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

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Learning Management System

Question #1 of 62
Wes Smith, CFA, refers many of his clients to Bill Towers, CPA, for accounting services. In return,
Towers performs routine services for Smith, such as his tax returns, for no charge. Towers has
just become a member of CFA Institute. With this development, Towers must:

A) reveal to the prospects referred by Smith that he performs services for Smith, along
with the estimated value of those services.
B) discontinue his services for Smith.

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C) only reveal to the prospects referred by Smith that he performs services for Smith.

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Explanation

According to VI(C), Referral Fees, as a member of CFA Institute, Towers must tell his clients
about the payment in kind to Smith along with an estimate of the value of those services.

Related Material
SchweserNotes - Book 1

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Question #2 of 62

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(Study Session 1, Module 2.8, LOS 2-VI.(C))

A rm produces regular proprietary research reports on various companies. According to

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Standard VI(B), Priority of Transactions, which of the following would be an "access person?"

A) A supervisory analyst who reviews all research reports prior to dissemination.

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B) An independent auditor with access to material, non-public information on a
company being analyzed.
C) A person working in the mail room.
Explanation
Persons with access to information during the normal preparation of research
recommendations are subject to Standard VI(B). An independent auditor is not involved in
the normal preparation of research recommendations.
(Study Session 1, Module 2.8, LOS 2-VI.(B))
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SchweserNotes - Book 1

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Question #3 of 62
Jim Bennett, CFA, leases o ce space to his best friend, Steve Waters. Bennett is an independent
investment advisor specializing in high net worth clients and Waters is a licensed life insurance
underwriter. In lieu of paying rent, Waters refers his insurance clients to Bennett, but only with
the clients' permission. For clients referred by Waters, Bennett:

A) need not disclose the terms of the lease arrangement because Waters obtained the

B) must disclose the terms of the lease arrangement.

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clients’ permission for the referral.

C) need not disclose the referral fee if Waters discloses the lease arrangement to the

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clients rst.
Explanation

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Standard VI(C), Referral Fees, requires members to disclose to clients and prospects any
consideration or bene t received by the member or delivered to others for the
recommendation of any services to the client or prospect. Bennett has delivered a bene t
(free rent) to Waters, which must be disclosed to the clients referred by Waters. Bennett must
not rely on Waters to make the disclosure.
(Study Session 1, Module 2.8, LOS 2-VI.(C))

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SchweserNotes - Book 1

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Question #4 of 62

When an analyst makes an investment recommendation, which of the following statements

must be disclosed to clients?

A) An employee of the rm holds a directorship with the recommended company.
B) The rm is a market maker in the stock of the recommended company.
C) Both of these statements must be disclosed to clients.
Explanation
Both of these items are explicitly listed in the discussion of Standard VI(A), Disclosure of
Con icts.
(Study Session 1, Module 2.8, LOS 2-VI.(A))
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Related Material
SchweserNotes - Book 1

Question #5 of 62
David Lynch is an individual investment advisor who uses mutual funds for his clients. He
typically chooses funds from a list of 40 funds that he has thoroughly researched. The Palmers,
a married couple that are a client, asked him to consider the Twin Peaks fund for their
portfolio. Lynch had not previously considered the fund because when he rst conducted his

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research three years ago, Twin Peaks was too small to be considered. However, the fund has
now grown in value, and after doing thorough research on the fund, he nds the fund has

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suitable characteristics to be included in his acceptable list of funds. He puts the fund in the
Palmers' portfolio but not in any of his other clients' portfolios. The fund ends up being the best

A) not violated the Standards.

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performing fund of any of the funds on his list. Has Lynch violated any Standards? Lynch has:

B) violated the Standards by not disclosing con icts to clients.
C) violated the Standards by not dealing fairly with clients.
Explanation

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Prior to the discovery of the fund, Lynch did not put all of the same funds in all of his clients'
portfolios, so there was no reason to do so now. The fund was among a list of other good
funds. Lynch did not fail to maintain independence and objectivity, had no con icts to
disclose to clients, and did not deal unfairly with clients.
(Study Session 1, Module 2, LOS 2.a)

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SchweserNotes - Book 1

Question #6 of 62
All of the following are required for a CFA Institute member to maintain his or her active status
EXCEPT:

A) paying membership dues to CFA Institute on an annual basis.
B) Passing each exam in no more than two tries.
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C) remit a completed Professional Conduct Statement on an annual basis.
Explanation
Passing each exam in two or fewer tries is not required to maintain active status as a
member of the CFA Institute. CFA Institute imposes both of the other choices.
(Study Session 1, Module 2.9, LOS 2-VII.(B))
Related Material
SchweserNotes - Book 1

Tucson Financial Advisors (TFA) has determined that it needs to have the ability to conduct in-

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house research to support its other activities. To this end, TFA has recently hired Alba

