CFA – LEVEL 1

Ethical and Professional Standards

Index

Topics Pg. No.

ETHICS AND TRUST IN THE INVESTMENT PROFESSION 1 - 11

CODE OF ETHICS AND STANDARDS OF PRO-FESSIONALCONDUCT 12 - 26

GUIDENCE I-VII 27 - 167

INTRODUCTION TO THE GLOBAL INVESTMENT PERFORMANCE 168 - 174
STANDARDS (GIPS)
THE GIPS STANDARDS 175 - 185
ADDITIONAL QUESTIONS 186 - 204

SUMMARY AT THE END OF THIS SECTION

ETHICAL AND PROFESSIONAL STANDARDS

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 Ethics and Trust in the Investment Profession

Study Guide
1 Ethics and Trust in the Investment Profession
The investment services market will not always have a specific law or regulatory mandate
applicable to rapidly changing products, services, and situations. In order for investors to trust you
with their money, they must believe that you and your company are reliable based on ethical and
transparent business practices.
Investors must believe that you and your firm will act in their best interests rather than simply
following the “rules” or trying to get around them. Toward that end, the investment industry—and
CFA Institute in particular—has adopted an ethical framework to help describe our role in the
profession.

1.1 An Explanation of Ethics

LOS 1a: Explain ethics.
In modern use, ethics describes a system of principles, beliefs, and values that guide (or society
believes should guide) our behavior. Ethics may refer to the study of ethical principles or may also
refer to the principles themselves.

Principles are fundamental truths that form the basis for a chain of reasoning leading to beliefs about
cause and effect and the way things should and shouldn't be. Beliefs form a system
of values describing goals or ideals that we have decided benefit us as individuals or society as a
whole. Ethical principles develop over time to guide our understanding of required, acceptable, or
exemplary behavior.
Investment industry professionals practice ethical behavior to benefit clients, employers, the
industry, and the investing public (i.e., society). Regulators and others exist to help police capital
markets. These groups are collectively known as stakeholders of the investment industry.

1.2 Communicating Expected Conduct

While societies in general may establish laws designed to promote or require acceptable behavior, a
group within the society may develop a code of ethics to communicate its own values. These groups
may further describe expected member behaviors or implement rules known as standards of conduct.
While standards reflect minimally acceptable behavior based on group values, they often represent
a higher level of acceptable behavior than that required for the general public. This sets the group
apart from the general public in a way often beneficial to its members.
Standards may be grouped into two categories:

1. Rules-based standards—Apply to specific groups in specific circumstances.

2. Principles-based standards—Apply to all members regardless of situation.

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CFA Institute's standards are based on the principles of honesty, integrity, transparency, diligence,
and faithfulness to the client's interests. CFA Institute members and candidates agree to follow its
Code of Ethics and Standards of Professional Conduct (Code and Standards). Together, these make
up the Standards of Practice Handbook. Members and candidates reaffirm their commitment to the
organization's values each year when they renew membership and sign the Professional Conduct
Statement disclosing any potential misconduct with regard to the Code and Standards.

1.3 Defining the Profession through Ethical Conduct

LOS 1b: Describe the role of a code of ethics in defining a profession.
A profession is a group that agrees to a common code of ethics in serving others by using their
specialized knowledge and skills. The profession's code of ethics communicates shared principles
under which members use their specialized skills and experience to benefit others.
Greater assurance of high ethical standards by members of a profession often leads to longer-term
client relationships. While a customer simply purchases goods and services from a provider the
customer may or may not completely trust, a client usually has an ongoing fee-based relationship
with a trusted professional.
As a CFA Institute member or candidate, you are expected to comply with all aspects of the Code
and Standards. Doing so will help ensure that investment professionals act with competency in an
ethical manner that engenders trust.

LOS 1c: Identify challenges to ethical behavior.

Investment management clients may use poor judgment in making investment decisions. In many
cases, these poor decisions are called biases because they put undue weight on a particular part of a
decision. Our behavioral biases as advisors can also lead to poor decision making when working
with clients, especially when faced with ethical choices.
One of the likely reasons for challenges to ethical behavior is the influence of opportunities for
short-term gain. These tend to be weighted more heavily in our decision-making process than the
longer-term risks to our reputation and the integrity of the financial markets.

1.4 Overconfidence Bias

Overconfidence can lead us to believe our ethical treatment of a client is superior relative to the
industry. As a result, decisions may not be fully considered and clients are treated at a less than
desirable standard.

1.5 Situational Influences

Situational influences arise from external rather than internal inputs. Social, cultural, and
environmental factors can impact our behavior and decision making, both positively and
negatively. The challenge is to recognize when these influences weight our ethical scales and result
in unethical actions.
The bystander effect, for example, represents a failure to offer help to someone when others are
nearby and not helping. These same people may act if others act or if they are not with others.
People also tend to bend the rules more often when they believe nobody is looking. People tend to
behave more ethically, however, when a mirror is placed close to them or they believe someone is
watching them.

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Situational influences appear frequently in our interactions with clients and elsewhere in the
investment industry. Large financial awards and prospects for prestige often lead to unethical
behavior. Even the mention of money can reduce the likelihood of ethical behavior.
Loyalty to our employer or team can result in less ethical behavior as we attempt to fit in rather
than rise above potential ethical violations. A good example of this might be when local financial
advisors encourage you to follow local law rather than the greater burdens imposed by the Code
and Standards. This social pressure can be a bigger motivator for ethical lapses than the potential
for large financial gains.

A strong compliance culture can become a situational influence if ensuring compliance becomes the
focus rather than considering the larger picture of potential ethical violations. An organization may
be so focused on being in compliance on a project that it fails to see the project itself is unethical.
These are cases where a strong compliance mandate results in leaders asking, “What can I do?”
rather than “What should I do?”

LOS 1d: Describe the need for high ethical standards in the investment industry.
Capital markets provide a mechanism for matching those who provide capital (i.e., investors) with
those who use capital (i.e., borrowers). Borrowers have various projects, each with a specific
projected return and risk of that return being realized. Investors have specific required returns, risk
tolerance, time horizon, and other considerations that serve as parameters for their investments.
Broad participation in the financial system is necessary to attract the level of capital required to
optimize current levels of economic activity as well as to provide infrastructure for future growth.
In order to achieve broad participation, capital markets must engender trust among both investors
and borrowers (i.e., market participants).
Borrowers trust that capital will be delivered as agreed; investors trust that their risk, return, and
other constraints will be met. Without this trust, capital will not flow smoothly, and results for the
economy will be suboptimal.

1.6 The Ethical Basis of Trust

Three types of trust specific to the financial system and requiring high ethical standards by capital
markets are: (1) the client-advisor relationship, (2) information and knowledge asymmetries, and (3)
intangibility of investment products and services.

1.6.1 Client-Advisor Relationships

Maintaining and growing financial assets is a chief concern among most investors. Clients depend
on their financial advisors to take care of their assets. A financial firm's failure to take care of client
assets will lead to loss of confidence and trust, and ultimately a loss of clients for the firm.

1.6.2 Information and Knowledge Asymmetries

Closely related to client-advisor relationships is the need to trust that advisors will not misuse their
superior information and knowledge in the relationship. Having better information and greater
knowledge creates an advantage. Clients must trust that advisors will use their information and
knowledge advantage in the clients' best interest.

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1.6.3 Intangibility of Investment Products and Services
Companies typically produce something that can be seen, felt, heard, or otherwise experienced with
the senses. Investment products and services, however, are intangible goods that cannot be directly
experienced with the senses. Investors cannot hold their investment assets in their hand or hear
them perform as they can a cellular phone.

In fact, clients experience the quality of investment advice only as the numbers on a financial
statement. Investors must rely on what their advisors have told them about an investment and its
performance rather than experiencing it firsthand as they would with a tangible asset. Investors
must trust that the information they receive—before and after the investment—is accurate,
complete, and fair.

Ethical investment advice and reporting represent one aspect of enabling successful market
outcomes and thereby encourage the broadest possible investor participation.

1.7 Costs of Unethical Behavior in Capital Markets

Unethical capital market operators will soon attract regulatory scrutiny in most jurisdictions. This
will lead to increased compliance costs, legal fees, and possible penalties. In addition, the firm's
reputation of trustworthiness will diminish and the firm could lose massive amounts of assets
under management (AUM) on which it receives fee-based compensation.
Capital markets in general can suffer from the diminished reputation of its participants. As
investors struggle to determine whether their advisor is more or less reliable than its untrustworthy
competitor, they may demand greater return to compensate for the additional perceived risk.
A higher required return can lead to lower investment and levels of economic activity, and the
advisor labor force may be reduced as firms struggle to compete. Firms unconnected with the
unethical behavior may even have to close their doors, further extending the economic
consequences.

Investment advisors personally connected with the unethical behavior can lose their reputations,
suffer diminished income, and even lose their jobs. In some cases, the firm will be punished with
civil penalties and those individuals involved will be punished with criminal penalties.

LOS 1e: Distinguish between ethical and legal standards.

In some cases, laws are designed to reinforce behavior deemed ethical by society. Sometimes,
however, the benefit of having a law depends on a particular stakeholder's point of view. A public
protest, for example, may be illegal on one hand because it can block traffic and can lead to bodily
injury. On the other hand, it may be ethical because it allows freedom of expression to air
grievances and possibly incentivize better solutions.
The same types of situations occur in the investment industry. There may be cases where keeping
information secret benefits capital market participants but is against the law. As an extreme
example, a public company failing to disclose damaging financial information could be violating the
law, but may prevent a financial collapse.

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In unique cases, American jurisprudence will attempt a judgment in equity if a judgment in law
would lead to an inequitable result. The types of legal versus ethical outcomes appear in Figure 1.1.

Figure 1.1 Legal versus Ethical Outcomes

Ethical behavior, however, often exceeds the requirements presented by laws and regulations.
Consider the case of doctors who agree to lower prices charged to low-income health care
recipients. In general, price fixing is illegal when it is higher than market rates. Should colluding
to decrease prices also be considered illegal? Perhaps it should not be considered illegal when it is
ethical (i.e., satisfies ethical principles). As an additional benefit to society, ethical behavior creates a
more immediate solution that seldom encounters legislative/regulatory process lags.
Generally, and at least theoretically, laws apply equally to all persons in the jurisdiction whereas
ethical behavior applies only from the perspective of the group establishing the ethical framework.
In some cases, ethical behavior can lead to worse outcomes—at least in the short term—for those
choosing ethical behavior over legal behavior. A law prohibiting activities in one jurisdiction may
also cause bad actors to “jurisdiction shop” for a place where they can continue their activity.
In the end, ethically sound decisions are almost always better than law from an equity standpoint,
but almost always require good judgment and active consideration of stakeholders' interests from

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the stakeholder perspective. Everyone can know the law but may not reach the same ethical
conclusions.
LOS 1f: Describe and apply a framework for ethical decision making.

