R02.6 Guidance For Standard IV - Answers PDF

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
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.
Question #1 - 6 of 56 Question ID: 1228407

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) Both Linstrom and Wadel violated Standard VI(A): Disclosure of Con icts.
C) Wadel did not violate Standard VI(A): Disclosure of Con icts, and Linstrom did
violate Standard VI(A).
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.
(Study Session 1, Module 2, LOS 2.a)
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 need not disclose anything to his clients or to Platt because he is violating
no duciary duty.
C) 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.
Explanation
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) Standard IV(B): Additional Compensation with relation to the Jensen deal, but did
not violate the Standard with relation to the Jorgensen deal.
C) no Standards with regard to both the Jensen and Jorgensen deals.
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 III(B): Fair Dealing, but not Standard IV(B): Additional
Compensation Arrangements.
B) did not violate the Code and Standards because the appropriate disclosures were
made.
C) violated Standard IV(B): Additional Compensation Arrangements, Standard III(B):

Fair Dealing, and Standard IV(C): Responsibilities of Supervisors.
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) Initiate an investigation and place limits on the intern’s activities pending the
outcome.
B) Report the intern’s behavior to the appropriate regulatory authority.

C) Tell the intern to stop the conduct.
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.
Platt is considering adopting local investment practices in Xania. According to the Standards,
Platt may:
A) not use material inside information unless trading Xanian stocks.
B) not use material inside information when trading in Xania.
C) use material inside information when trading in Xania only if the information does
not relate to a tender o er.
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.
Question #7 of 56 Question ID: 1228372
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) contact industry regulators.
B) review the company’s policies and procedures for reporting ethical violations.
C) provide her supervisor with a copy of the Code and Standards.

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.
(Study Session 1, Module 2.6, LOS 2-IV.(A))
Jess Green, CFA is the research director for Castle Investment, Inc., and has supervisory
responsibility over eight analysts, including three CFA charterholders. Castle has a compliance
program in place. According to CFA Institute Standards of Professional Conduct, which of the
following is least likely an action that Green should take to adhere to the compliance
procedures involving responsibilities of supervisors? Green should:
A) issue periodic reminders of the procedures to all analysts under his supervision.
B) incorporate a professional conduct evaluation as part of the performance review

only for the three CFA charterholders.
C) disseminate the contents of the compliance program to the eight analysts.
Explanation
Green should incorporate a professional conduct evaluation as part of his review of all eight
analysts under his supervision, not just the three CFA charterholders.
(Study Session 1, Module 2.6, LOS 2-IV.(C))
John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own
money management business and has given his two-week notice of his resignation from
Advisors. A few days before his resignation takes e ect, a former client of Advisors calls Hill at
his home about his new rm. The former client says that he is very happy that Hill is leaving
Advisors because now he and Hill can resume a professional relationship. The client says that
he would never become a client of Advisors again. Hill promises to call the client back after he
has left Advisors. Hill does not tell his employer about the call. Hill has most likely:
A) violated the Standard concerning disclosure of con icts.
B) violated the Standard concerning loyalty to employer.

C) not violated the Standards.
Explanation
Based on the information here, Hill has done nothing wrong. He took a call at his home,
presumably on his own time, and the client made it clear that he would never be a client of
Advisors. Therefore, there was no breach of loyalty to Advisors by Hill, nor is there a con ict
of interest.
David Saul, CFA, heads the trust department at Savage National Bank. Fairway Enterprises
invites Saul to sit on its Board of Directors. In return for his services on the Board, Fairway
o ers to provide Saul and his family with access to the facilities at Wilmont Country Club at no
cost. Saul will not receive any monetary compensation for his services on the Board. According
to CFA Institute Standards of Professional Conduct, which of the following actions must Saul
take?
A) Saul must disclose in writing to Savage Bank the terms of the o er whether or not
he accepts the o er to serve on the Board of Directors.
B) Saul must reject the o er to serve on the Board of Directors.
C) Saul must obtain written consent from Savage Bank and Fairway Enterprises if he
decides to accept the o er to serve on the Board of Directors.
Explanation
Standard IV(B) requires that members obtain written consent from all parties involved
before accepting monetary compensation or other bene ts that they receive for their
services that are in addition to compensation or bene ts conferred by a member's
employer. The phrase "all parties" is referring to Saul's employer and Fairway's Board of
Directors.
(Study Session 1, Module 2.6, LOS 2-IV.(B))
A rm recently hired Viola Sandoval, CFA, to be a managing supervisor in the rm. Sandoval
knows that all of her subordinate supervisors are members of CFA Institute and the rm has a
compliance system in place with respect to the Code and Standards. Under these conditions
Sandoval needs to:

A) review the compliance system for its adequacy.
B) rely on the current compliance system since the subordinate supervisors are
subject to the Code and Standards.
C) immediately implement a new compliance system.
Explanation
According to Standard IV(C), Responsibilities of Supervisors, Sandoval must make reasonable

e orts to detect violations of the law, rules, regulations, and Code and Standards. This
responsibility is not eliminated because Sandoval's subordinates are CFA Institute members.
Sandoval should review the compliance system and report any inadequacies to senior
management.
Jan Hirsh, CFA, is employed as manager of a college endowment fund. The college's
endowment is held by the brokerage rm Advisors, Inc. Over the years, Hirsh has developed a
solid relationship with Advisors. Because of this relationship, Advisors has given her their
Platinum level service for her personal account. Advisors ordinarily gives the Platinum level
only to clients who do a minimum of $2,500 of commission business in a year. Hirsh has never
reached the $2,500 commission level and probably will never do so. According to Standard
IV(B), Additional Compensation Arrangements, Hirsh needs to:
A) inform her supervisor in writing about the Platinum account.
B) inform her supervisor verbally about the Platinum account.
C) do none of the actions listed here.
Explanation
Having the Platinum account is a bene t from her managing the endowment, which led to
the relationship with Advisors. Members should report to their employers any additional
compensation or bene ts they receive for their services. This must be in writing. Doing
$2,500 in business alone will not negate her obligation unless she explicitly tells Advisors
that she is willing to accept whatever penalties accompany a Platinum account when a client
does less business.

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) delivers a typed memo to her supervisor about the vacation home the rst time
she uses it.
B) does nothing with respect to this.
C) sends an e-mail to her supervisor about the vacation home.
Explanation
Standard IV(B) requires that members disclose to their employer in writing all bene ts that
they receive in addition to their regular compensation for services they perform on behalf of
their employer. E-mail messages qualify. As long as the agreement is in e ect, she must
inform her employer even if she has yet to use the potential bene t.
Jill Marsh, CFA, works for Advisors where she manages various portfolios. Marsh's godfather is
an accountant and has done Marsh's tax returns every year as a birthday gift. Marsh's
godfather has recently become a client of Advisors and asked speci cally for Marsh to manage
his account. In order to comply Standard IV(B), Disclosure of Additional Compensation
Arrangements, she needs to:
A) liquidate from her personal portfolio any stocks her godfather owns and verbally
tell her supervisor about the tax services.
B) have her godfather cease doing her taxes.
C) do neither of the actions listed here.
Explanation
their employer. It is not unreasonable for an individual's godfather to give them a birthday
gift. Moreover, since the tax services were a regular birthday present before her godfather
became a client, this implies that they are unrelated to any investment management
services.

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
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.
Janet Thompson, CFA, is employed as an analyst by Nationwide Securities. According to CFA
Institute Standards of Professional Conduct, which of the following statements about

Thompson's duty to Nationwide is NOT correct? Thompson must refrain from:
A) engaging in independent competitive activity that could con ict with the business
of Nationwide unless she receives written consent.
B) making arrangements to go into a competitive business before terminating her

relationship with Nationwide.
C) engaging in any conduct that would injure Nationwide.
Explanation
Standard IV(A) permits Thompson to make preparations to go into a competitive business
before terminating her relationship with Nationwide provided that such preparations do not
breach her duty of loyalty.
The following information concerns two analysts at Mega Securities Company.
Mega recently hired Ron Anderson, CFA, who was previously an independent
investment advisor. Anderson wants to keep his existing clients for himself and obtains
written consent from Mega to do so. He also informed and received consent from his
existing clients in writing about his new position at Mega.