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Hernandez, a CFA charterholder in good standing, as an investment analyst. Hernandez
becomes the rst full-time employee of TFA to have the CFA designation. When she is hired, her
supervisor tells her that TFA is familiar with the CFA Institute Code and Standards, but that the
company does not feel that they are important. TFA is a well-respected rm with a reputation

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for integrity that predates the CFA program. TFA tells her that they do not plan to use
Hernandez's a liation with CFA Institute in any of their literature or advertisements.
Prior to her employment with TFA, Hernandez was an independent contractor, providing
nancial advice for a fee to private clients. She continues to do so but has informed these

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clients not to reveal this fact to TFA. Some of her private clients would be considered viable
prospects by TFA, while others would not meet TFA's $1 million net worth criterion. Hernandez

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routinely uses TFA's data and other research materials in servicing her private clients.

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Throughout the year, Hernandez holds a "quarterly investment forum" under the guidance of
TFA. Prospects nd out about the meetings via private mailings from TFA, which Hernandez

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supervises. In composing the mailing list, Hernandez is aware that many of the clients do not
meet TFA's $1 million net worth criterion. After each forum, Hernandez often contacts those
attendees that do not meet TFA's criterion, and she solicits them to become clients in her
private practice.
ChemMex is a large conglomerate headquartered in Monterrey, Mexico. At present, ChemMex
is planning an IPO in the U.S. TFA is seeking the mandate for the IPO, and has asked Hernandez
to meet with management to present a proposal. Hernandez's uncle, Hector Lopez, is CFO and
treasurer of ChemMex. In recent years, Lopez has given ChemMex securities to his nieces and
nephews as Christmas gifts. TFA is not aware of Hernandez's nancial interests and personal
connections with ChemMex.

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Hernandez is putting together a research report on CoppOre, a rm that mines copper in a
developing country. She obtains insider information that states a rival rm in that country will
soon make a tender o er for CoppOre. Hernandez knows the laws in that country very well and

knows that trading on inside information is not illegal there. Hernandez plans to write the
research report exaggerating the facts on positive points in order to encourage her clients to
purchase shares in CoppOre, but she does not plan to explicitly say that CoppOre will soon be
bought out in a tender o er. In doing so, the clients will be encouraged to buy CoppOre stock
while not knowing about the tender o er. Hernandez feels that this is part of her duciary duty
and explains her plan to TFA management. The managers of TFA tell her to do what she thinks

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is in the best interest of the clients.

Concerning her private clients, Hernandez:

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Question #7 of 62

A) must obtain written consent from TFA only if the private practice was not disclosed

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orally during the hiring process.

B) must obtain written consent from TFA to continue the relationship.
C) must discontinue her independent practice.
Explanation

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Even though the relationships with Hernandez's private clients predate her employment with
TFA, she is obligated to obtain written consent from TFA to continue with the activities.
Moreover, she needs written consent from her private clients as well. Standard IV(A) Loyalty
to Employer, and Standard IV(B) Additional Compensation Agreements.
(Study Session 1, Module 2.8, LOS 2-VI.(A))
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SchweserNotes - Book 1

Question #8 of 62
With respect to the prospects she invites to the "quarterly investment forum" and then solicits
for her private practice, Hernandez is:

A) not in violation of any Code or Standard.
B) in violation Standard VI(A) concerning disclosure of con icts.
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C) in violation of Standard I(D) concerning professional misconduct.
Explanation
Standard I(D) states that members shall not engage in any professional conduct involving
dishonesty, fraud, or deceit Hernandez is being dishonest by using a TFA mailing to bring in
prospects that she knows cannot become TFA clients with the apparent intent of soliciting
them for her own private business. Note that Standard VI(A) deals with disclosing con icts of
interest that would impair the member's ability to make unbiased and objective
recommendations, such as serving on a board or having a bene cial interest in a security.
Standard III(C) states that a member must inquire as to a client's nancial situation and
consider the appropriateness of investment recommendations for each client. Because there
are no speci c recommendations being given, Standard III(C) does not apply here.

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(Study Session 1, Module 2.7, LOS 2-V.(B))
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Question #9 of 62

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SchweserNotes - Book 1

With respect to the proposal for the IPO mandate of ChemMex, Hernandez:

A) may meet with ChemMex o cials, but cannot be otherwise involved with the IPO.

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B) may meet with ChemMex o cials and be involved with the IPO, as long as she
discloses the material facts of the situation to TFA.

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Explanation

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C) is not allowed to meet with ChemMex o cials.