A code of ethics should set the tone for ethical decision making within an organization, but senior
executive behavior provides important cues that reinforce an ethical or unethical culture. Therefore,
senior management must demonstrate integrity in their actions in order for the entire organization
to follow the code of ethics.
A framework for ethical decision making should consider the effect of a decision on stakeholders,
not only in the short term but in the longer term. Such a framework not only helps the decision
maker reach an ethical decision, but makes it easier to justify a decision to the broader group not
directly affected, but perhaps indirectly affected.
Table 1.1 describes a very simple decision-making framework that can be applied to ethical
decisions.

Table 1.1 Steps in Making Ethical Decisions

1. Identify—Facts of the situation, ethical/legal obligations to stakeholders, and potential conflicts
of interest.
2. Consider—Potential alternatives, situational influences, and guidance external to the situation.
3. Decide and act.
4. Reflect—Why or why didn't the decision yield the expected result?

The important part is not names for the steps, but that this is a process with multiple pieces, each
with multiple potential outcomes that must be considered.

1.8 Stage 1: Identify

Stage 1 requires identifying any relevant facts specific to the situation and potential conflicts of
interest among stakeholders that are sensitive and perhaps difficult to reconcile. In general,
stakeholders within the investment industry include:
 Clients and the investing public (i.e., investors and/or borrowers)
 Members and candidates and their employers (i.e., intermediaries)
 Legal and regulatory authorities
 Society in general

Once the stakeholders have been identified, it will be necessary to identify the ethical duties owed
to each under the Code and Standards.

1.9 Stage 2: Consider

The second stage considers alternative decisions and the potential outcomes. Outcomes may not be
optimal for all stakeholders, so potential conflicts of interest arise and the consequences of
stakeholder dissatisfaction should be considered. This may require going back to an identification
stage, but the decision-making process could involve skipping steps, returning to previous steps,
and so forth in an iterative process.

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At this stage, you should consider seeking guidance from those not affected by the same situational
influences and other biases. External guidance may come from:
 CFA Institute Code and Standards
 Company policies
 Family members
 Mentors
 Your company compliance department
 Outside legal counsel

It is important, however, not to engage in unethical or illegal behavior in seeking guidance. In most
cases, it will be necessary to consider information safety requirements such as internal rules and
procedures, legal and regulatory constraints on information sharing, and the Code and Standards.

1.10 Stages 3 and 4: Decide, Act, and Reflect

Once you have made and implemented the decision, you should reflect on whether the outcome
met your expectations or there were unintended outcomes or tangential consequences. This is a
critical decision-making step because it informs future decisions and the degree to which you may
need to rely on external guidance to make better decisions.
All the consequences of a decision may not be immediately apparent shortly after implementation.
Decision makers should revisit their decisions periodically to determine the longer-term
consequences that may have developed.

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 KEY CONCEPTS

LOS 1.a
Ethical behavior is that which conforms to set of rules and moral principles based on shared beliefs
about what behavior is acceptable and what behavior is unaccepatable.

LOS 1. b
A professional code of ethics is a way for a profession to communicate to the public that its
members will use their knowledge and skills to serve their clients in an honest and ethical manner,
and can increase public confidence and trust that members will act ethically.

LOS 1 .c
Challenges to ethical behavior overestimating one's own ethical character, considering only near
term consequences and not longer term consequence of behavior, and letting situational (external)
influence, such as peer pressure, unduly affect one's decisions and behavior.

LOS 1.d
Investment professionals have a special responsibility to use their specialized knowledge and skills
to both protest and grow client assets. The fact that investment management is an intangible
product makes high ethical standards all the important in the financial services profession.

LOS 1.e
Not all unethical actions are illegal and not all illegal actions are unethical. Laws are more specific
than ethical principle and often address prior unethical behavior. Ethical behavior requires more
judgment acts such as civil disobedience may be considered ethical even when they are illegal.

LOC 1.f
A framework for ethical decision making is designed to lead to better decisions by identifying the
stakeholders affected and the conflicts of interest among them, considering alternative actions and
the relevant situational influence on decision makers, seeking out different perspectives, and
evaluating decisions to see if they had unintended consequences.

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 PRACTICE QUESTIONS

1. Ethics is least likely :

A. the study of acceptable and unacceptable behavior.
B. the careful following of all laws and regulations.
C. a set of moral principles to guide bnehavior.

2. A code of ethics :
A. is a personal view of acceptable behavior
B. encompasses current "best practices".
C. specifics a minimum level of acceptable conduct.

3. A professional code of conduct :

A. can increase public trust in the profession
B. guarantees that members will adhere to a minimum level of ethical conduct.
C. include standards that provide guidance for specific behavior.

4. Situational factors that influence ethical behavior are least likely to include :
A. a social pressure
B. large financial rewards.
C. a track of ethical principle.

5. Compared to complying with laws and regulations complying with a code of ethics :
A. is considered a lower standard
B. often involves more judgment.
C. includes compliance with all laws and regulations.

6. Employing a framework for decision making that include the ethical aspects of the decision is
most likely to :
A. lead to higher profits.
B. avoid any unintended ethical consequences of decisions.
C. balance the increases of various stakeholders.

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 ANSWERS
1. ANSWER :B
Simply following all laws and regulations is not as high a standard as ethical behavior. Ethical
principle typically involve more judgment than laws or regulations.

2. ANSWER : C
A code of ethics specifies a minimum level of acceptable conduct for a group or organization,
whereas "best practices" are suggested behavior, not a minimum acceptable level.

3. ANSWER : A
A professional code of conduct communicates to the public that members have promised to
uphold a minimum level of ethical conduct when acting for clients. 'This is no guarantee that all
members will follow the code at all times. A code of conduct may include specific standards of
behavior or only state principles of conduct without specific standards or guidance.

4. ANSWER: C
Situational factors are those external to the decision makers, such as financial towards and
desires to please co-workers or others. Researches have found the external factors are often
more likely than a lack of personal ethics to lead to poor ethical decisions.

5. ANSWER : B
A code of ethics is considered a higher standard of behavior as it goes beyond simply legality of
behavior. Compliance with the ethical principles of a code of ethics often requires judgment in
balancing the interests of various stakeholders and consideration of short-term effects with
longer-term effects of decisions. Some behavior that is illegal, such as civil disobedience or
"whistle-blowing" is considered to be ethical behavior by many.

6. ANSWER : C
A decision -making framework that includes the ethical aspects of the decisions is should
consider the conflicts among the interests of various stakeholders so that decision makers can
use the company's stated ethical principles and their judgment to balance these interests in an
ethical manner. Profit maximization, at least in the short term, does not necessarily follow from
sound ethical judgment. While integrating ethics into the decision- making process can consider
and reduce unintended ethical consequences of a decision, avoiding them altogether can never
be assured.

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ETHICAL AND PROFESSIONAL STANDARDS

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 LOS: 1.b Six components of the Code of Ethics and the seven Standards of
Professional Conduct;

State the six components of the Code of Ethics.

1. Act with integrity, competence, diligence, respect, and in an ethical manner.
2. Place the integrity of the profession and the interest of clients above your own interests.
3. Use reasonable care and exercise independent judgment
4. Encourage others to practice in a professional and ethical manner.
5. Promote the integrity of the capital markets.
6. Maintain and improve your professional competence.

State the seven Standards of Professional Conduct.

I. Professionalism
II. Integrity of Capital Market
III. Duties of Clients
IV. Duties to Employers
V. Investment Analysis, Recommendations, and Action
VI. Conflicts of Interest
VII. Responsibilities as CFA Institute Members or CFA Candidates
Standard I.A. Knowledge of the Law
Standards
Members and candidate must understand and comply with all applicable laws, rules, and regulations (including
the CFA Institute Code of Ethics and Standard of Professional Conduct) of any government, regulatory organi-
zation, licensing agency, or professional association governing their professional activities. Members and candi-
dates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or
regulations.
Guidance
 You are responsible to have an understanding of the laws and regulations as they apply to the countries in which you
do business.
 When applicable laws, regulations, and the Standards are in conflict, the more strict standard applies.
 You must not knowingly assist in violating the laws or Standards.
 You must disassociate from activities that violate the law or Standards, up to and including resignation.
Question
Jan and Bill are members working for a firm based in the country of Home, doing business in Local nation. Lo-
cal’s law is less strict than both Home’s securities laws and the Code and Standards. Home law prohibits man-
agers from participating in any IPO’s, but states the jurisdiction of the transaction applies. Jan tells Bill about an
oversubscribed IPO in Local, which Bill subsequently purchases for himself without telling Jan. Was there a

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violation of the Standards and what is the best course of action?

Application
Since Local’s law applies, the more strict standard would be the Code and Standards.
Bill violated Standards I(A) and VI(B) by purchasing the IPO.
Jan did not violate the Standard because she did not knowingly assist Bill in committing the violation. Jan
should disassociate from the activity but is under no obligation to report Bill.

NS: country with no securities laws or regulations

LS: country with less strict securities laws and regulations than the Code
and Standards

MS: country with more strict securities laws and regulations than the Code
and Standards

Applicable Law Duties Explanation

Member resides in NS country, does Member must Because applicable law is less strict than the
business in LS country; LS law ap- adhere to the Code and Standards, the member must adhere to
plies. Code and Stan- the Code and Standards.
dards.

Member resides in NS country, does Member must Because applicable law is stricter than the Code
business in MS country; MS law ap- adhere to the law and Standards, member must adhere to the more
plies. of MS country. strict applicable law.

Member resides in LS country, does Member must Because applicable law is less strict than the
business in NS country; LS law ap- adhere to the Code and Standards, member must adhere to the
plies. Code and Stan- Code and Standards.
dards.

Member resides in LS country, does Member must Because applicable law is stricter than the Code
business in MS country; MS law ap- adhere to the law and Standards, member must adhere to the more
plies. of MS country. strict applicable law.

Member resides in LS country, does Member must Because applicable law states that the law of the
business in NS country; LS law ap- adhere to the locality where the business is conducted governs
plies, but it states that law of locality Code and Stan- and there is no local law, the member must ad-
where business is conducted gov- dards. here to the Code and Standards.
erns.

Member resides in LS country, does Member must Because applicable law of the locality where the
business in MS country; LS law ap- adhere to the law business is conducted governs and local law is
plies, but it states that law of locality of MS country. stricter than the Code and Standards, member
where business is conducted gov-

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erns. must adhere to the more strict applicable law.