Brenda Ford, a CFA Institute member, has been a full-time analyst for Mega for 12
years. She recently started providing investment services, which compete with Mega, to
private clients on her own time. Ford obtained written consent for this arrangement
from her direct supervisor at Mega. Ford has not disclosed to each of her clients her
employment at Mega.
According to CFA Institute Standards of Professional Conduct, have Anderson and Ford
violated Standard IV: Duties to Employers?
A) Anderson violated this Standard, but Ford has not.
B) Ford violated this Standard, but Anderson has not.
C) Neither Anderson nor Ford violated this Standard.
Explanation
Standard IV(A) requires consent to enter into independent practice. Standard IV(B)
Additional Compensation Arrangements states that no compensation may be accepted
which may create a con ict of interest without written consent from all parties. Anderson
received consent from all parties, Ford did not receive consent from her independent
clients.
Which of the following statements is most correct under the Code and Standards?
A) Consent from the employer is necessary to permit independent practice that could
result in compensation or other bene ts in competition with the member's
l
B) Members are prohibited from making arrangements or preparations to go into
competitive business before terminating their relationship with their employer.
C) CFA Institute members are prohibited from undertaking independent practice in

competition with their employer.
Explanation
Members are not prohibited from making arrangements or preparations to go into

competitive business before terminating their relationship with their employer. CFA Institute
members are not prohibited from undertaking independent practice in competition with
their employer provided they have consent from their employer. Members must provide
noti cation to their employer describing the types of services to be rendered, the expected
duration, and compensation for the services.
Chuck Daniels has just been hired to manage a security analysis group for Aaron Asset
Management. Daniels performed a similar function at another rm and nds the compliance
system at Aaron inadequate. He develops a system that he feels is appropriate, but senior
management tells him he will have to wait six months to implement the system. Daniels
should:
A) decline in writing to accept supervisory responsibility until a satisfactory

compliance system is put into place.
B) protest in writing the delay, listing the potential dangers that can occur.
C) resign his position immediately.
Explanation
According to the Standard on supervisory responsibilities, Daniels should decline in writing

to accept supervisory responsibility until a satisfactory compliance system is put into place.
The proper system for compliance with CFA Institute Standards and requirements:
A) should incorporate the professional conduct evaluation of the employees into
their performance review.
B) should incorporate professional conduct evaluation of the employees into their

performance review only for those employees who are CFA charterholders.
C) cannot incorporate the professional conduct evaluation of the employees into

their performance review, because not all of the employees are CFA
h h ld
Explanation
Once a compliance system is established, it should prohibit all employees, including those
who are not CFA charterholders, from violating CFA Institute Standards. The incorporation of
the professional conduct evaluation into the employee's performance review is one of the
recommended features of the compliance system.
Jane Talbot, CFA, is a portfolio manager at Cavalier Investments. Talbot manages the account
of Wendall Wilcox. The performance of Wilcox's portfolio has been below that of the
benchmark portfolio, the S&P 500, for the past several years. In an e ort to enhance his
portfolio's performance, Wilcox o ers to pay Talbot $2,000 each year that his portfolio's return
exceeds that of the S&P 500. Wilcox suggests this arrangement last for the next three years.
The amount that Wilcox agrees to pay Talbot is in addition to the compensation that Talbot
will receive from his employer and the standard fee that Wilcox will pay Cavalier for managing
his portfolio over the three-year period. Talbot agrees to the arrangement proposed by Wilcox
and informs Cavalier in writing of the terms of the agreement under which she will receive
additional compensation. According to CFA Institute Standards of Professional Conduct Talbot

must disclose:
A) the nature and amount of compensation plus the duration of the agreement.
B) both the nature and amount of compensation only.
C) the nature of the compensation only.
Explanation
Procedures for compliance for Standard IV(B) indicate that the written report should state
the terms of any oral or written agreement under which Talbot will receive additional
compensation including the nature of the compensation, the amount of compensation and
the duration of the agreement.