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Hernandez would be allowed to meet with ChemMex and to be involved with the IPO so long
as she discloses the material facts to TFA. Once in possession of these facts, TFA is in position
to determine if the con icts of interest are such that they should preclude Hernandez's
participation in the project. Standard VI(A), Disclosure of Con icts.
(Study Session 1, Module 2.7, LOS 2-V.(B))
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SchweserNotes - Book 1

Question #10 of 62
With respect to the recommendation that Hernandez writes for CoppOre, Hernandez may:

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A) proceed with the recommendation as long as she does not exaggerate facts and
mention the tender o er, but must make an e ort to achieve public dissemination
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B) proceed with the recommendation as long as she does not exaggerate facts and
mention the tender o er, but does not have to make an e ort to achieve public
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C) not proceed with the recommendation with either the exaggerated information or
the information of the tender o er.
Explanation

Related Material
SchweserNotes - Book 1

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Question #11 of 62

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

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Exaggerating facts is a violation of Standard V(A) Diligence and Reasonable Basis. Mentioning
the tender o er, or causing others to trade in a security involved with a tender o er is a
violation of Standard II(A): Material Nonpublic Information. According to Standard II(A), in no
instance may a member trade or cause other to trade in a security while a member possesses
material nonpublic information . The fact that the home country does not make trading on
information concerning a tender o er a crime does not allow Hernandez to use it because
Standard II(A) prohibits it. Remember that the member must go along with either the home
country laws or the Code and Standards, whichever is stricter.

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All of the following are violations of the Code and Standards EXCEPT:

A) TFA’s management not making any special e ort to include Hernandez’s holding

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the CFA designation in their literature and advertisements.
B) Hernandez not informing TFA of her private practice and getting written permission
for it.

C) Hernandez using TFA data and research for her private practice.
Explanation

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Using the CFA designation is a privilege and is not mandatory. TFA has not prohibited
Hernandez from using it, they simply have said that they will not make an e ort to use it,
which may actually be in compliance with the Standards in that they avoid any undigni ed
use of the designation. The other three choices are clear violations. Hernandez cannot use
the property, i.e., the data and research, of TFA. She needs written permission to continue
her private practice. TFA is required to supervise Hernandez, and they are not ful lling this
responsibility by allowing her to proceed with her plans to write the CoppOre report.
(Study Session 1, Module 2.7, LOS 2-V.(B))
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SchweserNotes - Book 1

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Question #12 of 62
Upon her arrival at TFA, as a CFA charterholder, Hernandez:

A) is only required to provide her employer with written noti cation of her obligation

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to comply because she has been told her supervisors are aware of the Code and
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B) is required to deliver a copy of the Code and Standards to her employer and
provide them with written noti cation of her obligation to comply.
C) is not required to deliver a copy of the Code and Standards to her employer.

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Explanation

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There is no longer a requirement to provide an employer with a copy of the Code and
Standards.

(Study Session 1, Module 2.8, LOS 2-VI.(A))
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SchweserNotes - Book 1

Question #13 of 62
Judy Gonzales is a portfolio manager with Brenly Capital and works on Johnson Company's
account. Brenly has a policy against accepting gifts over $25 from clients. The Johnson portfolio
has a fantastic year, and in appreciation, the pension fund manager sent Gonzales a rare bottle
of wine. Gonzales should:

A) present the bottle of wine to her supervisor.
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B) inform her supervisor in writing that she received additional compensation in the
form of the wine.
C) return the bottle to the client explaining Brenly's policy.
Explanation
By not returning the bottle she would be violating the Standard on disclosure of con icts to
the employer, which states that employees must comply with prohibitions imposed by their
employer.
(Study Session 1, Module 2, LOS 2.a)

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SchweserNotes - Book 1

Question #14 of 62

Nichole Zeller and Randy To er have both passed Level II of the CFA Exam Program and have

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registered for Level III. Zeller circulates a resume stating that she is a candidate for the CFA
designation and has passed Level II of the CFA program. To er circulates a resume stating that
he is a CFA II. Which of the following statements is CORRECT?

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A) Only To er has violated the Code of Standards.
B) Only Zeller has violated the Code of Standards.

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Explanation

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C) Both Zeller and To er have violated the Code of Standards.

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The Code and Standards permit an individual to state that he or she is a candidate for the
CFA designation as long as the person is registered for the next CFA exam. The same
individual may state the fact that he or she has passed Level I or II of the CFA program. There
is no partial designation, such as CFA II.
(Study Session 1, Module 2.9, LOS 2-VII.(B))
Related Material
SchweserNotes - Book 1

Question #15 of 62

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Julie Stades retired several years ago and relinquished her membership in CFA Institute. She
had the CFA designation up until then. She has decided to go back to work and puts the
following statement on her resume: "I earned the CFA designation 10 years ago." Is this a
violation of Standard VII(B)?

A) Yes, she has used the letters "CFA" in an undigni ed manner.
B) Yes, because she uses "CFA" as a noun.
C) No, as long as she does not indicate she currently has the designation.
Explanation

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Stades is allowed to state that she earned the designation as long as she does not infer that
she currently has the designation.