Member resides in MS country, does Member must Because applicable law is stricter than the Code
business in LS country; MS law ap- adhere to the law and Standards, member must adhere to the more
plies. of MS country. strict applicable law.

Member resides in MS country, does Member must Because applicable law states that the law of the
business in LS country; MS law ap- adhere to the locality where the business is conducted governs
plies, but it states that law of locality Code and Stan- and local law is less strict than the Code and
where business is conducted gov- dards. Standards, member must adhere to the Code and
erns. Standards.

Member resides in MS country, does Member must Because applicable law states that the law of the
business in LS country with a client adhere to the client’s home country governs (which is less strict
who is a citizen of LS country; MS Code and Stan- than the Code and Standards), member must ad-
law applies, but it states that the law dards. here to the Code and Standards.
of the client’s home country governs.

Member resides in MS country, does
business in LS country with a client
who is a citizen of MS country; MS
law applies, but it states that the law
of the client’s home country governs.
Member must Because applicable law states that the law of the
adhere to the law client’s home country governs and the law of the
of MS country. client’s home country is stricter than the Code and
Standards, the member must adhere to the more
strict applicable law.

Standard I.B. Independence and Objectivity

Standards
Members and candidates must use reasonable care and judgment to achieve and maintain independence and
objectivity in their professional activities. Members and candidates must not offer, solicit, or accept any gift,
benefit, compensation, or consideration that could be reasonably expected to compromise their own or an-
other ’s independence and objectivity.
Guidance
 Gifts from clients may be distinguished from gifts from target firms. However, care should be taken to avoid
favoring one client to the detriment of others.
 Members and candidates are personally responsible for maintaining their independence and objectivity.
 Employers should foster an environment that encourages independence and objectivity. Issuer- paid re-
search raises particular issues of objectivity.
Question
Heydon Tong, a mining analyst with Quickflip Securities, planned a tour of some mining sites in the Austral-
asian Region by using the subject company for flights to the more remote sites. Tong also slept in company
facilities since no others were available. The company would not accept his offer to pay for the flights or the
accommodation.
Application
Members and Candidates must always use their judgment to avoid compromising their independence and

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objectivity. In this case, Tong did not violate the Standard because only chartered flights were available and
there were no other accommodations at which Tong could have stayed.

Standard I.C. Misrepresentation

Standards
Members and candidates must not knowingly make any misrepresentations relating to investment analysis, rec-
ommendations, actions, or other professional activities.
Guidance
 “Misrepresentations” are untrue statements, omissions, or false or misleading statements with regard to in-
vestments, recommendations, or credentials.
 Guarantees about investment performance must be avoided unless an actual guarantee is in place, qualified by
any caveats.
 Plagiarism must be avoided by citing the source of all material or ideas borrowed from others, including
third-party research.
Question
Marketing material for Duntime Securities stated that all the members of the research department were CFA
charterholders. There were several junior analysts and assistance who were not CFA charterholders or en-
rolled in the program. The CEO realized that this was an oversight but let the material be distributed because
all senior analysts had the CFA designation.
Application
This is a violation of the Standard since it is a false and misleading statement. Although not directly responsible
for the misrepresentation, all of the senior members of the research department would be in violation of the
Standard if they were aware of, but did not act to remedy, the oversight.

Standard I.D. Misconduct

Standards
Members and candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or
commit any fact that reflects adversely on their professional reputation, integrity, and competence.
Guidance
 Be aware of conduct that may compromise the ability to competently undertake responsibilities, such as
abusing alcohol during business hours.
 Personal bankruptcy does not constitute a violation unless it involves fraud.
 This Standard recognizes members’ rights to engage in acts of civil disobedience as a means of social pro-
test. Such acts do not constitute violations of the Standards.
Question
I an Costalott, a CFA candidate, recently submitted a reimbursement request from a sales trip in which he in-
flated his expenses to cover the cost of two new business suits. This was not the first time he had done this, so
he believed that it would go undetected.
Application
Costalott violated the Standard since he was dishonest in reporting his expenses. Once discovered, the mis-
conduct would reflect poorly on his honesty, would call into question his professional conduct, and could reflect

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negatively on the profession.

Standard II.A. Material Nonpublic Information

Standards
Members and candidates who possess material non-public information that could affect the value of an invest-
ment must not act or cause others to act on the information.
Guidance
 Material includes information that affects the price of the stock.
 Nonpublic means not yet disseminated to the public.
 The Mosaic Theory, combining immaterial nonpublic information with public information to draw conclusions,
is permissible, but all records should be maintained.
 Firms should institute policies that limit access to sensitive information and restrict trading when the firm is in
possession of inside information.
Question
RonMoneybags, an investment banker with a major brokerage firm, was overheard talking with the head of trad-
ing by many traders and institutional brokers from his firm about the likelihood of a large secondary offering by
ABC Company, a long- standing client of the firm. During the discussion, many of the traders and salespeople
phoned clients to inform them of the upcoming issue and they started selling the stock in advance of the an-
nouncement.
Application
Ron violated the Standard because he failed to prevent the improper dissemination of material non-public in-
formation and its use by the firm’s employees. Firms should adopt a “fire-wall” and have a strict policy on how
may have access to such information and how it is to be appropriately handled by the firm’s employees. The
employees who traded on this information are also in violation are also in violation of the standard.

Standard II.B. Market Manipulation

Standards
Members and candidates must not engage in practices that distort prices or artificially inflate trading volume
with the intent to mislead market participants.
Guidance
 Market manipulation includes transactions that are intended to deceived market participants or the dissemi-
nation of false or misleading information.
 Placing orders intended to distort the volume, price, or volatility of a security is a violation of this standard.
 Spreading rumors or “pump and dump” practices are also violations of this Standard.
Question
In an effort to improve quarterly performance, Jimmy Runnup places several orders at the close of the last trad-
ing day of the quarter to inflate the closing prices of his largest holdings, thus improving his performance re-
sults.
Application
Jimmy is in violation of the Standard by purposely inflating the closing prices of his largest holdings in order to
improve his quarterly numbers. This practice also violates laws in many jurisdictions and, if discovered, could
result in criminal prosecution.

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Standard III.A. Loyalty, Prudence and Care
Standards
Members and candidates have a duty of loyalty to their clients and must act with reasonable care and exercise
prudent judgment. Members and candidates must act for the benefit of their clients and place their clients’ in-
terests before their own interests. In relationship with clients, members and candidates must determine applica-
ble fiduciary duty and must comply with such duty to persons and interests to whom it is owed.
Guidance
 Members must identify the ultimate beneficiary to whom the fiduciary duty is owed.
 Prudence applies the standard of a reasonable and informed person. Investment decisions will be judged in
the context of the entire portfolio.
 Members must abide by the client guidelines or portfolio documents when managing a portfolio.
 Proxy voting and soft dollar arrangements are covered under this Standard.
Question
Janet Turnem manages the majority of her firm’s discretionary accounts. Though the portfolios do not trade fre-
quently, her firm recently entered into a soft dollar arrangement in order to receive an extensive software appli-
cation that plays an integral role in determining asset allocation for the firm’s clients. However, she has been in-
formed that year- to-date trading has not been sufficient to cover the costs. She then trades in her larger ac-
counts more than usual in order to make up the difference.
Application
Turnem has violated the Standard because she is client assets (brokerage) to her firm’s benefit. While the program
is within guidelines of soft dollar arrangements and does benefit the clients, she has purposely traded the accounts
beyond normal parameters in order that her firm will meet the minimum commission levels to cover the cost of the
software program.

Standard III.B. Fair Dealing

Standards
Members and candidates must deal fairly and objectively with all clients and prospective clients when providing
investment analysis, making investment recommendations, taking investment action, or engaging in other profes-
sional activities.
Guidance
 “Fairly” does not mean “equally.” Recommendations should be disseminated to all clients with interest and
suitability as close to simultaneously as is practical and with enough time to act on it.
 Clients who submit transactions prior to the dissemination of a changed recommendation should be in-
formed of the change before accepting the order.
 Oversubscribed issues should be awarded on a pro rata basis.
Question
Abby Gail always calls her largest clients after her firm has disseminated investment recommendations elec-
tronically to all the firm’s clients to discuss in more detail. These clients pay a premium fee structure for the addi-
tional attention.

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Application
Abby is not in violation since clients have been treated fairly given that the information has been disseminated
prior to her call. She would be in violation if she called preferred status clients prior to the release of the informa-
tion. Providing additional services to clients paying premium prices is consistent with the spirit of his Standard.

Standard III.C.1. Suitability

Standards
When members and candidates are in an advisory relationship with a client or prospective client, they must:
 Make a reasonable inquiry into a client ’s experience, objectives, and constraints prior to making any rec-
ommendation or taking action.
 Determine that an investment is suitable to the client ’s financial situation and consistent with the client ’s writ-
ten objectives and constraints.
 Judge the suitability of investments in the context of the client ’s total portfolio.
Guidance
 Managers should refuse unsolicited trades if they are not within the guidelines agreed to in advance, or
require the client to affirm that suitability is not a consideration.
 A written Investment Policy Statement (IPS) should incorporate all client information and attempt to appro-
priately gauge risk tolerance, return objectives, and investment constraints. The IPS should be updated at
least annually.
Question
John Newcomer recently took over several new accounts that did not have any of clients’ investment objectives
in the file. Cash constituted a significant portion of the portfolios, and they were significantly underweight in
domestic equities. Rather than investing in equities, John invested the cash in Treasury Bills and made an ap-
pointment with the clients to update their files.
Application
The Standard requires members and candidates to make proper inquiries regarding client objectives and con-
straints before taking investment action. While the accounts may underweight domestic equities, Newcomer
must wait until he can properly ascertain investor objectives and constraints before rebalancing the accounts.

Standard III.C.2. Suitability

Standards
When members and candidates are responsible for managing a portfolio to a specific mandate, strategy, or
style, they must only make investment recommendations or take investment actions that are consistent with the
stated objectives and constraints of the portfolio.
Guidance
 Information must be gathered at the inception of the relationship.
 Members should update information at least annually.
 Most portfolios, especially those in which a fiduciary responsibility exists, benefit from reasonable diversifica-
tion.
 Index funds must be managed to their mandate; members who manage such funds are not responsible for
determining the suitability of investors participating in the funds.