Michel Marchant, CFA, recently became an independent money manager. After six months, he
has only ten clients, who are family and friends. To supplement his income, Marchant
accepted part-time employment as an advisor at Middleton Financial Advisors. According to
CFA Institute Standards of Professional Conduct, which of the following statements about
Marchant's duty to his new employer is CORRECT?
A) Marchant must inform Middleton to keep his existing clients and must inform his
existing clients of his new part-time employment at Middleton.
B) Marchant must inform Middleton about his existing clients but need not inform his
existing clients about his new part-time employment with Middleton.
C) Marchant need not inform Middleton about his existing clients but must inform his
existing clients about his new part-time employment at Middleton.
Explanation
Standard IV(A) and IV(B) requires that Marchant inform both Middleton and his existing
clients.
Sharon West is a CFA charterholder and trust o cer for REO Trust Company. Soon after
beginning work for REO, West nds that REO has been conducting all its securities
transactions through her brother who is a registered representative. West's brother charges
REO commissions that are equal to the lowest available from another broker. West's brother
tells her that if she continues doing business with him, he will give her a substantial discount
on all personal transactions she conducts through him. West:
A) does not need to inform her employer of the arrangement because the
commissions her brother charges the rm are the lowest possible.
B) must inform her employer of the arrangement because it provides her with
additional compensation.
C) must inform her employer of the arrangement because she is doing business with
a member of her immediate family.
Explanation
Members are required to disclose to their employer in writing all monetary compensation or
other bene t they receive in addition to the employer's compensation. The discounting of
West's commissions is a bene t that must be disclosed.
Nick O'Donnell, CFA, unsuspectingly joins the research team at Wickett & Co., an investment
banking rm controlled by organized crime. None of the managers at Wickett are CFA Institute
members. Because of his tenuous situation at Wickett, O'Donnell begins making preparations
for independent practice. He knows he will be terminated if he informs management at
Wickett that he is preparing to leave. Consequently, he determines that "if he can just hang on
for one year, he will likely have a client base su cient for him to strike out on his own." This
action is:
A) a violation of his duty to disclose con icts to his employer.
B) not a violation of his duty to employer.
C) a violation of his duciary duties.
Explanation
O'Donnell is required to obtain consent from his employer if he is attempting to practice in

competition with his employer. Merely undertaking preparations to leave, which do not
violate a duty, is not a violation of the Code and Standards.
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) do nothing since the o er is not linked to the performance of the client's portfolio.
C) inform his supervisor in writing of the o er if the analyst intends to accept the
o er.
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.
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) has violated Standard IV(C), Responsibilities of Supervisors.
B) is relieved of his obligation to supervise the employees under the mid-level

supervisors.
C) is still responsible for seeing that procedures are in place to prevent violations of
the Code and Standards.
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.
Nicholas Brynne, CFA, develops a trading model while working for CE Jones, an investment
management rm. By working on the model at home from his personal computer, Brynne is
able to devote additional work hours. Although the trading model is successful, Brynne loses
his job in a company restructuring, and decides to start his own practice using the trading
model. Nicholas is most likely:
A) in violation of the Standards because he did not have permission to build the
trading model using his home computer.
B) in violation of the Standards because he did not receive permission from his
employer to keep or use the les after employment ended.
C) not in violation of the Standards because the trading model was created using his
home computer.
Explanation
Brynne is in violation of Standard IV(A) "Loyalty." Employer records include items stored in
any medium including home computers.
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 formal value limit based on local customs.
B) a requirement to disclose the gift.
C) restrictions on all types business entertainment.
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.
For years John Berger, a CFA charterholder and CEO of a company, relied upon a set of
reasonable procedures for preventing violations of the Code and Standards of Professional
Conduct in the rm. To comply with the Standards, Berger must:
A) do nothing more than have the set of procedures in place as stated.

B) only ensure the procedures are monitored and enforced.
C) both periodically review the procedures and ensure the procedures are monitored
and enforced.
Explanation
As a CEO, Berger is responsible for implementing and maintaining appropriate compliance

procedures. He must also ensure the procedures are monitored and enforced.
Wanda Kirby, CFA, recently joined Allegheny Investments as a senior analyst. Because of her
extensive experience in the investments business and knowledge of the Code and Standards,
Allegheny's management asked her to assume supervisory responsibility. Kirby reviewed
Allegheny's existing compliance system and determined that it was inadequate to allow her to
clearly discharge her supervisory responsibility. According to CFA Institute Standards, Kirby
should:
A) agree to accept supervisory responsibility provided that Allegheny adopts

reasonable procedures to allow her to adequately exercise such responsibility.
B) decline in writing to accept supervisory responsibility until Allegheny adopts

reasonable procedures to allow her to adequately exercise such responsibility.
C) agree to accept supervisory responsibility and to develop reasonable procedures

to allow her to adequately exercise such responsibility.
Explanation
If Kirby clearly cannot discharge supervisory responsibilities because of an inadequate

compliance system, she should decline in writing to accept supervisory responsibility until
Allegheny adopts reasonable procedures to allow her to adequately exercise such
responsibility.

