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

Study Session 1, Module 2.4, LOS 2-III.A Related Material SchweserNotes - Book 1 Question #6 of 199 Which of the following would be a violation of Standard IIIB, Fair Dealing?. Study Ses

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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.

Explanation

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

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

Related Material

SchweserNotes - Book 1

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

NOT correct? Client brokerage commissions:

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

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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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

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

subordinates

Explanation

Even though members may delegate supervisory duties, such delegation does not relieve

members of the supervisory responsibility

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

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

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

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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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

Ethics

B) a violation of only The Code of Ethics.

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

of Ethics

Explanation

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

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

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

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

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.

B) restrictions on all types business entertainment.

C) a formal value limit based on local customs.

Explanation

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

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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:

"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

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

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.

C) Coleman did not violate the Standards.

Explanation

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

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

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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.

Explanation

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

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto He

places trades for the fund with River City Brokerage River City provides Calaveccio with soft

dollars to purchase research River City also deals in municipal bonds, some of which

Calaveccio holds in his personal portfolio He periodically uses the soft dollars to request

research reports on various small cap stocks and also on the status of the municipal bond

market and issues that he holds These actions are:

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

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

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

report and making patriotic statements

B) not violated the Standards.

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

report, but not by making patriotic statements

Explanation

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

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

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

stock, shown below as Exhibit B In accordance with Lang's routine procedures for

pre-dissemination 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

prepared

Exhibit B

LANG & COMPANY Company Report

Industrial: Specialty Chemicals Equity Research

Rating: Buy

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 quarterending June 30 Higher sales, better margins, an improved geographic sales mix, andsavings from reduced pension expense are all contributing to this year's gains

Although European production is up only modestly year-over-year, successful costreduction e orts are limiting the adverse e ects of weak volume and pricing A possibleplant closure in September could improve plant utilization by 10%, accompanied bypotentially dramatic margin improvement However, a $30 million after-tax specialcharge could be taken at the time of the closure

We expect a moderate increase in second half 2014 sales Although management looksfor 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 asizable 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 overthe balance of the year is high.

We think SpecChem stock is undervalued and believe it can easily reach the low 100s onthe strength of continuing earnings momentum The downside is estimated to be in themid-80s There is plenty of room for upside earnings surprises if volume and pricesimprove, 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

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

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

the securities of the company mentioned herein

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

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

d S d d

B) both of these.

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

Explanation

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)

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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

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

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

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

Standards?

A) The report does not adequately discuss the factors important to analysis,

recommendations, or action

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 ofSpecChem's earnings power is discussed, nor are such factors as cash ow, operatingstrength or nancial condition Brown has violated Standard V(B): Communication withClients and Prospective Clients

The report fails to disclose Lang's market-making activities with SpecChem Thisomission violates Standard VI(A): Disclosure of Con icts

Brown is not separating fact from opinion in her comment, "There is plenty of room forupside earnings surprises if volume and prices improve further, which would take thestock up strongly." This is a violation of Standard V(B): Communication with Clients andProspective Clients The above-noted comment could also be considered a violation ofStandard I(C): Misrepresentation

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?

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

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

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

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:

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 bySpecChem's management She has violated Standard I(B): Independence andObjectivity

Brown showed a lack of diligence and thoroughness in forming her investmentdecision and preparing the report Her analysis was cursory at best; the report was notobjective 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 hasalso occurred Brown failed to investigate SpecChem's basic investment characteristicsproperly and did not communicate the company's investment characteristics throughthe research report

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

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

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

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.

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

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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

name to the report to re ect his contribution

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

report before it is disseminated?

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

B) No.

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

Explanation

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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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

the Code and Standards

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

Explanation

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

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

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))

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

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

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

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

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

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

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

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

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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

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

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

A) le a professional conduct statement every year.

B) avoid two or more public censures within any 12 consecutive months.

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

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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

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

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

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

information

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

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

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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

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

Soliciting rejected prospects from Target is:

A) not a violation of CFA Institute Standards because she plans to use a model

rejected by Target’s management

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

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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

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

Explanation

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

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

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

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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:

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

B) to a ect, control, and guide employee behavior and to respond to employee

misconduct

C) to hire and re personnel.

Explanation

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

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

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

recommend:

A) neither of these choices.

B) an increased allocation of Treasury bills (T-bills) for all portfolios of assets that have

increased dramatically in the previous year

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

Explanation

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

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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

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

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

A) does nothing with respect to this.