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Standard III.D. Performance Presentation
Standards
When communicating investment performance information, members and candidates must make reasonable
efforts to ensure that it is fair, accurate, and complete.
Guidance
 This Standard encourages full disclosure of investment performance data to clients and prospects.
 This Standard prohibits misrepresentation of past performance or unreasonable guarantee of future per-
formance.
 Members should encourage their firms to adhere to Global Investment Performance Standards (GIPS),
which are voluntary.
Question
Taylor Blynd claimed in a presentation that her performance complied with Global Investment Performance
Standards, with the exception that terminated accounts from 6 years ago were not included. This was the only
exception.
Application
Taylor cannot claim compliance because there are no exceptions to the Global Investment Presentation Stan-
dards; you are either compliant or non-compliant.
Standard III.E. Preservation of Confidentiality
Standards
Members and candidates must keep information about current, former, and prospective clients confidential
unless:
1. The information concerns illegal activities on the part of the client;
2. Disclosure is required by law; or
3. The client or prospective client permits disclosure of the information.
Guidance
 When in doubt about confidentiality, members and candidates should consult with their employer ’s compli-
ance personnel or outside counsel.
 Members and candidates are expected to provide confidential information if required by appropriate legal
authority, and to facilitate CFA Institute’s Professional Conduct Program investigation.
Question
Liam Dunn, portfolio manger at Wealth Advisors, knows that one of her accounts is interested in donating a sig-
nificant amount to a charity. As trustee of Give Children Hope, Dunn sends client some information on the char-
ity and a brief note describing her involvement.
Application
Dunn is not in violation of Standard III(E) since she did not disclose the information to anyone else. She pro-
vided some information about the charity based on the client ’s wishes and did not misuse her position or
knowledge since she had only provided information about the charity.

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Standard IV.A. Loyalty
Standards
In matters related to their employment, members and candidates must act for the benefit of their employer
and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or
otherwise cause harm to their employer.
Guidance
 Members must protect the interest of their employer, but always place the interest of their clients above their
firm’s.
 Members may engage in competitive activities with the prior consent of their employer.
 Members may make preparations for leaving their employer on their own time while still employed, but they
must not misappropriate any company property.
Question
Robert John plans to establish his own investment management firm and starts the planning while still working
for his present employer. After he informs his employer of intentions to leave, he calls his largest accounts and
tells them of his pending departure.
Application
John is in violation of the Standard. While members may make arrangements or preparations to enter a com-
petitive business before terminating the existing relationship, they are not allowed to solicit clients while still em-
ployed. Robert is also prohibited from taking any client records without permissions from his employer.

Standard IV.B. Additional Compensation

Standards
Members and candidates must not accept gifts, benefits, compensation, or consideration that competes with, or
might reasonably be expected to create a conflict of interest with, their employer ’s interest unless they obtain
written consent from all parties involved.
Guidance
 “Written consent ” includes any form that can be documented, including email.
 Compensation could be either direct (cash) or indirect (gifts or benefits).
Question
One of Penny Wise’s clients has offered a performance bonus of $4,000 if she outperforms the portfolio benchmark
two years in a row. She accepted this offer based on a conversation she had with a fellow portfolio manager who
had similar performance arrangements with other clients and intends to inform her supervisor when and if she ac-
tually earns the bonus.
Application
Wise is in violation of the Standard because she must obtain written consent from her employer prior to accept-
ing the offer. Her acceptance was based on a conversation with a fellow employee rather than written approval
from her firm.

Standard IV.C. Responsibilities of Supervisors

Standards
Members and candidates must make reasonable efforts to detect and prevent violations of applicable laws,

Page 21 of 204
rules, regulations, and the Code and Standards by anyone subject to their supervision or authority.
Guidance
 Delegation of supervisory responsibility does not relieve the member ’s burden, but shares it with the per-
son to whom supervisory responsibility is delegated.
 Members that adopt reasonable procedures and attempted to enforce them may not be in violation if mis-
deeds still occur.
 Members should decline to accept supervisory responsibility if no or inadequate procedures are in place.
 Investigations must be prompt, through, and detailed.
Question
A subordinate informs Martin Stewart that one of his direct reports, Tommy Hilfarber, may be churning accounts
to increase his commissions. Stewart Thinks the accusation may be credible, but because the firm’s compliance
officer is on vacation for three weeks, Stewart decides not to address the issue until the compliance officer ’s
return.
Application
Stewart is in violation of the Standard. Once a violation is suspected, a supervisor must respond promptly, con-
duct a thorough investigation to determine the scope of the violation, and take action to prevent further viola-
tions from occurring. If a firm investigation must wait for the compliance officer ’s return, Stewart should restrict
Hilfarber ’s duties until that time.

Standard V.A. Diligence and Reasonable Basis

Standards
Members and candidates must:
1. Exercise diligence, independence, and thoroughness in analyzing investments, making investment recom-
mendations, and taking investment actions.
2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any in-
vestment analysis, recommendation, or action.
Guidance
 Members must make reasonable efforts to address all relevant issues when making recommendation and
should support the research by offering to provide supporting information to clients.
 Members may rely on second or third-party research that is approved by their firms unless they have rea-
son to suspect it is unsound.
 Though members may not agree with a “team” decision, they do not have to dissociate from it, but they
should document their dissenting opinion.
Question
Glenn Date is going to open a small investment management boutique and will make his investment decision
based on a newsletter service he saw advertised in a local business journal.
Application
Dale can rely on third-party research but must make reasonable and diligent efforts to determine whether the
research process is sound. Given that this decision was based on an advertisement with no due diligence, he
is most likely in violation of the Standard if he does no further due diligence.

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Standard V.B. Communication with Clients and Prospective
Standards
Members and Candidates must:
1. Disclose to clients and prospective clients the basic format and general principals of the investment proc-
esses used to analyze investments, select securities, and construct portfolios and must promptly disclose
any changes that might materially affect those processes.
2. Use reasonable judgment in identifying which factors are important to their investment analysis, recommen-
dations, or actions and include those factors in communications with clients and prospective clients.
3. Distinguish between fact and opinion in the presentation of investment analysis and recommendations.
Guidance
 Any change to a basic decision-making process, the construction of portfolios, or types of investments under
consideration must be disseminated to clients and prospects immediately.
 Members must outline relevant facts, including known limitations of the analysis, in sufficient detail that would
allow a client to challenge the conclusions.
 In research reports, members must clearly distinguish fact from opinion and describe the basic character-
istics of the investment.
Question
Wenthru Capital decided to change their focus (style) to dividend-paying stocks after a sudden decline in the
growth-stock sector. They changed their marketing materials to reflect this change and the portfolio managers
slowly changed existing portfolios over to the new strategy. Clients who noticed the change were told of the new
format.
Application
Wenthru Capital’s portfolio managers and others are in violation of the Standard because they did not inform
existing clients immediately of any change to the investment process or types of securities selected.

Standard V.C. Record Retention

Standards
Members and candidates must develop and maintain appropriate records to support their investment analysis,
recommendations, actions, and other investment-related communications with clients and prospective clients.
Guidance
 Records can be maintained either in hard copy or electronic form.
 The role of the member or candidate in the decision-making process determines the nature of records to be
maintained.
 In the absence of specific regulation, CFA Institute suggests maintaining records for at least seven years.
Question
Ian Main has decided to start his own investment management company. In his new marketing brochure, he pro-
vides his 10-year performance record, which includes eight years with his former employer. During five of those
eight years, he was part of a team that managed several portfolios. The split from his former employer was not an
amicable one, so he has none of the supporting documentation. However, he is confident in his recollection of the
numbers.

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Application
Given that Ian is unable to obtain past records, he is prohibited by the Standards from using his past investment
performance. Further, given that he was part of a team, rather than being the sole decision maker, he should not
portray his past results as his own.

Standard VI.A. Disclosure of Conflicts

Standards
Members and candidates must make full and fair disclosure of all matters that could reasonably be expected to
impair their independence and objectivity or interfere with respective duties to their clients, prospective clients,
and their employer. Members and candidates must ensure that such disclosures are prominent, are delivered in
plain language, and communicate the relevant information effectively.
Guidance
 Conflicts of interest should be promptly disclosed.
 Types of conflict could be directorships, investment banking relationships, personal/corporate ownership, or
power to dispose of security.
 The mere appearance of a conflict may create problems and therefore full disclosure should be provided.
Question
Aude Daz is an analyst at First Banker Investment Company and in his work he covers XYZ Corporation. XYZ has
asked Daz to sit on their board, which is not against his company’s policy as long as it is cleared with the need of
research. Daz joins the board and maintains a BUY rating on the company without disclosing her new position as a
board member..
Application
An analyst must disclose all conflicts to the firm and to their clients. Daz violates the Standard because she has
not disclosed the conflict to her clients or the public through her research report.

Standard VI.B. Priority of Transactions

Standards
Investment transactions for clients and employers must have priority over investment transactions in which a
member or candidate is the beneficial owner.
Guidance
 Members must place the interests of their clients before their own and their employer ’s.
 Members must place their employer ’s interests before their own.
 Family accounts that are client accounts should be treated like any other client account; no better, no worse.
 A beneficial interest is one in which the member or his immediate family has a financial interest in.
Question
Ginny Martini manages a fee-paying retirement account for her grandparents. Over the past year, several attrac-
tive secondary offerings have become available to Ginny for investment on behalf of her clients. Whenever an
issue is oversubscribed, Ginny first allocates shares to her other clients and only purchases for her grandpar-
ents account after other client orders are filled. Ginny considers this to be the most conservative ethical practice.
Application
Ginny violates the Standard by disadvantaging her family relative to other firm accounts. If her firm has pre-
clearance requirements and Ginny has a beneficial ownership in her grandparents’ account, she may be re-
quired to pre-clear and report any trades. However, family accounts that are also client accounts should be nei-

Page 24 of 204
ther advantaged nor disadvantaged. Ginny should have allocated shares to her grandparents’ account on the
same basis as the others.