Selma Brown, CFA, is a portfolio manager for Mainland Securities. Rick Wood, one of her
clients and owner of Wood Fitness Centers, o ers to permit Brown and her immediate family
to use the facilities at his tness centers at no cost during 2003. To get this bene t, Brown
must achieve on Wood's portfolio at least a 2-percentage point return above the total return
on the S&P's 500 index during 2002. Brown orally informs her immediate supervisor of the
nature and duration of the proposed arrangement.
Arnold Turley, a CFA Institute member, is a portfolio analyst at Mainland Securities. He was
just elected to the Board of Directors for Omega Services, which pays him $1,000 plus
expenses for attending each of its quarterly board meetings. Turley e-mails Mainland's
compliance o cer informing her of this arrangement with Omega and receives a reply
informing him that the agreement is acceptable.
Did Brown or Turley violate CFA Institute Standards of Professional Conduct?
A) Brown: No, Turley: No.
B) Brown: Yes, Turley: No.
C) Brown: Yes, Turley: Yes.
Explanation
Brown violated Standard IV(B), Additional Compensation Arrangements, because she must
disclose in writing other bene ts to be received for services that are in addition to
compensation conferred by her employer. Turley did not violate Standard IV(B) because he
received consent from his employer in writing, which includes e-mail.
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) to hire and re personnel.
B) which is consistent with the most senior partner or executive o cer in the rm.
C) to a ect, control, and guide employee behavior and to respond to employee

misconduct.
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.
An analyst belongs to a nationally recognized charitable organization, which requires dues for
membership. The analyst has worked out a deal where he provides money management
advice in lieu of paying dues. Which of the following must the analyst do?
A) Resign from the position because the relationship is a con ict with the Standards.
B) Nothing since he is not an employee of the charitable organization.
C) Must treat the charitable organization as his employer.
Explanation
An employee/employer relationship does not necessarily mean monetary compensation for

services. If the analyst is performing services for the organization, then the analyst must
treat the position as if he were an employee.
Sue Parsons, CFA, works full-time as an investment advisor for the Malloy Group, an asset
management rm. To help pay for her children's college expenses, Parsons wants to engage in
independent practice in which she would advise individual clients on their portfolios. She
would conduct these investment activities only on weekends. She is currently only in the
preparation stage and has not started independent practice yet. Which of the following
statements about Standard IV(A), Loyalty to Employer, is most accurate? Standard IV(A):
A) does not require Parsons to notify Malloy of preparing to undertake independent

practice under the current conditions.
B) requires Parsons to notify Malloy in writing about her intention to undertake an

independent practice.
C) requires Parsons to obtain written consent from both Malloy and the persons
from whom she undertakes independent practice.
Explanation
Standard IV(A), Loyalty to Employer, requires that Parsons obtain written consent only from
her employer before she undertakes independent practice that could result in
compensation or other bene t in competition with Malloy. It is not required to get
permission from your employer when only preparing to go into independent practice.
An analyst needs to inform his supervisor in writing of which of the following?
A) Both the lunch and the bonus mentioned in the other answers.
B) 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
h h b l i i b h b
C) A client and the analyst alternate paying for lunch at a local sandwich shop.
Explanation
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.
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's supervisory responsibilities do not apply to those subordinates who are

not subject to the CFA Institute Code and Standards.
B) Miller retains supervisory responsibilities for those duties delegated to her

subordinates.
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.
Grant Starks, CFA, has been working for Advisors, Inc., for eight years. Starks is about to start
his own money management business and has given his two-week notice of his resignation. A
few days before his resignation takes e ect, a current client of Advisors calls him at his o ce
to inquire about some services for her account at Advisors. During the conversation, Starks
tells the client that his new business will have lower commissions than Advisors. Starks has
most likely violated:
A) Standard IV(A), Loyalty to Employer.
B) Standard VI(B), Priority of Transactions.
C) Standard V(B), Communication with Clients and Prospecitve Clients.
Explanation
This is a breach of loyalty to his current employer. By telling a current client of his employer
about the lower commissions he will charge in his new business, Starks is placing himself in
direct competition with Advisors, and this is a violation of Standard IV(A).