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

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

uses it

Explanation

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

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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

Which of the following is a possible breach of duciary duties by a CFA Institute member who

manages assets on behalf of a client?

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

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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:

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

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

C) contact industry regulators.

Explanation

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

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)

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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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

A) current clients and former clients only.

B) current clients, former clients, and prospects.

C) current clients and prospects only.

Explanation

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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The following information pertains to the Galaxy Trust, a trust established by Stephen P House

and managed by Gamma Investment LLC:

At the time the trust was established House provided $5 million in cash to fund the trust,but Gamma was aware that 93% of his personal assets were in the form of Oracle stock

Gamma has been asked to view his funds and the trust as a single entity for planningpurposes, since House's will stipulates that all of his estate will pass to the trust upon hisdeath

The investment policy statement, developed in September 1996, stipulates that the trustshould maintain a short position in Oracle stock and use the proceeds to diversify thetrust more adequately

House was able to sell all of his Oracle shares back to the corporation in January 1999 forcash

The policy statement redrawn in September 1999 continues to stipulate that the trusthold a short position in Oracle stock

House has given the portfolio manager in charge of the trust an all expenses paidvacation package anywhere in the world each year at Christmas The portfolio managerhas reported this fact in writing to his immediate supervisor at Gamma.

Which of the following is most correct? The investment manager is:

A) in violation of the Code and Standards by not properly updating the investment

policy statement in light of the change in the circumstances but is not in violation

B) not in violation of the Code and Standards for not properly updating the investment

policy statement in light of the change in the circumstances and is not in violation

C) in violation of the Code and Standards by not properly updating the investment

policy statement in light of the change in the circumstances and is in violation with

Explanation

The investment manager is in violation of the Standard requiring him to make a reasonable

inquiry into the client's nancial situation and update the investment policy statement since

such a dramatic change in the client's circumstances would undoubtedly alter the investment

policy statement and would probably eliminate the need to hold a short position in Oracle

The investment manager is not in violation of the Standard concerning additional

compensation, since the gift has been reported to his supervisor and has come from a client

If there was a failure to report such a gift, if the rm had a rule in place against the

acceptance of gifts from clients, or if the gift had come from a non-client, there would be a

violation of the standard

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Joan Platt, CFA, operates an investment rm in New York, but maintains an o ce in Xania

Platt's rm invests on its clients' behalf in both domestic and international stocks and bonds

Platt's employees include two analysts, Paula Linstrom, CFA, and Hershel Wadel, a member of

the CFA Institute Both analysts report to Platt directly Thorvald Knudsen, CFA, manages the

international bond portfolio Xania recently established a stock market, which is not very

e cient None of the Xanian stocks trade in the U.S market Xania legally permits the use of

material inside information Platt believes that using inside information would help her

compete against other Xanian investment advisers, and also help some of her Xanian clients

reach their investment objectives Platt instructs Wadel to write a research report on Gamma

Company Wadel's wife inherited 500 shares of Gamma Company from her father when he died

ve years ago Gamma stock currently sells for $35 a share Wadel does not believe that

informing Platt about his wife's inheritance is necessary Doris Black, one of Wadel's long-time

clients, verbally promised Wadel that he could use her vacation home in Aspen, Colo., for a

week during skiing season if the return on her portfolio exceeded its benchmark by two

percentage points during the next year Black also promised to reimburse Wadel for his travel

expenses Because Wadel is the sole manager of Black's portfolio, he says nothing to Platt

about his arrangement with Black Platt instructs Linstrom to write a research report on Delta

Enterprises Delta's stock is widely held by institutional and individual investors Linstrom does

not own any Delta shares, though one of her friends owns 100 shares of Delta Linstrom does

not believe that informing Platt about her friend's ownership of Delta shares is necessary

Linstrom has a client, Mandy Miller, with a large account Miller has set a return goal for her

portfolio, promising Linstrom that if the portfolio exceeded the target return, she would let

Linstrom use her time-share in St Maarten in December Linstrom sent an e-mail to Platt

describing Miller's promise to her Platt promptly replied to her email granting her permission

to enter the agreement In February, Linstrom was able to arrange for the purchase of Brady

Company bonds at a signi cant discount to market value The purchase was made in three

blocks at 13 percent, 15 percent, and 12 percent discounts to market value Linstrom allocated

the 15 percent discount block to Miller's account and the balance to her remaining clients