Standard VI.C. Referral Fees

Standards
Members and candidates must disclose to their employer, clients, and prospective clients, as appropriate, any
compensation, consideration, or benefit received from, or paid to, others for the recommendation of products or
services.
Guidance
 The referral arrangement must be disclosed before entry into a formal agreement for services.
 Consideration or benefits may include performance bonus, soft dollar, flat fee, one time or continuing benefit ar-
rangement.
 Disclosure must be maid for all considerations whether paid in cash or in kind.
Question
Nick Nelson recently opened a account with Standard Investment based solely on his accountant ’s recommen-
dation. Fiona Smith, the portfolio manager, has a referral arrangement with Nick’s accountant where the ac-
countant is paid $100 flat free for every referral. Fiona did not inform Nelson of the referral arrangement she had
with the accountant until after the account had been set up.
Application
Smith is in violation of the Standard, which required her to inform prospective clients of the arrangements prior
to making any formal agreement. Further, she must disclose the relationship in detail.
Standard VII.A. Conduct as Members and Candidates in the CFA Program
Standards
Members and candidate must not engaged in any conduct that compromises the reputation or integrity of CFA
Institute or CFA designation or the integrity, validity, or security of the CFA examinations.
Guidance
 Any action that would undermine public confidents in the achievement of the CFA designation would be a
violation of the Standard.
 This Standard does not prohibit or discourage members from voicing dissenting options about CFA Institute
policies, procedures, or advocacy positions.
Question
After the morning portion of her level II CFA exam in Amsterdam, Jenny White phones her friend in Los Angeles
to discuss the exam. The friend will bee taking the exam hours later..
Application
Jenny and her friend have violated the Standard. Jenny has given her friend an unfair advantage, their by com-
promising the integrity of the CFA examination process since she is telling specific details of the current exam to
potential candidates.
When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA pro-
gram, members and candidates must not misrepresent or exaggerate the meaning or implications of member-
ship in CFA Institute, holding the CFA designation, or candidacy in the CFA program.
Guidance
 Describe the rigors of the exam in a brief and dignified manner.

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 Never over-promise competency or future investments results.
 You may indicate that you passed an exam on the “first try”.
 No partial designation (i.e., CFA level II), or estimated completion date.
 The reference “CFA” and “Chartered Financial Analyst” should never be used as a noun ( e.g., she is a CFA
Charterholder…NOT:She is a CFA).

Standard VII.B. Reference to CFA Institute, the CFA designation, and the CFA Program
Question
On a recent marketing trip, Adrian Choo described the rigorousness of the CFA examination process and that
the firm’s entire research staff are “CFAs”. Choo further stated that the firm’s CFAs passed on their first attempt.
Application
Adrian violates the Standard when he claims superior performance related to the entire research staff holding the
CFA designation. He also refer to them improperly as “CFAs”, because “CFA” may only be used as an adjectives
and not a noun.
Referencing the fact that all the charterholders past on the first attempt is not in it self a violation, as long as it is
true. However, superior ability cannot be attributed to this fact.

Page 26 of 204
ETHICAL AND PROFESSIONAL STANDARDS

Page 27 of 204
 Ethical and Professional Standards

GUIDENCE I-VII

OVERVIEWS—

 Los a Demonstrate the application of the Code of Ethics and Standards of Professional Conduct to
situations involving issues of professional integrity.
 Los b Distinguish between conduct that conforms to the Code and Standards and conduct that vio-
lates the Code and Standards.
 Los c Recommend practices and procedures designed to prevent violations of the Code of Ethics
and Standards of Professional Conduct.

PRACTICE PROBLEM
1. Member compliance on issues relating to corporate governance or to soft dollars is primarily addressed by
the Standard concerning:
A) Loyalty, Prudence, and Care.

B) Disclosure of Referral Fees.

C) Disclosure of Conflicts to Clients and Prospects.

2. Acme Advisors recently had a trading error in a customer account that was subsequently covered by
Acme. The firm felt embarrassed by the disclosure of this error, and, in order to induce the client to con-
tinue its relationship, Acme offers the client preferential access to a new issue that is expected to be hot.
Which Standard is violated, if any?
A) The Standard concerning Fair Dealing.

B) The Standard concerning Fiduciary Duty.

C) The Standard concerning Independence and Objectivity.

3. Baker Diaz, CFA, is a stockbroker selling an oversubscribed stock issue. Which of the following best de-
scribes Diaz' actions regarding this sale? Diaz:
A) cannot offer an oversubscribed issue of stock to any clients.

can offer this security on a prorated basis to all clients for which the security is
B)
appropriate.

can only offer this security to clients for which it is appropriate on a first come
C)
first serve basis.

Page 28 of 204
4. The use of client brokerage by an investment manager to obtain certain products and services to aid the
manager in the investment decision-making process is called:
A) quid pro quo practices.

B) trading practices.

C) soft dollar practices.

5. Acuity Systems is an investment management firm that adopted the Code and Standards as part of its
policy manual. Gerald Smithson, CFA, has recently added the stock of Advanced Biochemical Company
and Norgood PLC to all his client's investment portfolios. Shortly afterwards Advanced Biochemical and
Norgood announced a merger that increased the share price of both companies. Smithson contends he
saw the president of Advanced Biochemical dining with the chairman of Norgood, but did not overhear
their conversation. Smithson researched both companies extensively and determined that each company
was a good investment. He put in a block trade for shares in each company. Acuity's policies were not
clear in this area as he allocated the shares by starting with his largest client accounts and working down
to the small accounts. Some of Smithson's clients were very conservative personal trust accounts, others
were pension funds who had aggressive investment objectives. Which standard was NOT broken?
A) Standard V(A)--Diligence and Reasonable Basis.

B) Standard IV(C)--Responsibilities of Supervisors.

C) Standard III(C)-- Suitability.

6. Bennett Flores has been asked by the Chief Investment Officer to develop a firm-wide policy for proxy
voting. Which of the following would NOT be acceptable to include in the policy statement?
A) Voting proxies may not be necessary in all instances.

B) The value of proxy voting must be maximized.

Portfolio managers of active funds must vote in all proxies; portfolio managers
C)
of index funds should vote only when they have a definitive opinion.
7. In the course of reviewing the Aetna Co., an analyst has received comments from management that, while
not meaningful by themselves, when pieced together with data he has accumulated from outside sources,
lead him to recommend placing Aetna Co. on his firm's sell list. What should the analyst do?
Show his report to his own manager and counsel for their review since this
A)
information has become material once it was combined with his analysis.

B) Not issue the report until the comments are publicly announced.

The comments are non material and the report can be issued as long as he
C)
maintains a file of the facts as supplied by management.
8. Dona Bouchard, CFA, is asked by her boss, also a CFA charterholder, to use a research report of a com-
peting firm, change a few details, sign it and send it to a large client. He says their firm's researchers will
draw the same conclusions but haven't gotten to them yet. If she complies, she is doing all of the following
EXCEPT:
A) complying with CFA Institute standards because she cannot disobey her boss.

obeying her boss, a CFA charterholder, but violating several of the CFA Insti-
B)
tute Code and Standards.

Page 29 of 204
 C) violating CFA Institute standards dealing with plagiarism.
9. Alyssa Gagne has accepted a one-year gift membership (valued at approximately $225) to the Women's
World Health Club from a firm to which she directs trades. She has done so without notifying her em-
ployer. Which of the following statements is least accurate?
This is a violation of the Code and Standards but is less serious than an identi-
A)
cal case in which the gift was given by a client of Gagne.

This is a violation of the Code and Standards, because the gift is not a token
B)
amount.

This is a violation of the Code and Standards, because it has not been dis-
C)
closed to her employer.
10. While visiting the CSI Company, Butler Levesque, CFA, overheard management make comments that
were not public information, but were not really meaningful by themselves. However, when this informa-
tion is combined with his own analysis and other outside sources, Levesque decides to change his rec-
ommendation on CSI from buy to sell. According to CFA Institute Standards of Professional Conduct,
Levesque should:
report these events to his immediate supervisor and legal counsel, since they
A)
have become material in combination with his analysis.

B) not issue his report until these comments are made public.

issue his sell report because the facts are nonmaterial, but maintain a file of
C)
the facts and documents leading to this conclusion.
11. Carter Crudz is a partner in a money management firm. He recently attended a seminar and learned
about a quantitative model presented by Dixon. Upon returning to his office, Crudz began testing the
model and making a few minor alterations. He showed the model to his partners who were impressed and
decided to promote the model as proof of the firm's value added. In the firm's next newsletter, Crudz in-
cluded a discussion of the model, the results, and financial data on several stocks selected by the model.
These factual data were taken from Standard and Poor's publication. According to the CFA Institute Stan-
dards of Professional Conduct, which of the following actions is Crudz required to take?
A) Crudz must credit Dixon, no need to credit S&P.

B) Crudz must credit S&P, no need to credit Dixon.

C) Crudz must credit both Dixon and S&P.

12. Jhimi Brown is a research analyst at Superior Investments and is researching a biotech firm specializing
in the analysis of "mad cow" disease. While touring company facilities and meeting with management, she
learns that they believe they may have found a way to reverse the disease. Moreover, one manager con-
jectured, "Suppose that we reversed the disease in someone who didn't even have it? We might then be
able to boost that individual's IQ into the stratosphere!" After returning to her office, Brown issues a re-
search report describing the compound as an "IQ booster with huge potential." This statement:
A) is reasonable given the information she was provided by the company.

B) lacks a reasonable and adequate basis in fact.

C) is allowable but only if quoted verbatim from her conversations with management.
13. Cox Android works as a research analyst for Toby Securities. Android recommends changing a recom-
mendation from sell to buy on Alpha Company. His firm, which manages several mutual funds, may be

Page 30 of 204
 interested in buying Alpha's stock. He also manages the retirement account that his parents established
with Toby. Android wants to buy shares of Alpha's stock because it is an appropriate investment for his
parent's retirement account and obtains approval from his employer to do so. Android is also thinking
about personally investing in Alpha stock. According to CFA Institute Standards of Professional Conduct,
which of the following best describes the priority of transactions? Android should give:
Toby's clients and his parent's account equal priority, followed by his employer,
A)
and then his personal account.

priority to Toby's clients and his employer concurrently, followed by his par-
B)
ent's retirement account, and finally his personal account.

priority of transactions to Toby's clients, followed by his employer, then his

C)
parent's retirement account, and finally his personal account.
14. Jessica Poulin, an analyst for Lansing Asset Management, just completed an investment report in which
she recommends changing a buy to a sell for Gallup Company. Her supervisor at Lansing approves of
the change in recommendation. Poulin wonders about whether she needs to disseminate this investment
recommendation to Lansing's clients and if so, how to distribute this information. According to CFA Insti-
tute Standards of Professional Conduct, Poulin is:
not required to disseminate the change of recommendation from a buy to a sell
A)
because the change is not material.

required to design an equitable system to disseminate the change in a prior

B)
investment recommendation.

required to disseminate the change in a prior investment recommendation to

C)
all clients and customers on a uniform basis.
15. Duck Cruz is a security analyst with a large brokerage company. Sui Donald is a money manager. They
both listen in on a conference call for security analysts with the president of Stoppard, Inc., who states
that in two days the company will be holding a press conference announcing a new product. Both Cruz
and Donald feel the news will increase the value of Stoppard.
Cruz can disseminate the information to clients, and Donald can purchase the
A)
stock for his clients immediately.