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) not in violation of the Code and Standards.
B) in violation of Standard IV(A) "Loyalty."
C) in violation of Standard III(E) "Preservation of Con dentiality."
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.
Brian Williams is a portfolio manager with Santo Capital and works on the Banks Company's
account. Santo has a policy against accepting gifts over $500 from clients. The Banks' portfolio
has a fantastic year, and in appreciation, a Banks manager sends Williams a rare bottle of wine
that he estimates is worth $300. Williams must:
A) return the bottle to the client.
B) report the pension fund manager to the CFA Institute Professional Conduct
Program.
C) inform his supervisor in writing that he received additional compensation in the

form of the wine.
Explanation
The Standards require that he inform his supervisor in writing about the gift.

Karen Dalby, CFA, volunteers on her church's nance board but receives no cash
compensation so she does not report the arrangement to her employer. Board compensation
is limited to an annual retreat to Hawaii, but the accommodations are modest. Dalby does not
enjoy the retreat and often considers skipping the event entirely. Dalby is most likely:
B) in violation of Standard IV(A) "Loyalty."
C) in violation of Standard IV(B) "Additional Compensation Arrangements."
Explanation
Dalby is in violation of Standard IV(B) "Additional Compensation Arrangements."

Nonmonetary compensation may still create a con ict of interest.
Dan Lee, CFA, is a portfolio manager with Jewel Investment Advisors. Doris Black, one of Lee's
long-time clients, tells Lee that he can use her vacation home in Aspen, Colorado, for a week
during skiing season if the return on her portfolio exceeds its benchmark by two percentage
points during the next year. Black also o ers to reimburse Lee and his wife for their
transportation expenses to Aspen. Lee accepts this arrangement. According to CFA Institute
Standards of Professional Conduct, what is Lee's obligation, if any, to disclose this
arrangement to Jewel? Lee:
A) must disclose both the arrangement to use Black's vacation home and the
reimbursement of expenses.
B) need not disclose either the arrangement to use Black's vacation home or the
C) must disclose in writing the arrangement to use Black's vacation home but not the
Explanation
Standard IV(B) Additional Compensation Arrangements requires that Lee disclose to Jewel in
writing any extra monetary compensation or other bene ts that he receives from outside
the rm for his services.

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.
Which of the following statements would NOT be in violation of the Code and Standards?
A) 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.
B) Tonis is a CFA Level II Candidate.
C) Tonis is a member of CFA Institute and would become a CFA upon completion of
the Level III exam.
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. There is no
prohibition against using the CFA marks as a noun. To use the CFA marks, besides passing
the three exams, a candidate must also complete the required work experience.
In order to keep her CFA Institute membership status Tonis must:
A) le a professional conduct statement every year.
B) enroll in the next scheduled CFA exam.
C) avoid two or more public censures within any 12 consecutive months.
Explanation
Summary suspension may be imposed on a covered person for failure to complete, sign,
and return a professional conduct statement for one year. If a candidate is not enrolled in
the next scheduled CFA exam, he may not say that he is a CFA candidate but enrollment in
the next exam is not required to keep CFA Institute membership and avoid summary
suspension. Two or more public censures within any 12 consecutive months would not lead
to a summary suspension.
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 and accommodations but not the membership.
B) the tickets but not the membership or accommodations.
C) the membership, the tickets, and accommodations.
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 trade on the information using the mutual funds she has been already been
using only.
C) may not act on the information.
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.
With respect to planning her own business while still at Target, which of the following
statements is most accurate? Tonis may:
A) copy and later use her model because Target is not using it.
B) not copy and take home the model because it is property of her employer.
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.
Brian Bellow, a CFA Institute member, is a portfolio manager for Progressive Trust Company.
Several friends asked Bellow to review their investment portfolios. On his own time, Bellow
examined their portfolios and made several recommendations. He received no monetary
compensation from his friends for his investment advice and provided no future investment
counsel to them. According to CFA Institute Standards of Professional Conduct, did Bellow
violate his duty to Progressive Trust?
A) Yes, because he undertook an independent practice that could result in

compensation or other bene t to him.
B) No, because Bellow provided no ongoing investment advice.
C) No, because Bellow received no compensation for his services.
Explanation
Standard IV(A) Loyalty requires members and candidates to disclose to their employers any
independent practice for compensation. In this case, Bellow did not receive any
compensation for his advice and therefore did not engage in independent practice.