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(Study Session 1, Module 2.9, LOS 2-VII.(B))
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Question #16 of 62

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SchweserNotes - Book 1

An analyst who is a member of CFA Institute has composed an introductory information packet

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for her new clients, which includes information on fees she receives for referring clients to
other professionals and those she pays for having clients referred to her. With respect to

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Standard VI(C), Referral Fees, this action:

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A) exceeds the requirement of the Standard because she does not need to reveal the
fees she pays to those that refer clients to her.

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B) is not addressed in the Standard.
C) may not satisfy the Standard if such information is only provided after the receivers
of the information have become clients.
Explanation
Standard VI(C) says that a member must reveal information both on fees she receives for
referring clients to other professionals and those she pays for having clients referred to her
before a prospect becomes a client. This allows the prospect to evaluate any partiality of a
recommendation and the full cost of the services.
(Study Session 1, Module 2.8, LOS 2-VI.(C))
Related Material
SchweserNotes - Book 1
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Question #17 of 62
All of the following are violations of conduct as members and candidates in the CFA Program,
EXCEPT:

A) expressing opinions in disagreement with CFA Institute advocacy positions.
B) providing con dential program information to the public.
C) disregarding the rules related to the administration of the CFA examination.

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Explanation

(Study Session 1, Module 2.9, LOS 2-VII.(A))
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Question #18 of 62

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SchweserNotes - Book 1

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Members and Candidates are allowed to express their opinions about the CFA Institute and
CFA Program without violation of any Standards. All of the other choices are in direct
violation of Standard VII(A), Conduct as Members and Candidates in the CFA Program.

Ralph Lim and Susan Bland have both passed Level I of the CFA Program. Both are currently

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enrolled to sit for Level II. Lim's business card reads, "Ralph Lim, CFA Level I." Bland's resume

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states, "Level II Candidate in the CFA Program." According to CFA Institute Standards of
Professional Conduct involving use of the professional designation:

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A) Lim violated the Standard, but Bland did not.
B) Both Lim and Bland violated the Standard.
C) Bland violated the Standard, but Lim did not.
Explanation
There is no designation for someone who has passed Level I, Level II, or Level III of the CFA
examination. Candidates may state, however, that they have completed Level I, II, or III, as
the case may be, in the CFA Program. Thus, Lim violated the Standard, but Bland did not.
(Study Session 1, Module 2.9, LOS 2-VII.(B))
Related Material
SchweserNotes - Book 1
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Question #19 of 62
Bill Valley has been working for Advisors, Inc., for several years, and he just joined CFA Institute.
Valley routinely writes research reports on Pharmaceutical rms. Valley has recently been
asked to serve on the board of directors of an organization that promotes the search for a cure
of a certain cancer. Serving on the board is an unpaid position without any direct bene ts other
than meeting new people and potential clients. To comply with Standard VI, Disclosure of
Con icts, Valley needs to:

responsibilities on the board.

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B) only disclose the position on the board to his supervisor.

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A) both disclose the position on the board to his supervisor and describe his

C) do nothing.
Explanation

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Valley could be a ected by his position on the board because he may tend to favor
investments in rms that do cancer research. To comply with Standard VI(A), Disclosure of
Con icts, Valley must inform his supervisor of this relationship and describe his
responsibilities on the board. Even if his supervisor does not nd the relationship
troublesome, any subsequent action that could lead to a con ict of interest should be
discussed with the rm's compliance o cer.

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(Study Session 1, Module 2.8, LOS 2-VI.(A))

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SchweserNotes - Book 1

Question #20 of 62
Stephanie Irons, Level II CFA candidate, regularly posts in Internet chat rooms dedicated to
candidates studying for the Level II exam. Throughout the season, she and other candidates
discuss curriculum content in great detail. Three days after the exam, she returns to the site
and vents her frustrations over complicated exam questions by posting questions she
remembers on the site, and asking others for their responses and reasoning. Other candidates

follow suit and post the questions they remember. Within a week, Irons and her fellow
candidates are able to reconstruct about 85% of the exam from their collective memory. Irons
and her fellow candidates are most likely:

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A) in violation of Standard VII(A) the Code and Standards for discussing curriculum
content in a public forum prior to the exam.
B) not in violation because the information about the actual exam contents was
posted after the conclusion of the exam.
C) in violation of Standard VII(A) the Code and Standards for providing con dential
information about the exam.
Explanation

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Standard VII(A) Conduct as Participants in CFA Institute Programs prohibits members and
candidates from providing con dential information about the exam even after the conclusion
of the exam.
(Study Session 1, Module 2.9, LOS 2-VII.(A))

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Question #21 of 62

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SchweserNotes - Book 1

Phil Trobb, CFA, is preparing a purchase recommendation on Aneas Lumber for his research

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rm. All of the following are potential con icts of interest EXCEPT:

A) Aneas hires Trobb as a consultant to analyze Aneas' nancial statements.

