more public censures within any 12 consecutive months would not lead to a summary
suspension.
(Study Session 1, Module 2, LOS 2.a)
Related Material
SchweserNotes - Book 1

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Question #22 of 199
With respect to the honorary membership in the alumni association, the complimentary tickets,
and accommodations for the sporting event, Tonis needs to inform her employer in writing of:

A) the tickets but not the membership or accommodations.
B) the membership, the tickets, and accommodations.
C) the tickets and accommodations but not the membership.
Explanation

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Question #23 of 199

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SchweserNotes - Book 1

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(Study Session 1, Module 2, LOS 2.a)

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According to Standard IV(B), Additional Compensation Arrangements, a member shall
disclose in writing all monetary compensation or other bene ts that they receive for their
services that are in addition to the compensation or bene ts conferred by the employer.

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With respect to the information that Tonis overhears at the sporting event, she:

information.

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A) may not act on the information and must try to achieve public dissemination of the

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B) may not act on the information and must keep the information a secret.
C) may trade on the information using the mutual funds she has been already been

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using only.
Explanation

According to Standard II(A), Members and Candidates cannot trade or cause others to trade
on material nonpublic information. Although recommended, she is not required to make
reasonable e orts for public dissemination of the data.
(Study Session 1, Module 2, LOS 2.a)
Related Material
SchweserNotes - Book 1

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Question #24 of 199
With respect to planning her own business while still at Target, which of the following
statements is most accurate? Tonis may:

A) not copy and take home the model because it is property of her employer.
B) copy and later use her model because Target is not using it.
C) not begin planning a new business until she resigns from Target.
Explanation

(Study Session 1, Module 2, LOS 2.a)

SchweserNotes - Book 1

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Question #25 of 199

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Under Standard IV(A), Loyalty to Employer, Tonis has a duty to act in her employer's best
interest until her resignation becomes e ective. She is not allowed to copy or take any of her
employer's property. Even though she developed the model, she did it on her employer's
time and the model is her employer's property. It is irrelevant whether her employer is using
or plans to use the model. The standards do not prohibit Tonis from planning her own
business while still with her current employer, but she must do that on her own time.

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Soliciting rejected prospects from Target is:

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A) not a violation of CFA Institute Standards because she plans to use a model
rejected by Target’s management.

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B) not a violation of CFA Institute Standards because rejected prospects do not
represent a competition with Target.
C) a violation of CFA Institute Standards under any circumstances.
Explanation
Tonis may solicit rejected prospects while she is still at Target because they do not represent
a competition with her current employer. However, she has a duty of loyalty to her employer
and must work on her new business on her own time.
(Study Session 1, Module 2, LOS 2.a)
Related Material
SchweserNotes - Book 1

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Question #26 of 199
An analyst working at an investment rm has a client that rents limousines. The client tells the
analyst that as long as he is the client's analyst, he can have free use of a limousine several
times a year. The analyst needs to:

A) explicitly refuse such an o er.
B) inform his supervisor in writing of the o er if the analyst intends to accept the
o er.

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C) do nothing since the o er is not linked to the performance of the client's portfolio.

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Explanation

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Standard IV(B) requires that members disclose to their employer in writing all bene ts that
they receive in addition to their regular compensation for services they perform on behalf of
their employer. They also need to get consent from their employer in writing. The written
report to the employer should include the details of any written or oral agreement for extra
compensation. The analyst does not have to refuse the o er.
(Study Session 1, Module 2.6, LOS 2-IV.(B))
Related Material

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SchweserNotes - Book 1

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Question #27 of 199

Which of the following statements about soft dollars is least accurate?

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A) Soft dollars are assets of the client.
B) Directed brokerage are soft dollars to be used for research that bene ts the
investment rm.
C) Soft dollars are third party research arrangements.
Explanation
Directed brokerage are soft dollars directed by the client to the investment manager to pay
for goods and services that bene ts the client only and not the rm.
(Study Session 1, Module 2, LOS 2.a)
Related Material
SchweserNotes - Book 1
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Question #28 of 199
A manager has pointed out that his rm has experienced signi cant expansion over the past
few years. Until recently, its Legal Department was responsible for the rm's compliance
activities. Now, however, the legal and compliance functions have been separated. A
compliance o cer has been formally designated and a comprehensive compliance program
has been put in place.