Cruz must wait until after the press conference to disseminate the information
B) to clients, and Donald must wait until after the press conference to purchase
the stock for his clients.

Cruz must wait until after the press conference to disseminate the information
C)
to clients, but Donald can purchase the stock for his clients immediately.
16. Adward Long, CFA, manages portfolios of high net worth individuals for DFR Corp. Alice Thurmont, one of
his close friends, heads a local charity for homeless children that depends on donations to operate. Be-
cause donations have declined during the past year, the charity is experiencing financial difficulty. Thur-
mont asks Long to give her a partial list of his clients so that she can contact them to make tax-deductible
donations. Because Long knows that the charity provides much benefit to the community, he provides
Thurmont with the requested list.
Beauty Short, CFA, also works for DFR Corp. She receives a letter from CFA Institute's Professional
Conduct Program (PCP) requesting that she provide information about one of DFR's clients who is
being investigated. Short complies with the request despite the confidential nature of the information
requested by the PCP.

Page 31 of 204
 Based on Standard III(E), Preservation of Confidentiality, which of the following statements about
Long and Short's actions is CORRECT?
A) Long violated Standard III(E) but Short did not violate Standard III(E).

B) Short violated Standard III(E) but Long did not violate Standard III(E).

C) Both Long and Short violated Standard III(E).

17. Which of the following actions is least likely to prevent the misuse of insider information?
Placing securities on a restricted list when the firm is in possession of material
A)
nonpublic information.

B) Monitoring all the phone calls made by the brokers.

C) Controlling relevant interdepartmental information.

18. Foster Landry is the trustee of a trust of which Gini Wander is the main beneficiary. Wander's husband is
the president of a company. In emptying the recycling bin at home, Wander finds some papers that lead
her to believe that her husband's company will make a tender offer to acquire another firm. Wander takes
the information to Landry, who uses it to purchase shares of the company for the trust, but does not fur-
ther disclose the information. Landry has:
A) not violated any Standards.

B) violated the Standards concerning material nonpublic information.

C) violated the Standards concerning loyalty, prudence, and care.

19. Glow Gagne is employed by a company to provide investment advice to participants in the firm's 401(k)
plan. One of the investment options is a stable value fund run by the company. Gagne' research indicates
that the fund is far riskier and less liquid than the typical stable value fund and has a fundamental asset
value lower than book value of the assets. He tells Jessica Cox, the head of employee benefits, about his
research, and indicates that he will advise new employees to not invest in the fund and will advise em-
ployees who already own the fund to reduce their holdings in the fund. Cox points out that the fund is not
in any current danger because there are very few redemptions requested of the fund. Cox also states that
a sell recommendation may become a self fulfilling prophecy, causing investors to redeem their shares
and forcing the fund to liquidate, which in turn will cause the remaining investors to receive less than their
promised value. Gagne agrees with this assessment and feels his fiduciary duty is to all employees.
Gagne should:
tell investors he cannot give advice on the fund because of a conflict of inter-
A)
est.

continue to recommend that new investors do not invest in the fund and exist-
B)
ing investors reduce their holdings.

continue to recommend that new investors do not invest in the fund, but not
C)
advise existing investors to reduce their holdings.
20. Victor Logan is a portfolio manager for McCoy Advisors, and Glow Brisco is the Director of Research for
McCoy. Brisco has developed a proprietary model that has been thoroughly researched and is known
throughout the industry as the McCoy model. The model is purely quantitative and screens stocks into
buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. Brisco
frequently alters the model based on rigorous research”an aspect that is well explained to clients, al-
though the specific alterations are not continually disclosed. Portfolio managers then make specific sector
and security holding decisions, purchasing only securities that are indicated as "buys" by the model.

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 Logan has conducted very thorough research on his own, using the same process that Brisco uses to vali-
date his findings. Logan feels the model is missing some key elements that would further reduce the list of
acceptable securities to purchase, however, Brisco has refused to look at Logan's research. Frustrated by
this, Logan applies his own version of the model, with the justification that he is still only purchasing secu-
rities on the buy list. Because of the conflict with Brisco, he does not disclose the use of the model to any-
one at McCoy or to clients. Which of the following statements regarding Logan and Brisco is CORRECT?
Logan is:
violating the Standards by applying his version of the model and by not dis-
A) closing it to clients. Brisco is violating the Standards by failing to consider
Logan's research.

not violating the Standards by applying his version of the model, but is violating
B) the Standards by not disclosing it to clients. Brisco is not violating the Stan-
dards.

violating the Standards by applying his version of the model and by not dis-
C)
closing it to clients. Brisco is not violating the Standards.
21. 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:
inform his supervisor in writing that he received additional compensation in the
A)
form of the wine.

B) return the bottle to the client.

report the pension fund manager to the CFA Institute Professional Conduct
C)
Program.
22. Glow Couture, a CFA candidate, is a telecommunications analyst at Parent Securities. Based upon his
analysis of Midwest Telecom, he changes his recommendation of the company's common stock from
hold to sell. Before disseminating his recommendation and the reason for the change to Parent's cli-
ents, Couture informs several portfolio managers at Parent, whom he knows personally own Midwest
stock, of the changed recommendation. Several days later, Parent communicates the change in invest-
ment recommendation on Midwest to clients known to have bought Midwest and those who currently hold
the stock.
June Black, CFA, is a broker at Parent Securities. One of her clients places a buy order contrary to
the current recommendation on Midwest. After advising her client of the recommendation, she exe-
cutes the transaction.
According to Standard III(B), Fair Dealing, which of the following statements about Couture and
Black's actions is CORRECT?
A) Both Couture and Black violated Standard III(B).

B) Neither Couture nor Black violated Standard III(B).

C) Couture violated Standard III(B), but Black did not violate Standard III(B).
23. Stephen Bolduc is a portfolio manager with California Capital and works on Johnson Company's account.
California has a policy against accepting gifts over $25 from clients. The Johnson portfolio has a fantastic
year, and in appreciation, the pension fund manager sent Bolduc a rare bottle of wine. Bolduc should:

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 inform her supervisor in writing that she received additional compensation in
A)
the form of the wine.

B) return the bottle to the client explaining California's policy.

C) present the bottle of wine to her supervisor.

24. One year ago, Anderson Jason left the employment as a portfolio manager of Howe Advisors. The depar-
ture was contentious and both parties threatened legal action. As a result, both parties signed a settle-
ment in which Jason was paid a pro rated bonus, but agreed not to work on the portfolios of any existing
Howe client for two years. The terms of the agreement were that both parties agreed to keep all aspects
of the agreement confidential, including the fact that there was hostility surrounding the departure. Jason
now works for Torre Advisors, who has the Stein Company as a new client. At the time Jason left Howe,
Stein was a client of Howe, although Jason did not personally work on the Stein portfolio. Jason's super-
visor at Torre wants Jason to work on the Stein portfolio. Jason should:
inform her supervisor that she cannot work on the portfolio because of a non-
A)
compete agreement.

work on the portfolio because she did not personally work on the portfolio
B)
when she was at Howe.

inform her supervisor that she cannot work on the portfolio because of a legal
C)
agreement, but cannot tell him why.
25. Ron Menard is an individual investment advisor in San Francisco with 300 clients. Menard uses open-
ended mutual funds to implement his investment policy. For most of his clients, Menard has used the
Baker fund, a small company growth fund based in Boston, for a portion of their portfolio. As a result he
has become very friendly with Barnes Champagne, the manager of the fund, whom Menard feels is
mainly responsible for Baker's performance. One day Champagne calls Menard and tells him that he will
be leaving the fund in four weeks and moving to San Francisco to work for a different money management
company. Champagne is seeking suggestions on housing in the area. Baker has not yet announced
Champagne's departure. Menard immediately finds a fund that is a suitable replacement for the Baker
fund, and over the next two days he calls his 30 clients with the largest dollar investments in the funds and
tells them he feels they should switch their holdings. Baker feels the remaining clients' positions are small
enough to wait for their annual review to switch funds. Menard has:
violated the Standards regarding nonpublic information but has not violated the
A)
Standards in failing to deal fairly with clients.

violated the Standards by not dealing fairly with clients but has not violated the
B)
Standards regarding material nonpublic information.

violated the Standards by not dealing fairly with clients and regarding material
C)
nonpublic information.
26. Longy Dupuis is an individual investment advisor with 200 individual clients. When she first obtains a cli-
ent, Dupuis solicits personal data that helps her formulate an investment recommendation, including tax
status, income, expenditure needs, and risk tolerance. The Standards:
require updating a client's data only when a material change occurs to the per-
A)
sonal data.

B) require Dupuis to update the data regularly.

C) only require to update a client's data when a material change is being made to

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 the clients' portfolio.
27. The following information pertains to the Galaxy Trust, a trust established by Stephen P. House and man-
aged by Beta Investment LLC:
 At the time the trust was established House provided $5 million in cash to fund the trust, but Beta
was aware that 93% of his personal assets were in the form of Oracle stock.
 Beta has been asked to view his funds and the trust as a single entity for planning purposes,
since House's will stipulates that all of his estate will pass to the trust upon his death.
 The investment policy statement, developed in September 1996, stipulates that the trust should
maintain a short position in Oracle stock and use the proceeds to diversify the trust more ade-
quately.
 House was able to sell all of his Oracle shares back to the corporation in January 1999 for cash.
 The policy statement redrawn in September 1999 continues to stipulate that the trust hold a short
position in Oracle stock.
 House has given the portfolio manager in charge of the trust an all expenses paid vacation pack-
age anywhere in the world each year at Christmas. The portfolio manager has reported this fact in
writing to his immediate supervisor at Beta.
Which of the following is most correct? The investment manager is:
in violation of the Code and Standards by not properly updating the investment
A) policy statement in light of the change in the circumstances and is in violation
with regard to the acceptance of the gift from House.

in violation of the Code and Standards by not properly updating the investment
B) policy statement in light of the change in the circumstances but is not in viola-
tion with regard to the acceptance of the gift from House.

not in violation of the Code and Standards for not properly updating the in-
C) vestment policy statement in light of the change in the circumstances and is
not in violation with regard to the acceptance of the gift from House.
28. Which of the following statements about a member's use of client brokerage commissions is NOT correct?
Client brokerage commissions:
A) may be directed to pay for the investment manager's operating expenses.

should be commensurate with the value of the brokerage and research ser-
B)
vices received.

should be used by the member to ensure that fairness to the client is main-
C)
tained.
29. Stive William is the new director of equity research for a brokerage company. He receives a call from a
reporter at the Financial News, a weekly publication that comes out on Mondays. The reporter explains
the relationship she had with his predecessor. They would share information that they both learned on
stocks' the former director would benefit the company's clients by news he obtained from the reporter in
exchange for information he gave to her. The former director could ask her not to publish any information
he gave her until after a certain date, ensuring that the brokerage clients would be informed before the
publication date. After the conversation, William called the former director, who confirmed that the reporter
was trustworthy with respect to honoring the agreement for delaying publication until clients have been in-
formed. Philips should:
not disclose any research even after it has been disseminated to clients re-
A)
gardless of the value of the information that the reporter may have.