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B) Trobb's research rm has a large stake of ownership in Aneas Lumber.

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C) Trobb's cousin repairs machines for Aneas.
Explanation

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Standard VI(A) de nes what constitutes a con ict of interest with regard to clients,
prospective clients, and employers. All of these represent potential con icts of interest with
the exception of the cousin working for Aneas Lumber in a job that is unrelated to the Aneas'
nancing.
(Study Session 1, Module 2.8, LOS 2-VI.(A))
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SchweserNotes - Book 1

Question #22 of 62
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Steve Jones is a member of CFA Institute but has not earned the CFA designation yet. CFA
Institute is investigating Jones' activities. If Jones declines to cooperate, he:

A) may be suspended from membership.
B) may not be suspended because cooperating could be self incriminating.
C) may not be suspended because he does not have the CFA designation yet.
Explanation
Refusing to cooperate with a CFA Institute investigation of a member's behavior could lead to
suspension of membership or participation in the CFA Program.

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(Study Session 1, Module 1.1, LOS 1.a)

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Question #23 of 62

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SchweserNotes - Book 1

Dwight Dawson, a CFA charterholder and portfolio manager at Ascott Investments, was recently
appointed to the investments committee at Brightwood College. He will receive no
compensation from Brightwood for serving on this committee. Another person at Ascott

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manages part of Brightwood's endowment. Dawson does not inform Ascott's compliance o ce

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of his involvement with Brightwood, because he does not believe doing so is necessary.
Brenda Hamilton, a CFA candidate, also works for Ascott as an investment analyst. Procedures

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established at Ascott prohibit personal trading in securities analyzed or recommended by

Ascott. One of these securities is Horizon, a telecommunications rm. Hamilton buys 10 shares

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of Horizon for her infant son's trust account. She believes that reporting this purchase to
Ascott's compliance o cer is unnecessary because the amount of the transaction is small and
is not for her own personal account.
Did Dawson or Hamilton's actions violate CFA Institute Standards of Professional Conduct?

A) Dawson: No, Hamilton: No.
B) Dawson: Yes, Hamilton: Yes.
C) Dawson: No, Hamilton: Yes.
Explanation

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Dawson violated Standard VI(A), Disclosure of Con icts, by failing to inform Ascott of her
involvement with Brightwood College. Dawson could reasonably be expected to be involved
with investment policy decisions at Brightwood that could a ect Ascott because Ascott
manages a portion of Brightwood's endowment. Hamilton also violated Standard VI(A),
because she ignored a directive of her employer. Her purchase of Horizon stock has an
appearance of impropriety. Hamilton could discuss the purchase of Horizon stock with her
rm's compliance o cer and request an exception to the prohibition against personal
trading in securities analyzed or recommended by Ascott.

(Study Session 1, Module 2.8, LOS 2-VI.(A))
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SchweserNotes - Book 1

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Question #24 of 62

An analyst, who is a CFA Institute member, manages a high-grade bond mutual fund. This is his
only professional responsibility. When the analyst comes across a speculative stock investment

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that he feels is a good investment for his personal portfolio, the analyst:

A) may invest in the stock because the analyst would not purchase the stock for the
bond portfolio he manages.

B) is in violation of Standard IV(A), Loyalty to Employer, by spending time analyzing

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stocks when he should only analyze bonds.

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C) must notify his supervisor about the stock according to Standard VI(B), Priority of

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Transactions, to see if it is appropriate for the portfolio that he manages.
Explanation

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The problem says the analyst "came across" the speculative stock investment. We do not
know if the analyst neglected his duties. Since such an investment is clearly not appropriate
for a high-grade bond fund, the analyst may invest in the stock without any restrictions
relating to the fund.
(Study Session 1, Module 2.8, LOS 2-VI.(B))
Related Material
SchweserNotes - Book 1

Question #25 of 62
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Janet Olson, CFA, is an analyst at Quantech Associates. Olson attended a conference at which

Brian Wright presented several proprietary computerized spreadsheets that he had developed
to value high-tech stocks. While at the conference, Olson copied the spreadsheets without
Wright's knowledge. Later, Olson made several minor changes to Wright's initial model. After
testing the revised model, Olson was impressed with the results. As inputs for the model, she
used factual materials supplied by Moody's Investors Service, a recognized nancial and
statistical reporting service. Olson wrote a research report describing the revised model and its
results and distributed the report to Quantech's clients. According to CFA Institute Standards of
Professional Conduct, which of the following actions is Olson required to take? Olson is:

A) required to acknowledge Moody's Investors Service as the source of the data but is

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not required to seek authorization from Wright to copy the spreadsheets or to

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B) required to seek authorization from Wright to copy the spreadsheets and

acknowledge Wright for developing the initial model and Moody's Investors Service
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C) required to seek the authorization from Wright to copy the spreadsheets,

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Explanation

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acknowledge Wright for developing the initial model but is not required to
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To comply with Standard I(C) Misrepresentation, Olson should have gotten the authorization
from Wright to copy the spreadsheets. The prohibition against plagiarism requires that Olson
identify Wright as the source of the initial model. However, the Standard permits publishing
factual information from Moody's Investors Service without acknowledgment because
Moody's is recognized as a source of factual materials.