Knudsen's uncle, Gustaf Jensen, owns a construction rm that has extra cash When Jensen saw

Knudsen at a family event last November, he asked Knudsen to give him advice about

purchasing domestic bonds for the construction rm In exchange for the advice, the

construction rm would pay Knudsen $5,000 per year At the same event, Knudsen's aunt,

Hanna Jorgensen, approached Knudsen and asked if he would manage Jorgensen's apartment

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building for a fee of 10 percent of the gross rents Knudsen agreed to both Jensen's and

Jorgensen's proposals Knudsen informed Platt of Jensen's request, but not about the Jorgensen

arrangement Platt suspects that one of the rm's unpaid interns has violated a federal

securities regulation

Which of the following statements about Linstrom and Wadel's conduct regarding their

research reports is CORRECT?

A) Wadel violated Standard VI(A): Disclosure of Con icts, and Linstrom did not violate

Standard VI(A)

B) Wadel did not violate Standard VI(A): Disclosure of Con icts, and Linstrom did

violate Standard VI(A)

C) Both Linstrom and Wadel violated Standard VI(A): Disclosure of Con icts.

Explanation

Wadel violated Standard VI(A) by not disclosing his wife's holdings, but Linstrom is not in

violation of the Standard, as a friend's ownership of the shares should not be expected to

impair her ability to make objective decisions

What is the obligation, if any, to disclose Wadel's arrangement with Black?

A) Wadel must disclose the arrangement to Platt but is not required to disclose the

arrangement to his other clients

B) Wadel must disclose the arrangements to his clients and to Platt only if he believes

it will create a con ict with his responsibilities to other clients

C) Wadel need not disclose anything to his clients or to Platt because he is violating no

duciary duty

Explanation

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Wadel is required to disclose the arrangement between him and Black under Standard IV(B):

Additional Compensation Arrangements, regardless of whether or not the compensation is

cash or noncash Under Standard I(B): Independence and Objectivity, members may accept

bonuses or gifts from clients , so long as they disclose them to their employers, because gifts

in a client relationship are deemed less likely to a ect a member's objectivity and

independence than gifts in other situations Token gifts need not be disclosed

Knudsen violated:

A) Standard IV(B): Additional Compensation with relation to the Jorgensen deal.

B) no Standards with regard to both the Jensen and Jorgensen deals.

C) Standard IV(B): Additional Compensation with relation to the Jensen deal, but did

not violate the Standard with relation to the Jorgensen deal

Explanation

Notifying Platt about the Jensen deal is not enough He needs permission in writing from

both parties before accepting the work Thus, Knudsen violated Standard IV(B) with relation

to the Jensen matter However, it does not appear that the work performed for Jorgensen is

in competition with Platt's employer, so this aspect is not in violation of Standard IV(B)

The handling of the Miller account:

A) violated Standard IV(B): Additional Compensation Arrangements, Standard III(B):

Fair Dealing, and Standard IV(C): Responsibilities of Supervisors

B) violated Standard III(B): Fair Dealing, but not Standard IV(B): Additional

Compensation Arrangements

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C) did not violate the Code and Standards because the appropriate disclosures were

made

Explanation

Linstrom did not violate Standard IV(B) because she disclosed Miller's o er to Platt However,

her allocation of the best lot of bonds to Miller's account violated Standard III(B)

According to the Standards, how must Platt deal with the intern's alleged illegal activity?

A) Tell the intern to stop the conduct.

B) Initiate an investigation and place limits on the intern’s activities pending the

outcome

C) Report the intern’s behavior to the appropriate regulatory authority.

Explanation

Platt must initiate an investigation, and must also take steps to ensure that additional

violations do not occur during the investigation The investigation could be handled internally

by the rm's compliance o cer, or could involve outside legal counsel Simply instructing the

intern to stop the conduct is not su cient – the Standards require more of a proactive

response Reporting the intern to the authorities is not appropriate because Platt is not sure

the intern is violating the law The fact that the intern is not paid does not absolve Platt or

her company from liability for the intern's actions

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A) not use material inside information unless trading Xanian stocks.

B) use material inside information when trading in Xania only if the information does

not relate to a tender o er

C) not use material inside information when trading in Xania.