An analyst belongs to a nationally recognized charitable organization, which requires dues for
membership. The analyst has worked out a deal that he provides money management advice
in lieu of paying dues. For this arrangement to comply with the standards, the analyst needs
consent from:
A) his supervisor in the organization only.
B) his supervisor in his regular place of work only.
C) both his supervisor in the organization and his regular place of work.
Explanation
An employee/employer relationship does not necessarily mean monetary compensation for

services. If the analyst is performing services for the organization, then the analyst must
treat the position as if he were an employee and obtain consent from both his supervisor in
the organization and in his regular place of work.
Francisco Perez, CFA, is an equity research analyst for a long-term investment fund. The fund
is seeking new clients, so Perez contacts old clients he knew through his former employer.
Which of the following is most accurate?
A) Perez can only solicit clients after notifying his former employer.
B) Perez is not prevented from soliciting clients as long as he is working from

memory and publically available information rather than a list generated while he
ill i h h f l
C) Perez cannot solicit clients from a former employer.
Explanation
According to Standard IV(A), Perez is not prevented from soliciting clients as long as he is
working from memory and publically available information rather than a list generated while
he was still with the former employer.

A rm recently hired Hal Crane, CFA, to be a supervisor in the rm. Crane has reviewed the
procedures for complying with the Code and Standards in the company. It is Crane's belief
that the procedures need revision in order to be e ective. Crane must:
A) decline supervisory responsibilities in writing until the company adopts an

adequate compliance system.
B) make reasonable e orts to encourage the company to adopt an adequate

compliance system.
C) exercise his supervisory responsibilities with the greater level of diligence required
by the Code and Standards.
Explanation
According to Standard IV(C) Responsibilities of Supervisors, if Crane believes the company's

compliance procedures are not adequate, Crane should decline supervisory responsibilities
in writing until an adequate system is adopted.
An analyst working at an investment rm has a client that provides income tax prep services
for individuals. The client tells the analyst that as long as he is the client's analyst, he will
prepare the analyst's income tax return free of charge. The analyst needs to:
A) inform his supervisor in writing of the o er.
B) do nothing since the o er is not linked to the performance of the client's portfolio.
C) explicitly refuse such an o er.
Explanation
Standard IV(B), Additional Compensation Arrangements, 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.

Martin Tripp, CFA, is vice-president of the equity department at Walker Financial, a large
money management rm. Of the twenty analysts in his department for whom he has
supervisory responsibility, eight are subject to CFA Institute Standards of Professional
Conduct. Tripp believes that he cannot personally evaluate the conduct of the twenty analysts
on a continuing basis. Therefore, he plans to delegate some of his supervisory duties to Sarah
Green, who is subject to the Standards, and some to Bob Brown, who is not subject to the
Standards. According to CFA Institute Standards of Professional Conduct, which of the
following statements about Tripp's ability to delegate supervisory duties is most accurate?
A) Tripp may delegate some or all of his supervisory duties only to Green because
she is subject to the Standards.
B) Tripp may delegate some or all of his supervisory duties to Brown, even though
Brown is not subject to the Standards.
C) Tripp may not delegate any of his supervisory duties to either Green or Brown.
Explanation
Standard IV(C) Responsibilities of Supervisors permits Tripp to delegate supervisory duties

to Green, Brown, or both, but such delegation does not relieve Tripp of his supervisory
responsibility.
Dave Kline, CFA, is a personal investment advisor with 200 individual, family, and corporate
accounts. 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 his accounts. The rm's stated policies require him to notify each client of
his planned departure and personally introduce them to their new account representative,
Greg Potter. Kline sees Potter as a rival and states "...let Potter do his own work and nd his
own clients." Kline is most likely:
B) in violation of Standard IV(A) "Loyalty" for failing to follow the employer’s policies
and procedures related to notifying clients of his departure.
C) in violation of Standard I(D) "Misconduct" for leaving clients subject to an account