(Study Session 1, Module 2.9, LOS 2-VII.(B))

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SchweserNotes - Book 1

Question #26 of 62

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For the past 5 years, Karen Beckworth, CFA, has served as a proctor for the CFA exam.
Beckworth tells her assistant, a Level III CFA candidate, that she normally receives the
examinations on the Thursday before the exam. Given the low pass rate at Level III, Beckworth
asks her assistant if he would like an advance copy of the next exam. Beckworth's assistant
declines the o er.
Beckworth's assistant has been very vocal about expressing his opinions about the low pass
rate. The assistant claims, "there are too many charterholders and CFA Institute is deliberately
failing candidates because the prestige of the CFA charter is becoming diluted."
With regard to Standard VII(A) Conduct as Participants in CFA Institute Programs, which of the

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following statements concerning Beckworth's and her assistant's behavior is most accurate?

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A) Neither Beckworth nor her assistant is in violation of Standard VII(A).
B) Both Beckworth and her assistant are in violation of Standard VII(A).

C) Beckworth is in violation of Standard VII(A), but her assistant is not in violation.

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Explanation

Beckworth is in violation of Standard VII(A), Conduct as Participants in CFA Institute
Programs. Beckworth compromised the integrity of the exam by o ering her assistant an
advance copy. Beckworth's assistant is allowed to express his opinion without violation of any
Standards.

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SchweserNotes - Book 1

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(Study Session 1, Module 2.9, LOS 2-VII.(A))

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Question #27 of 62

When Wes Smith rst joined Advisors, Inc., he was excited that all the analysts at the rm had
the CFA designation. In letters to prospective clients, he states that this ensures that Advisors
can provide better service than their competitors. With respect to Standard VII(B), Reference to
CFA Institute, the CFA Designation, and the CFA Program, this is:

A) a violation for both mentioning the CFA designation and saying the rm can
guarantee better service.
B) a violation because he cannot guarantee better service.
C) a violation because he mentions the CFA designation in the letter.
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Explanation
According to Standard VII(B), the analyst cannot guarantee better service. Smith can mention

the fact that all analysts have the designation, but he is limited in what he can say with
respect to this fact. He could say, for example, that this means the analysts all had to take
and pass three rigorous exams.
(Study Session 1, Module 2.9, LOS 2-VII.(B))
Related Material
SchweserNotes - Book 1

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Question #28 of 62

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Lindsay Gordon is a Level II CFA candidate living in San Francisco. Gordon's best friend, Steve
Haney, also a Level II candidate, is living in Munich. Because of the time di erence between
Munich and San Francisco, Gordon suggests that Haney call Gordon during the Munich exam

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lunch break to discuss the morning exam. Haney makes the call on exam day.

Which of the following statements regarding Gordon and Haney is most accurate?

A) Neither Gordon nor Haney is in violation of the Code and Standards.
B) Gordon is in violation of the Code and Standards, but Haney is not in violation.

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Explanation

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C) Both Gordon and Haney are in violation of the Code and Standards.

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Both Gordon and Haney violated Standard VII(A) Conduct as Participants in CFA Institute
Programs by compromising the integrity of the exam.

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(Study Session 1, Module 2.9, LOS 2-VII.(A))
Related Material
SchweserNotes - Book 1

Question #29 of 62

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During 2004 Nancy Arnold received an undergraduate business degree with a management

major and completed all requirements for the CFA designation imposed by CFA Institute. She is
applying for employment at several brokerage rms. Her resume states, "I was awarded the
CFA degree in 2004 by CFA Institute." Her resume also states that she graduated "with honors"
and majored in nance. Her grade point average was 3.48 but "with honors" requires a 3.50
grade point average.
Which of the following statements about Standard VII(B), Reference to CFA Institute, the CFA
Designation, and the CFA Program, and Standard I(C), Misrepresentation, is CORRECT? Arnold:

B) did not violate either Standard VII(B) or Standard I(C).

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C) violated both Standard VII(B) and Standard I(C).

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A) violated Standard I(C) but she did not violate Standard VII(B).