Explanation

Standard II(A): Material Nonpublic Information does not allow the use of material nonpublic

information in investment decisions Platt is bound by the law of the land if it is stricter than

the Standards, and by the Standards if they are stricter than the law Since the Standards are

stricter than Xanian law, Platt's Xanian operations are governed by the Standards Thus she

cannot use material nonpublic information under any circumstances

Maggie McCarthy is an individual investment advisor who uses mutual funds for her clients She

typically chooses from a list of 40 funds that she has thoroughly researched The Figgs, a

married couple that are a client, asked her to consider the Boilermaker fund for their portfolio

McCarthy had not previously considered the fund because when she rst conducted her

research three years ago, Boilermaker was too small to be considered However, the fund has

now grown in value, and after doing thorough research on Boilermaker, she found the fund

was by far the most outstanding large company value fund in her list of funds She puts the

fund in the Figgs' portfolio, and in all new clients portfolios, but not in any of her other clients'

portfolios Her reasoning is that her existing clients were comfortable with their current

holdings, and she did not want to risk disturbing their comfort Has McCarthy violated any

Standards? McCarthy has:

A) not violated the Standards.

B) violated the Standards by not having a reasonable and adequate basis for making

the recommendation

C) violated the Standards by not dealing fairly with clients.

Explanation

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The fund should have been considered for the existing clients' portfolios There may have

been reasons not to add the fund to their portfolios, such as tax consequences or a lack of

suitability, but disturbing their comfort is not su cient

Joni Black, CFA, works for a portfolio management rm Black is a partner of the rm and is

primarily responsible for managing several large pension plans She also is in a supervisory

position with several research analysts reporting directly to her Dave Wood is a research

analyst who has worked under Black for the last six years Wood recently completed the Level

III CFA exam and is anxiously awaiting the results As a display of con dence, Black shows Wood

a box of business cards that have already been printed up for Wood with the initials "CFA" after

his name She locks them away in a le cabinet and promises to deliver them on the day they

get the news of his passing the exam

Black and Wood have been working closely to service a number of clients Wood knows that

Black recently met with a prospect named John Talbert Black says that she received Talbert's

paperwork and made a recommendation to Talbert to which he agreed Black tells Wood to

execute the trade Wood has not seen the nal paperwork, but from what he knows, the trade

is congruent with Talbert's situation Wood also knows the recommendation is generally a

sound one

Black is on the board of directors for ATX Corporation She was asked to write a research report

for ATX Corporation Because of her relationship with ATX, she assigned Wood to write the

report instead Black is Wood's supervisor and requires Wood to show all of his work to her for

nal approval As Wood begins writing the report, he remembers that the trust fund of his

children, left to them by the parents of Wood's wife, has a sizable investment in ATX

Black manages a pension fund for Evergreen International The management of Evergreen

International has just requested that Black increase the portion in international equity funds to

30 percent of total assets from its current position of 10 percent of total assets The

management of Evergreen International believes the potential for growth in international

markets is much greater than the domestic market and would like to see the pension fund

managed more aggressively Wood watches as Black immediately acts upon the

recommendation of Evergreen International Black allocates some of the fund's assets to a few

stocks in foreign countries One of the stocks immediately goes up in price and volatility, and

Black sees an opportunity to earn some extra income by selling a covered call on that particular

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stock She sells the call on behalf of the pension fund Wood asks Black if the pension fund's

charter allows derivative strategies Black says she does not know, but says she only sells

covered calls when she sees a really good opportunity and none of her clients have ever

complained even when they have speci ed that no options shall be used "Covered calls can

never cost a client anything, and they always earn income for the client," Black points out to

Wood

Despite his close relationship with Black, Wood has been preparing to start his own money

management rm He has turned a spare bedroom in his house into an o ce with new

furniture and computer He has the room wired with the latest Internet service upgrades He

has subscribed to nancial news services and opened a trading account in the name of his

proposed company He has told an old friend about his plans His friend has a large portfolio

being managed at another brokerage rm The friend had met Black, and told Wood that he did

not like her and could not let them handle his portfolio despite their friendship If Wood was on

his own, however, the friend had told Wood that he would want Wood to manage his portfolio

Wood also contacts a cousin, who recently inherited a large portfolio The cousin says that he

would like to get some help managing the portfolio as soon as possible Wood instructs the

cousin to use futures contracts to, in e ect, hedge the value of the portfolio cost-free until

Wood sets up his business, and Wood can then take his cousin on as a client He sends each of

them a copy of his resume where in his credentials he places after his name "CFA (expected

200X)

With respect to Black's instruction to execute the trade for Talbert, according to the Standards,

Wood should:

A) execute the trade only after consulting the rm’s legal counsel.