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 disclose research not yet disclosed to clients, as long as the reporter promises
B) not to publish the information until after all clients have received the research,
and the reporter provides valuable information of her own.

only disclose research that has already been disseminated to clients, as long
C)
as the reporter is providing valuable information of her own.
30. Which of the following would be the least important proxy issue?
A) Takeover defense and related actions.

B) Election of internal auditors.

C) Compensation plans for officers.

31. Ronaldo Rousseau is the chief economist for a large brokerage firm. In the aftermath of a national trag-
edy, Rousseau feels that it is very possible that the stock market will drop significantly 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. Rousseau has:
violated the Standards by not including all of the relevant factors in the re-
A)
search report and making patriotic statements.

B) not violated the Standards.

violated the Standards by not including all of the relevant factors in the re-
C)
search report, but not by making patriotic statements.
32. Cox Anderson, CFA, writes an investment newsletter focusing on high-tech companies, which he distrib-
utes by e-mail to paid subscribers. Anderson does not gather any information about his clients' needs and
circumstances. Anderson has developed several complex valuation models that serve as the basis for his
recommendations. Each month, his newsletter contains a list of buy and sell recommendations. He
states that his recommendations are suitable for all types of portfolios and clients. Because of their pro-
prietary nature, Anderson does not disclose, except in general terms, the nature of his valuation models.
He conducted numerous statistical tests of these models and they appear to have worked well in the past.
In his newsletter, Anderson claims that subscribers who follow his recommendations can expect to earn
superior returns because of the past success of his models.
Anderson violated all of the following CFA Institute Standards of Professional Conduct EXCEPT:
A) Standard I(C), Misrepresentation.

B) Standard V(B), Communication with Clients and Prospective Clients.

C) Standard III(B), Fair Dealing.

33. Ron Leduc is a portfolio manager for Lambert Advisors and reports to Gray Gilbert, the Chief Investment
Officer. Lambert has developed a proprietary model that has been thoroughly researched and is known
throughout the industry as the Lambert model. The model is purely quantitative and takes a given set of
client characteristics and universe of potential securities and forms a portfolio for the investor. Individual
portfolio managers are responsible for selecting securities to fit into the model based on recommendations
from the firm's research department and the managers' own judgment. Because of the specific nature of
the inputs to the model, each manager is responsible for applying the model on his or her own computer.
The basic philosophy of the process is thoroughly explained to clients. Leduc does not understand the ba-
sics of the model, but feels that since it provides pure quantitative output, he does not need to understand
it. However, he misapplies the model for several of his clients. In reviewing some of Leduc's portfolios,

Page 36 of 204
 Tubbs finds the errors and points them out to Leduc. Which of the following statements regarding Tubbs
and Leduc is CORRECT?
Leduc has violated the Standards by not considering the appropriateness and
A)
suitability of the investment for his clients.

B) Tubbs has violated the Standards by failing to supervise adequately.

Leduc has violated the Standards by not exercising diligence and thorough-
C)
ness in making investment recommendations.
34. Katherine Boivin, a CFA charterholder, is preparing a research report on Gonzalez Company for her em-
ployer, Capital Asset Management. Stiven Cook, president of Boswell, invites Abbott and several other
analysts to visit his company and offers to pay her transportation and lodging. Abbott declines Carter's of-
fer but, while visiting the company, accepts a gift from Carter valued at $75. Abbott fails to disclose the gift
to her supervisor at Capital when she returns. In the course of the company visit, Abbott overhears a con-
versation between Carter and his chief financial officer that the company's earnings per share (EPS) are
expected to be $1.10 for the next quarter. Abbott was surprised that this EPS is substantially above her
initial earnings estimate of $0.70 per share. Without further investigation, Abbott decides to include the
$1.10 EPS in her research report on Boswell. Using the high EPS positively affects her recommendation
of Boswell.
Which of the following statements about whether Abbott violated Standard V(A), Diligence and Rea-
sonable Basis and Standard I(B), Independence and Objectivity is CORRECT? Abbott:
A) did not violate Standard V(A) but she violated Standard I(B).

B) violated both Standard V(A) and Standard I(B).

C) violated Standard V(A) but she did not violate Standard I(B).
35. Jennifer Hamel is an individual investment advisor with 200 clients and claims she conforms to Global
Investment Performance Standards (GIPS). French includes all of the clients on her books. One of those
clients is her father, to whom she charges no fee. However, she manages that portfolio using the same
processes as she uses for her paying clients. Another client included in the composite is Johnson Stone,
a wealthy entrepreneur. Stone is the only client who does not give her discretion over the assets and
makes every decision himself, getting suggestions from Hamel and using her to implement decisions.
French:
A) conforms to GIPS, if disclosures are made about the non-fee-paying account.

has violated GIPS because it includes her father's account, but not because it
B)
includes Stone's account.

has violated GIPS because it includes Randolph's account, but not because it
C)
includes her father's account.
36. Kylie Adward is the chief financial officer and compliance officer at Advent International Investment Advi-
sors, an organization that has incorporated the CFA Institute Code of Standards into the firm's compliance
manual. Anderson Trader is a portfolio manager for Super Selection. Trader is friendly with Rosy Gomz,
president of AMD, a rapidly growing biotech company. Trader has served on AMD's board of directors for
the last three years. Gomz has asked Trader to commit to a large purchase of AMD stock for Trader's cli-
ents' portfolios. Trader had previously determined that AMD was a questionable investment but agreed to
reconsider. Her reevaluation deemed the stock to be overpriced, but Trader nevertheless decides to pur-
chase for her portfolios. Which standard was least likely violated?
A) III(B) Fair Dealing.

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 B) V(A) Diligence and Reasonable Basis.

C) III(A) Loyalty, Prudence, and Care.

37. Garcia Anderson, CFA, is a broker with a money management company, Factor, Inc. In a conversation
with Tonny Williams, Anderson describes the activities of Factor and discusses the characteristics of port-
folio construction. Which of the following statements would NOT, on its face, be considered a misrepre-
sentation?
A) Factor guarantees the portfolio will achieve its goal return.

If Williams is not satisfied with the current target return, Johnson can always
B)
improve it by increasing his T-bills share.

The portfolio securities were carefully selected by Factor to minimize Williams'

C)
risk.
38. Amanda Brad, CFA, is a security analyst at DownTrend, Inc. During a routine visit to a beauty salon, she
learns that a major cosmetic company, Lorean, is expected to present a revolutionary formula for facial
cream. Brad buys Lorean stock for her portfolio and prepares a special report on the company. Brad also
makes a call to Hillary Lang, another security analyst at DownTrend, to inform her about the news. Lang
starts trading on her clients' portfolios. Brad's report states that given the on-going research activity at
Lorean within the last months, investors can expect some successful new products and a sharp increase
in the price of the stock. Lang's actions:
A) violate the Standard of Objectivity and Independence.

B) violate the Standards because she trades on inside information.

C) violate the Standard of Fair Dealing.

39. Jonson and Fudd is a major London-based brokerage and investment banking firm. Heritage Group, a
money management firm, is the first, second, or third largest holder of each of the securities listed on Jon-
son & Fudd's "PrimeShare #10" equity security list.
On Tuesday morning, August 22, Jonson & Fudd released a research report recommending the pur-
chase of Skelmerdale Industries to the public and to its clients. On Wednesday afternoon, August 23,
Heritage Group bought 1.5 million shares of Skelmerdale. This action is:

A) a violation of the Standard concerning fair dealing.

B) a violation of the Standard concerning disclosure of conflicts.

C) in accordance with the CFA Institute Code and Standards.

40. Tom Gorge has been recently hired as the head of compliance for Speed Capital. He decides the firm
should precisely follow the recommendations of the CFA Institute Standards of Professional Conduct to
ensure integrity within the firm. Which of the following is NOT a compliance procedure that Speed should
put in place?
A requirement that investment personnel should clear all personal investments
A)
to identify possible conflicts.

A requirement that employees provide duplicate confirmations of personal in-

B)
vesting transactions.

C) A requirement of disclosure of all investment holdings of friends and family

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 members of employees on an annual basis.
41. Andrea Goldy is an individual investment advisor who uses a computer model to place each of her clients
into an appropriate portfolio. The model analyzes a range of simulated portfolios and computes for each
the probabilities of achieving various levels of return. Young then selects the portfolio that provides the
highest probability of achieving the clients' minimum required return. By using this process, Young is:
A) violating Standard I(C) - Misrepresentation.

B) not violating the Standards.

C) violating Standard III(C) - Suitability.

42. Gonzalez Gravel, CFA, prepares a research report on the dynamics of a stock price. In his study, he uses
a considerable number of information sources, both outside sources and his company's own research pa-
pers, prepared for both internal and public use. The report will first be distributed at the monthly depart-
ment meeting and then later will be published on the company's Internet site. He thinks that he may have
neglected to mention some of his sources in his reference list but decides that he needs to be concerned
about full disclosure of his sources only for the public version of the report, so he will wait to revise his
work until after the monthly meeting but before it is published on the internet site. Which Standards does
Baker NOT comply with?
Standard I(C), Misrepresentation, I(B), Independence and Objectivity, and I(A),
A)
Knowledge of the Law.

B) Standard I(C), Misrepresentation, only.

C) Standard I(C), Misrepresentation, and I(A), Knowledge of the Law.

43. Brooklyn Devis is a chemical industry research analyst for a large brokerage company. That industry is
currently seeing an increase in mergers and acquisitions. While flying through Chicago, Jennings sees
several senior officers who she knows are from the largest and fourth largest chemical companies walk
into a conference room. She concludes that negotiations for an acquisition might be taking place.
Jennings:
A) may not act or cause others to act on this information.

B) may use this information to support an investment recommendation.

should inform her compliance officer that she has material nonpublic informa-
C)
tion on firms she covers.
44. Cooky Florid is an investment advisor who has a client, Hall Allard, who is an employment lawyer. At
lunch, Fox noticed Allard and the Chief Financial Officer of Blue Star Company at the next table. She
overhears them talking and ascertains that Blue Star is about to announce higher than expected earnings.
Before the earnings release, Gordon contacts Fox and asks her to purchase 3,000 shares for his portfolio.
Fox:
can purchase shares for Gordon, but cannot ever purchase shares for her per-
A)
sonal account.

can only purchase shares for her personal account after informing all of her
B)
clients about the potential of the increase in earnings.