Explanation

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Arnold violated Standard VII(B). The CFA designation should not be referred to as a degree.
Arnold also violated Standard I(C) because her claim that she graduated "with honors" is not
true.
(Study Session 1, Module 2.9, LOS 2-VII.(B))
Related Material

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SchweserNotes - Book 1

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Question #30 of 62

Ryan Brown, CFA, is an analyst with a large insurance company. His personal portfolio includes

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a signi cant investment in QRS common stock that his rm does not currently follow. The
director of the research department asked Brown to analyze QRS and write a report about its
investment potential. Based on CFA Institute Standards of Professional Conduct, Brown is
required to:

A) disclose the ownership of the stock to his employer and in the report.
B) decline to write the report without speci c approval of his supervisor.
C) sell his shares of QRS before completing the report.
Explanation

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Standard VI(A) (Disclosure of Con icts) requires that Brown make full disclosure of all matters
that could impair his objectivity. Brown needs to disclose his personal holding in QRS stock
not only to his employer, but also in any subsequent reports that he authors. Getting the
approval of his supervisor does not solve this con ict problem for Brown. Selling his shares
of QRS would be one solution to Brown's situation, however this action is not required by the
Standards.
(Study Session 1, Module 2.8, LOS 2-VI.(A))
Related Material

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SchweserNotes - Book 1

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Question #31 of 62

Steve Copper has worked as an independent consultant for the past ten years advising
companies on various ways to increase their internal e ciency and thereby increase the rm's
stock price as well. Copper recently accepted a job o er from an equity research rm as a

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senior stock analyst. One of the rms he will be responsible for researching, Johnson Machine
Tools (JMT), is also one of his consulting clients. Copper currently has a contract with JMT to
provide consulting services for another six months which he plans to honor even though there
are no penalties in the contract for early termination on his part. According to CFA Institute
Standards of Professional Conduct, which of the following is the most appropriate action for

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Copper to take? Copper should:

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A) disclose the arrangement only if he plans to renew the contract in six months.

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B) disclose the consulting arrangement to clients considering JMT as an investment.
C) terminate the contract with JMT prior to issuing any research on the company.

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Explanation

Standard VI(A) – Disclosure of Con icts requires members and candidates to inform clients,
prospects, and their employers of any situation that may impair their independence and
objectivity or interfere with duties owed to the same groups. The Standard notes that best
practice is to avoid con icts of interest when possible. This best practice recommendation is
consistent with Standard I(B) – Independence and Objectivity, which requires that
independence and objectivity be maintained. The consulting arrangement with JMT, a

company about which Copper will write research reports, divides his loyalty between JMT and
the clients purchasing Copper's research on the same company. This is a clear con ict of
interest which must be disclosed to clients, prospects, and Copper's employer if the con ict
cannot be avoided. However, there is no penalty for ending the consulting relationship and
best practice would dictate that Copper terminate the contract with JMT.
(Study Session 1, Module 2.8, LOS 2-VI.(A))

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Related Material
SchweserNotes - Book 1

Question #32 of 62
An analyst has the opportunity to o er his clients shares in a "hot new issue." One of the
analyst's clients is his brother. When the new issue comes out, for those clients he deems it
would be appropriate, he o ers them an equal share. He includes his brother in that group.

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With respect to Standard VI(B), Priority of Transactions, this is:

A) congruent with the Standard even if he has a direct personal interest in his

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brother's account.

B) congruent with the Standard if his brother is not a 'covered person'.

C) congruent with the Standard as long as he does not have a direct personal interest

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in his brother's account.
Explanation

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Client accounts that belong to family members should be treated like any other account so
long as there is no direct interest on the part of the analyst. In other words, these types of
accounts should not be at a disadvantage relative to other client accounts when there is no
direct interest on the part of the analyst overseeing the account.

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(Study Session 1, Module 2.8, LOS 2-VI.(B))

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SchweserNotes - Book 1

Question #33 of 62

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One year ago, Karen Jason left the employment as a portfolio manager of Howe Advisors. The
departure was contentious and both parties threatened legal action. As a result, both parties
signed a settlement in which Jason was paid a pro rated bonus, but agreed not to work on the
portfolios of any existing Howe client for two years. The terms of the agreement were that both
parties agreed to keep all aspects of the agreement con dential, including the fact that there
was hostility surrounding the departure. Jason now works for Torre Advisors, who has the Stein
Company as a new client. At the time Jason left Howe, Stein was a client of Howe, although
Jason did not personally work on the Stein portfolio. Jason's supervisor at Torre wants Jason to
work on the Stein portfolio. Jason should:

A) work on the portfolio because she did not personally work on the portfolio when

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she was at Howe.

compete agreement.

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B) inform her supervisor that she cannot work on the portfolio because of a non-

C) inform her supervisor that she cannot work on the portfolio because of a legal
agreement, but cannot tell him why.

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Explanation

Jason must inform her supervisor of the con ict, but she cannot violate the terms of the
con dentiality agreement and she cannot work on the portfolio.