B) not execute the trade because he has not met Talbert himself.

C) execute the trade immediately.

Explanation

Since Black is Wood's supervisor and has the CFA designation and Wood sees nothing wrong,

Wood has no reason to take any intermediate action

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With respect to the report on ATX Corporation that Black asked Wood to write, which of the

following must Wood include in the report?

A) Black is on the board of ATX and the position of ATX in the trust fund of Wood’s

This question is related to Disclosure of Con icts, Standard VI(A) Black's relationship with

ATX Corporation must be disclosed in the research report because it could impair Black's

ability to make an unbiased judgment Under the same standard, the position of ATX in the

children's trust fund must be mentioned because it is bene cial ownership that could

reasonably impair Wood's judgment Even though Wood is the one writing the report, both

potential con icts need to be disclosed since Black is supervising Wood The fact Black

requires Wood to get her approval, which is congruent with Standard IV(C), is simply a routine

rm policy that does not need reporting It is not required to mention that an analyst does

not have the CFA designation

With respect to the pension fund for Evergreen International, Black's duciary duty is:

A) owed to the participants and bene ciaries of Evergreen International Therefore,

Black should continue to manage the fund in their best interest regardless of the

B) to the participants, bene ciaries, and management of Evergreen International.

Therefore, Black should increase the portion in international equities as long as it is

C) primarily to the management and stockholders of Evergreen International Black

should follow management's direction to potentially increase the value of the

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This question relates to Standard III(A), Loyalty, Prudence, and Care Black's duciary duty is

to the participants and bene ciaries of the pension plan according to ERISA Black should act

in their best interest in managing the funds

With respect to the pension fund for Evergreen International, after Wood notices Black's actions

concerning the management's instructions, he should:

A) try to distance himself from Black’s activities.

B) do nothing because he knows what Black said about the covered call properties

and her record is true

C) report Black’s activities to the police.

Explanation

According to Standard I(A), Knowledge of the Law, members and candidates must know the

law and not knowingly assist in breaking the law When questionable activities occur like

Black's option trading, the best course of action for an associate is distance him/herself and

seek legal counsel

With respect to Wood preparing to set up his own business, Wood violated the Standards:

A) by setting up trading accounts in the name of his company.

B) in his communication with his cousin.

C) in his communication with his friend.

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Wood violated Standard IV(A), Loyalty to Employer by contacting his cousin and advising him

because the cousin could potentially be a client for his current rm Since the friend had said

he would not do business with Black, and Wood gave him no instructions, that was not a

violation Note that Standard IV(A) covers competing with an employer, not preparing to

compete Preparing to compete by setting up an o ce and other related activities are not a

violation of the Standards

Violations with respect to the use of the CFA designation occurred with:

A) both the printing of the business cards by Black and the letters sent by Wood to his

friend and cousin

B) the letters sent by Wood to his friend and cousin but not with the printing of the

business cards by Black

C) the printing of the business cards by Black but not the letters sent by Wood to his

friend and cousin

Explanation

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

the use of the CFA designation to those who have passed all three levels of the CFA Program,

have received their charters, and are charter holders in good standing Wood may not put

"CFA (expected 200X)" following his name because it is a violation of the Standard However,

he may state that he is a Level III candidate in the CFA program if he wishes The printing of

the business cards was not a prudent move, but since they are taking care not to distribute

them until the appropriate time, no violation has occurred In some sense, it is like a research

report written in advance of an anticipated event As long as the report is not released until

after the event, no violation has occurred

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A company has a de ned bene t plan that is currently under-funded The plan sponsor has

instructed the portfolio manager of the plan to invest more aggressively to bring the funding

level up to an adequate amount Which of the following statements best describes the course

of action the portfolio manager should take? The portfolio manager should:

A) not invest more aggressively because this is not the method used to increase the

funding level of a plan

B) not invest more aggressively since this may expose the plan to too much risk and

may not be in the best interest of the plan's bene ciaries

C) invest more aggressively because his duciary duties lie with the plan sponsor.