In order to function e ectively, the compliance o cer must have the authority:

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A) which is consistent with the most senior partner or executive o cer in the rm.

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B) to a ect, control, and guide employee behavior and to respond to employee
misconduct.
C) to hire and re personnel.
Explanation

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Compliance o cers must be able to guide employee behavior and respond to employee
misconduct, otherwise there will be no e ective compliance procedures in place. Unless the
compliance o cer can e ectuate compliance procedures, the compliance program has no
chance of responding to or preventing violations of the Standards.

Related Material

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SchweserNotes - Book 1

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(Study Session 1, Module 2.6, LOS 2-IV.(C))

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Question #29 of 199
Brenda Simone is a money manager and the Blue Streets Pension Fund is one of her clients.
The director of the pension fund calls Simone and asks her to use a particular broker so that
the fund can obtain some research services with the soft dollars from that broker. Simone
believes that the desired broker will provide the same price and execution as the normal
broker that Simone uses. Simone does as the client wishes. Simone has:

A) not violated the Standards as long as the research provided by the broker will
bene t the plan bene ciaries.
B) not violated the Standards as long as the research provided by the broker will
bene t Blue Streets.
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C) violated the Standards.
Explanation
Simone must ensure that the research bene ts the parties to whom she owes duciary duty,

which are the plan participants.
(Study Session 1, Module 2, LOS 2.a)
Related Material
SchweserNotes - Book 1

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Question #30 of 199

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An analyst notices that for most years that a given class of assets has an abnormally high rate
of return, the asset class often has an abnormally low rate of return the next year. Based upon
this information, according to Standard V(A), Diligence and Reasonable Basis, the analyst can

A) neither of these choices.

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recommend:

B) an increased allocation of Treasury bills (T-bills) for all portfolios of assets that have
increased dramatically in the previous year.

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C) short selling assets that have had a good previous year to all clients.

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Explanation

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An analyst should not make a recommendation based only upon a statistical anomaly.
Furthermore, none of the other choices would be appropriate. Clients with low risk tolerance
should not short sell assets. The analyst cannot make a recommendation to all clients
because each client has di erent characteristics and portfolios. The one answer that may
have some merit is to increase the allocation of T-bills in portfolios that have had recent,
dramatic increases. This would be for the purposes of maintaining a balanced portfolio. But
the decision to rebalance must be made on a case-by-case basis and not for all portfolios.
(Study Session 1, Module 2.7, LOS 2-V.(A))
Related Material
SchweserNotes - Book 1

Question #31 of 199
In order to comply with Standard III(A), Loyalty, Prudence, and Care, an analyst needs to:
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A) perform both of the actions listed here.
B) liquidate his personal holdings of all stocks that his client owns.
C) comply with applicable duciary duty.
Explanation
To comply with Standard III(A), the analyst must use reasonable care and exercise prudent
judgment, always act for the bene t of clients, and determine and comply with applicable
duciary duty.
(Study Session 1, Module 2.4, LOS 2-III.(A))
Related Material

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SchweserNotes - Book 1

Question #32 of 199

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Jill Marsh, CFA, works for Advisors where she manages a portfolio for a wealthy family. Marsh
earns 1% of the portfolio's value each year in the form of a commission from Advisors. The
family just told her that any year the portfolio she manages earns more than a 10% return, the
family will give her the use of the family's vacation home for one week. Marsh will comply with

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Standard IV(B), Additional Compensation Arrangements, if she:

A) does nothing with respect to this.

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B) sends an e-mail to her supervisor about the vacation home.

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C) delivers a typed memo to her supervisor about the vacation home the rst time she
uses it.