representative he does not nd suitable.
Explanation
Kline is in violation of Standard IV(A) "Loyalty" for failing to follow the employer's policies
and procedures related to notifying clients of his departure.
John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own
money management business and has given his two-week notice of his resignation from
Advisors. A few days before his resignation takes e ect, on his lunch hour, he takes out a loan
from a bank on behalf of his new business and uses the money to buy some o ce equipment
for his new business. Since he engaged in these transactions while still an employee of
Advisors, Hill violated Standard IV(A), Loyalty to Employer, by:
A) breaching his duty of loyalty to his current employer by making preparations to go

into a competitive business.
B) preparing to undertake independent practice before giving notice to his current

employer of his intent to resign.
C) neither taking out the loan nor buying the equipment.
Explanation
The Standards of Practice under IV(A) states that a departing employee is "generally free to
make arrangements or preparations to go into a competitive business before terminating
the relationship with the employee's employer provided that such preparations do not
breach the employee's duty of loyalty." Neither of these actions are in con ict with the
interests of Advisors, and Hill performed them on his own time.
Nancy Korthauer, CFA, has launched a new hedge fund called the Korthauer Tautology Fund
but has had trouble hiring analysts who are CFA charterholders as well as with nding clients.
She o ers a $15,000 incentive bonus to any charterholder who joins the rm with over $1
million in committed client investments. Which of the following interpretations of the Code
and Standards is most accurate?
A) A member or candidate may arrange for current clients to switch to the Korthauer
Tautology Fund provided the member or candidate refuses to accept the incentive
b
B) A member or candidate may arrange for current clients to switch to the Korthauer
Tautology Fund provided clients are informed of the incentive bonus.
C) A member or candidate may not solicit current clients away from their current
employer.
Explanation
A member or candidate may not solicit current clients away from their current employer
under Standard IV(A) "Loyalty."

R02.6 Guidance For Standard IV - Answers PDF

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

Question #1 - 6 of 56 Question ID: 1228407

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

Question #2 - 6 of 56 Question ID: 1228408

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

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

Question #3 - 6 of 56 Question ID: 1228409

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

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

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

Question #4 - 6 of 56 Question ID: 1228410

The handling of the Miller account:

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

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

Question #5 - 6 of 56 Question ID: 1228411

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

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

Question #6 - 6 of 56 Question ID: 1228412

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

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

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

Question #7 of 56 Question ID: 1228372

A) contact industry regulators.

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

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

Question #8 of 56 Question ID: 1228395

B) incorporate a professional conduct evaluation as part of the performance review

C) disseminate the contents of the compliance program to the eight analysts.

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

Question #9 of 56 Question ID: 1228362

A) violated the Standard concerning disclosure of con icts.

B) violated the Standard concerning loyalty to employer.

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

Question #10 of 56 Question ID: 1228381

B) Saul must reject the o er to serve on the Board of Directors.

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

Question #11 of 56 Question ID: 1228388

Sandoval needs to:

C) immediately implement a new compliance system.

According to Standard IV(C), Responsibilities of Supervisors, Sandoval must make reasonable

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

Question #12 of 56 Question ID: 1228376

A) inform her supervisor in writing about the Platinum account.

B) inform her supervisor verbally about the Platinum account.

C) do none of the actions listed here.

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

Question #13 of 56 Question ID: 1228378

B) does nothing with respect to this.

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

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

Question #14 of 56 Question ID: 1228382

Arrangements, she needs to:

B) have her godfather cease doing her taxes.

C) do neither of the actions listed here.

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

A) in violation of Standard IV(A) "Loyalty" recommended procedures for failing to

B) in violation of Standard IV(A) "Loyalty" recommended procedures for failing to

C) not in violation of the Code and Standards.

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

Question #16 of 56 Question ID: 1153587

Janet Thompson, CFA, is employed as an analyst by Nationwide Securities. According to CFA

Institute Standards of Professional Conduct, which of the following statements about

B) making arrangements to go into a competitive business before terminating her