Explanation

Standard III(A), Loyalty, Prudence, and Care, applies in this situation According to this

Standard, investment actions should be carried out for the sole bene t of the client and in a

manner the manager believes to be in the best interest of the client Here, the client is the

plan bene ciaries, not the manager or the entity that hired the manager

Nicole Wise, CFA, is an analyst at Chicago Securities She attends a meeting with management

of one of the companies that she covers During the meeting, management expresses great

optimism about the company's recent acquisition of a new business Wise is excited about

these prospects and issues a research report that states that the company is about to achieve

signi cant success with the new acquisition Wise has:

A) violated CFA Institute Standards of Professional Conduct because she

misrepresented the optimism by turning it to certainty

B) not violated CFA Institute Standards of Professional Conduct because she had

reasonable reason to believe that the statements in her report were true

C) violated CFA Institute Standards of Professional Conduct because she did not check

the accuracy of the statements that management made

Explanation

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Standard V(B), Communication with Clients and Prospective Clients Members must

distinguish between fact and opinion in the presentation of a research report or investment

recommendation Wise violated the standard because she misrepresented management's

enthusiasm by turning it into certainty

Brenda Clark is an investment advisor Two years ago Clark decided to stop calculating a return

composite because of the time required to make those calculations A prospective client asks

Clark what she thinks her performance would have been over the past two years Clark:

A) cannot answer the question because it would be misleading.

B) cannot answer the question, nor can she discuss potential future market returns

with the prospective client

C) can answer the question orally but cannot state the numbers in writing.

Explanation

Any discussion of past performance would imply that Clark had made some calculations,

which would be misleading However, Clark need not calculate historical performance to be

an advisor She can also talk about her view on the future of capital markets

Denise Weaver is a portfolio manager who manages a mutual fund and has pension clients

When Weaver receives a proxy for stock in the mutual fund, she gives it to Susan Gri th, her

administrative assistant, to complete When the proxy is for a stock owned in a pension plan,

she asks Gri th to send the proxy on to the sponsor of the pension fund Weaver has:

A) violated the Standards by her policy on mutual fund and pension fund proxies.

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B) violated the Standards by her policy on mutual fund proxies, but not her policy on

pension fund proxies

C) not violated the Standards.

Explanation

Proxies should be taken seriously, and although it is likely that Gri th can understand some

of the issues, it is likely that she is not capable of making responsible decisions on all

potential proxy issues Proxies for a pension plan should be voted in the best interests of the

bene ciaries, not the plan sponsor The sponsor's interests will not always be the same as

the bene ciary's interest

Greg Stiles, CFA, keeps a list of his clients' birthdays and has personally sent them a birthday

card each year at the appropriate time With respect to this action, which of the following may

be a violation of Standard III(E), Preservation of Con dentiality?

A) The mere act of sending a birthday card each year.

B) Hiring a company outside the rm to perform the task.

C) Sending a gift along with the card.

Explanation

According to Standard III(E), an analyst should limit the number of persons who have access

to clients' personal information Allowing a company outside the rm to send birthday cards

could be a violation Sending a birthday card is not a violation, nor is sending a gift of

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May Frost, CFA, is an equity research analyst for a "precious metals mining" exchange traded

fund which has recently started signi cantly outperforming its benchmark after several years of

stagnation Upon investigating the source of the outperformance, Frost learns that the fund has

experienced severe style drift, and now has a signi cant proportion of its resources invested in

technology and Internet stocks Frost reviews the fund's prospectus and learns the current

sector weighting violates multiple prospectus covenants Frost contacts her supervisor and the

fund's compliance department and is told the portfolio weighting is not her responsibility and

that she should not pursue the matter further Frost reviews the rm's whistleblower policy,

contacts personal legal counsel, and then contacts regulatory authorities regarding the style

drift and prospectus violations Frost is most likely:

A) in violation of Standard III(E) "Preservation of Con dentiality."

B) in violation of Standard IV(A) "Loyalty."

C) not in violation of the Code and Standards.

Explanation

Standard IV(A) "Loyalty" does not necessarily prohibit Frost from whistleblowing actions

Frost has properly contacted her supervisor and the compliance department, and has

reviewed her rm's whistleblower policy

Joni Black, CFA, works for a portfolio management rm Black is a partner of the rm and is

primarily responsible for managing several large pension plans Black has just nished a

research report in which she recommends Zeta Corporation as a "Strong Buy." Her rating is

based on solid management in a growing and expanding industry She just handed the report

to the marketing department of the rm for immediate dissemination Upon returning to her

desk she notices a news ash by CNN reporting that management for Zeta Corporation is

retiring Black wishes she did not recommend Zeta Corporation as a "Strong Buy," but believes

the corporation is still a good investment regardless of the management What course of action

for Black is best? Black:

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