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Explanation

Standard IV(B) requires that members disclose to their employer in writing all bene ts that
they receive in addition to their regular compensation for services they perform on behalf of
their employer. E-mail messages qualify. As long as the agreement is in e ect, she must
inform her employer even if she has yet to use the potential bene t.
(Study Session 1, Module 2.6, LOS 2-IV.(B))
Related Material
SchweserNotes - Book 1

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Question #33 of 199
While having a conversation with a prospective client, John Henry states that his performance
across all of his past clients over the past ve years was over 20%, which was 200 basis points
higher than his benchmark. He tells the client that while the benchmark may rise or fall over
time, his excess performance will remain consistent. Henry violated the Standards of
Professional Conduct because:

A) he cannot discuss prospective future performance in any manner.
B) the statement of excess performance is misleading with respect to its certainty.
C) he cannot discuss performance without clearly stating that the composite does not

Explanation

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conform to GIPS.

Guaranteeing performance on investments that are inherently volatile is misleading to
clients.

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(Study Session 1, Module 2, LOS 2.a)
Related Material

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SchweserNotes - Book 1

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Question #34 of 199

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Which of the following is a possible breach of duciary duties by a CFA Institute member who
manages assets on behalf of a client?

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A) Using directed brokerage.
B) Neither of these breach duciary duties.
C) Voting all proxies of stocks the client owns.
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 bene t analysis may
show that voting all proxies may not bene t 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 bene t the client.

Although, this may prevent best execution, it does not violate the Standards as it was
directed by the client, not the brokerage rm.
(Study Session 1, Module 2.4, LOS 2-III.(A))
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Related Material
SchweserNotes - Book 1

Question #35 of 199
May Frost, CFA, is concerned about the comments and activities of several of her coworkers
and feels both ethical and legal violations are routinely overlooked. According to the Code and
Standards, a recommended rst step would least likely be to:

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A) provide her supervisor with a copy of the Code and Standards.

C) contact industry regulators.
Explanation

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B) review the company’s policies and procedures for reporting ethical violations.

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See Standard IV(A) "Loyalty." Frost should begin by reviewing the company's policies and
procedures for reporting ethical violations and provide her supervisor with a copy of the
Code and Standards to highlight the high level of ethical conduct she is required to follow.
(Study Session 1, Module 2.6, LOS 2-IV.(A))
Related Material

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SchweserNotes - Book 1

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Question #36 of 199

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Susan Tigra, CFA, is a portfolio co-manager for the Sandia Energy pension fund. Sandra Bulow,
a research analyst under Tigra's supervision, creates a new trading model and immediately
begins to trade. Susan stops Bulow from trading, but notes that the rm has no guidelines for
testing new models. Tigra should most likely:

A) report Bulow to the rm’s compliance department for violation of Standard V(A)

"Diligence and Reasonable Basis."
B) encourage her rm to develop detailed, written guidance that establishes minimum
levels of testing for all computer-based models as recommended by Standard V(A)
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C) encourage her rm to develop detailed, written guidance that establishes minimum
levels of testing for all computer-based models as required by Standard III(C)
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Explanation
Tigra should encourage her rm to develop detailed, written guidance that establishes
minimum levels of testing for all computer-based models as recommended by Standard V(A)
"Diligence and Reasonable Basis." Reporting Bulow to the Compliance Department would be
of limited usefulness as she has already established that the rm does not have rules
discouraging this behavior.
(Study Session 1, Module 2.7, LOS 2-V.(A))
Related Material

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SchweserNotes - Book 1

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Question #37 of 199

Standard III(E), Preservation of Con dentiality, applies to the information that an analyst learns
from:

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A) current clients and former clients only.
B) current clients, former clients, and prospects.
C) current clients and prospects only.
Explanation

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According to Standard III(E), Preservation of Con dentiality, an analyst must preserve the
con dentiality of information communicated by clients, former clients, and prospects.
(Study Session 1, Module 2.5, LOS 2-III.(E))

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Related Material

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SchweserNotes - Book 1

Question #38 of 199

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