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SchweserNotes - Book 1

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

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Question #34 of 62

Which of the following statements about Standard VI(C), Referral Fees, is CORRECT?

A) Referral fees must be disclosed after proceeding with an agreement for service.
B) Referral fees may be disclosed before or after proceeding with an agreement for
service.
C) Referral fees must be disclosed before proceeding with an agreement for service.
Explanation

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According to Standard VI(C), referral fees must be disclosed before proceeding with an
agreement for service in order for the client or employer to compute the full cost of the
service and to evaluate any potential partiality of the recommendation.
(Study Session 1, Module 2.8, LOS 2-VI.(C))
Related Material
SchweserNotes - Book 1

Question #35 of 62

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A member or candidate that receives consideration from others for the recommendation of

A) cash only.
B) cash, soft dollars, or in kind.

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C) cash or soft dollars only.

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products or services, must disclose the estimated dollar value of the consideration paid in:

Explanation

According to Standard VI(C), Referral Fees, consideration includes all fees that are paid in
cash, soft dollars, and in kind. Referral fees must be disclosed to the client or employer
before engaging in an agreement to provide services.

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Related Material

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(Study Session 1, Module 2.8, LOS 2-VI.(C))

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SchweserNotes - Book 1

Question #36 of 62
An analyst routinely has the opportunity to o er his clients the opportunity to purchase "hot
new issues." He tells his clients that he will distribute each issue equally among those
interested, with himself included in the distribution. The clients do not object to this. With
respect to Standard VI(B), Priority of Transactions, this:

A) cannot be a violation because the clients know of the practice and agree.
B) may be a violation because it is impossible to distribute hot new issues equally.
C) may be a violation despite the clients' approval.

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Explanation

Just because the clients know of a practice does not make it right. The analyst must put the
clients rst. It is a violation for the analyst to participate in a "hot new issue" which can lower
the allocation to any given client below what that client would prefer. This is tantamount to
putting the analyst's interests ahead of the clients' interests.
(Study Session 1, Module 2.8, LOS 2-VI.(B))
Related Material
SchweserNotes - Book 1

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Question #37 of 62

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Ron Vasquez is registered to sit for the Level II CFA exam. Unfortunately, Vasquez has failed the
exam the past two years. In his frustration, Vasquez posted the following comment on a
popular internet bulletin board: "I believe that CFA Institute is intentionally limiting the number
of charterholders in order to increase its cash ow by continuing to fail candidates. Just look at

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the pass rates."

Which of the following statements regarding Vasquez's conduct is most accurate? Vasquez is:

A) in violation of both Standard I(D) Misconduct and Standard VII(A) Conduct as

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Participants in CFA Institute Programs.

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B) in violation of Standard VII(A) Conduct as Participants in CFA Institute Programs, but
not in violation of Standard I(D) Misconduct.

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C) not in violation of Standard I(D) Misconduct or Standard VII(A) Conduct as
Participants in CFA Institute Programs

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Explanation

Standard VII(A) Conduct as Participants in CFA Institute Programs does not prohibit
expressing opinions about the program or the CFA Institute. Thus, Vasquez is not in violation.
Nothing in the facts indicates a violation of Standard I(D, Misconduct. Standard I(D) deals with
professional conduct involving dishonesty, fraud, or deceit.
(Study Session 1, Module 2.9, LOS 2-VII.(A))
Related Material
SchweserNotes - Book 1

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Question #38 of 62
Stephanie Orange, Level II CFA candidate, posts blogs for her exam study group three days
after the exam to vent her frustrations over the exam. However, to avoid disclosing what was
actually on the exam, she only discusses topic areas she thought would be on the exam that
were not. She writes "...the topics selected were unnecessarily obscure. Important items like
FCF, DDM, and Residual Income were ignored completely..." Orange is most likely:

A) in violation of Standard VII(A) "the Code and Standards" for providing con dential
information about the exam.
B) not in violation because the information was only about what was not on the exam.

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C) not in violation because the information about the actual exam contents was

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posted only after the conclusion of the exam.
Explanation

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Standard VII(A) Conduct as Participants in CFA Institute Programs prohibits members and
candidates from providing con dential information about the exam – even after the
conclusion of the exam. Examples include broad topical areas tested or not tested.
(Study Session 1, Module 2.9, LOS 2-VII.(A))
Related Material

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SchweserNotes - Book 1

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Question #39 of 62

Standard VI(B), Priority of Transactions, applies to transactions an analyst takes on behalf of:

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A) both of these.
B) his employer.
C) his clients.
Explanation

Standard VI(B) addresses the treatment of both these accounts. The accounts of clients and
employers have priority over personal accounts.
(Study Session 1, Module 2.8, LOS 2-VI.(B))
Related Material

SchweserNotes - Book 1

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