C) must refuse to purchase shares for Gordon.

45. June Carter passed Level III of the CFA examination in June but will not complete her work experience
requirement until August of next year. Carter can state on her resume that she:

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 A) passed Levels I, II, and III of the CFA examination.

will be a CFA charterholder in August of next year as long as she is on track to

B)
complete her work experience.

C) is a CFA in waiting.
46. Harris Hell is employed by a company to provide investment advice to participants in the firm's 401(k)
plan. Company stock is one of the investment options in the plan. Hell feels that the stock is too risky for
employees to own in their 401(k) plan and starts advising them to pull out of the stock. The Treasurer of
the company calls Drake and tells him that he will be fired if he continues making such advice because he
is violating his fiduciary duty to the company. Hell should:
make sell recommendations but point out that the company Treasurer has a
A)
differing and valid point of view.

B) continue to advise employees to sell their stock.

tell employees that he cannot provide advice on company stock because of a

C)
conflict of interest.
47. Janice Helssy is a portfolio manager for Soprano Advisors. Soprano has developed a proprietary model
that has been thoroughly researched and is known throughout the industry as the Soprano model. The
model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy
of the model is thoroughly explained to clients. The director of research frequently alters the model based
on rigorous research an aspect that is well explained to clients, although the specific alterations are not
continually disclosed. Portfolio managers use the model to assist them in making portfolio decisions, but,
based on their own fundamental research, are allowed to purchase securities not recommended by the
model. This fact is not disclosed to the clients, because the head of marketing does not think it is relevant.
Which of the following statements regarding the portfolio manager's investment decisions is CORRECT?
Soprano is violating the Standards by not disclosing the fundamental research
A)
aspect of the investment process.

B) There is no violation of the Standards.

Helssy is violating the Standards by using two investment processes that are
C)
in conflict with each other.
48. Claire Boivin is a money manager and the Blue Streets Pension Fund is one of her clients. The director of
the pension fund calls Boivinand asks her to use a particular broker so that the fund can obtain some re-
search services with the soft dollars from that broker. Boivin believes that the desired broker will provide
the same price and execution as the normal broker that Simone uses. Boivin does as the client wishes.
Simone has:
not violated the Standards as long as the research provided by the broker will
A)
benefit Blue Streets.

B) violated the Standards.

not violated the Standards as long as the research provided by the broker will
C)
benefit the plan beneficiaries.
49. Dan Stephen is a portfolio manager who is being sued by one of his clients for inappropriate investment
advice. The Professional Conduct Program of CFA Institute is investigating Stephen for the same offense.
Stephen settles the lawsuit with the client while the Professional Conduct Program investigation is ongo-
ing. When the Professional Conduct Program staff questions Stephen about the problematic investment

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 advice, Stephen claims he cannot talk about it because doing so would violate the confidentiality of his
client. Stephen has:
not violated the Standards by executing the settlement agreement or by refus-
A)
ing to talk about the case with the Professional Conduct Program.

violated the Standards by refusing to talk about the case with the Professional
B)
Conduct Program, but not by executing the settlement agreement.

violated the Standards by executing the settlement agreement, but not by re-
C)
fusing to talk about the case with the Professional Conduct Program.
50. Gracie Hoolihan is an individual investment advisor who uses mutual funds for her clients. She typically
chooses funds from a list of 40 funds that she has thoroughly researched. The Burns, a married couple
that are a client, asked her to consider the Hawkeye fund for their portfolio. Hoolihan had not previously
considered the fund because when she first conducted her research three years ago, Hawkeye was too
small to be considered. However, the fund has now grown in value, and cursory research uncovers no
fundamental flaws with the fund. She puts the fund in the Burns' portfolio but not in any of her other cli-
ents' portfolios. The fund ends up being the best performing fund on her list. Hoolihan has:
A) violated the Standards by not dealing fairly with clients.

B) not violated the Standards.

violated the Standards by not having a reasonable and adequate basis for
C)
making the recommendation.
51. Green Fow, who is an investment advisor, is riding in a taxi and finds a file of information labeled "Genco
Valuation." The folder contains a great deal of financial data, projections and nonpublic information con-
cerning the food products industry that lead Roth to believe that Genco will be worth 50% more than its
current stock value. Roth also finds some correspondence that leads him to believe that the file belonged
to Tom Hagan. Roth tries to find out where Hagan works so he can return the file. Roth can recommend
Genco to his clients unless Hagan works for:
A) Roth cannot recommend Genco to his clients at this time.

B) the corporate finance department for Genco.

C) the equity research department for a brokerage firm.

52. Cook Miller is a research analyst for a brokerage firm following the computer industry. Joe Perry is Miller's
former college roommate and is the head of technology for Mercury, a large software company. Perry in-
forms Miller on Tuesday that in two days the company will be making an official announcement that its re-
lease of its newest version of its software will be moved up one month, from October 1 to September 1.
The announcement will be surprising to the industry and will likely be met with skepticism because the
company has had trouble meeting release dates in the past. Perry assures Marsh that he is certain that
they will meet the September 1 date. Miller considers Perry to be very honest and highly competent. Miller
should:
immediately put out a report recommending the stock, but waiting until the offi-
A)
cial announcement to state his reasons.

wait until the public announcement is made, then release a report explaining
B) that he believes the company will make the release date, disclosing that one of
the reasons for his opinion is Perry is a friend of his.

C) produce his research report in two days based solely on the official an-

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 nouncement, not taking into consideration the information from Perry.
53. While having a conversation with a prospective client, Lolz Hokens states that his performance across all
of his past clients over the past five 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.

he cannot discuss performance without clearly stating that the composite does
C)
not conform to GIPS.
54. Loly Gorge is an individual portfolio manager who only uses mutual funds for her clients; she has there-
fore never created a portfolio of stocks. She enters an Internet chat room on investments and starts an-
swering questions about investments. She states in the chat room that she has a CFA designation. One
woman in particular is interested and questions her about the viability of creating her own stock portfolio.
Gates feels that this would be a mistake because she only has $150,000 to invest, and states, "I have ex-
perience creating stock portfolios, and it does not make sense to do so with only $150,000." The woman
she has chatted with sends her an e-mail and eventually becomes a client of hers. Gates has:
A) violated the Standards by soliciting business over the Internet.

B) not violated the Standards.

C) violated the Standards by misrepresenting her experience.

55. Teddy Howard manages two dozen pension accounts, one of which earned over 25% during the past two
years. Howard tells prospective clients that based on past experience they can expect a 25% return on
their funds. Which of the following statements is CORRECT?
Howard has violated both Standard of Professional Conduct III(D), Perform-
A)
ance Presentation, and Standard I(C), Misrepresentation.

Howard has violated Standard of Professional Conduct III(D), Performance

B)
Presentation, but Howard has not violated Standard I(C), Misrepresentation.

Howard has not violated Standard of Professional Conduct III(D), Performance

C)
Presentation, but Howard has violated Standard I(C), Misrepresentation.
56. While attending his wife's office party, Donald West, CFA, overhears two top executives from Walker In-
dustries discussing that the company's Board of Directors just approved to omit its cash dividend due to
unexpected losses during the quarter. Parker has paid a quarterly dividend for the past ten years. The
next day, North calls his broker and instructs her to sell short Parker's common stock.
While in a coffee shop, Diane South, CFA, overhears two top executives from Island Products say
that their company is about to be acquired by another company for a substantial premium over the
market price. The next day, South calls her broker and instructs him to buy 500 shares of Island 's
common stock.
Which of the following statements about whether North and South violated Standard II(A), Material
Nonpublic Information, is CORRECT?
A) North violated Standard II(A) but South did not violate Standard II(A).

B) Both North and South violated Standard II(A).

C) Neither North nor South violated Standards II(A).

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57. Amber Hamel 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. Hamel had not previously consid-
ered the fund because when she first 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 Boil-
ermaker, 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) violated the Standards by not dealing fairly with clients.

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

C) not violated the Standards.

58. Baker Hamel is a portfolio manager for Washington Advisors. Washington has developed a proprietary
model that has been thoroughly researched and is known throughout the industry as the Washington
model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic
philosophy of the model is thoroughly explained to clients. The director of research frequently alters the
model based on rigorous research an aspect that is well explained to clients, although the specific altera-
tions are not continually disclosed. Portfolio managers then make specific sector and security holding de-
cisions, purchasing only securities that are indicated as "buys" by the model. Hamel feels the model would
be improved by adding some factors but he has not fully tested this new version of the model. Hamel dis-
closes his model to his own clients but not to his supervisor. Hamel is:
violating the Standards by not having a reasonable and adequate basis for his
A)
investment recommendation.

violating the Standards by not considering the appropriateness of the recom-

B)
mendations to clients.

C) not violating the Standards.

59. If the Chief Investment Officer of an investment advisory firm also is a CFA charterholder, which of the
following statements is CORRECT?
A) The firm must present an historical composite.

All performance results that are presented must comply with the CFA Institute
B)
Global Investment Performance Standards.

The firm must comply with the CFA Institute Global Investment Performance
C)
Standards only if it states that it follows the Standards.
60. A company has a defined benefit 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:
not invest more aggressively because this is not the method used to increase
A)
the funding level of a plan.

not invest more aggressively since this may expose the plan to too much risk
B)
and may not be in the best interest of the plan's beneficiaries.

Page 43 of 204
 C) invest more aggressively because his fiduciary duties lie with the plan sponsor.
61. Diana Rainy is an individual investment advisor who uses mutual funds for her clients. She typically
chooses funds from a list of 40 funds that she has thoroughly researched. The Cloudy, a married couple
that is a client, asked her to consider the Rainy fund for their portfolio. Westfall had not previously consid-
ered the fund because when she first conducted her research three years ago, Rainy was too small to be
considered. However, the fund has now grown in value, and after doing thorough research on the fund,
she finds the fund has suitable characteristics to be included in her acceptable list of funds. She puts the
fund in the Cloudy ' portfolio but not in any of her other clients' portfolios. The fund ends up being the
poorest performing fund in the Cloudy ' portfolio. Has Westfall violated any Standards? Westfall has:
A) violated the Standards by not dealing fairly with clients.

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

C) not violated the Standards.

62. Jackson Arsenault is a portfolio manager who manages a mutual fund and has pension clients. When
Arsenault receives a proxy for stock in the mutual fund, she gives it to Lonzy Griffith, her administrative
assistant, to complete. When the proxy is for a stock owned in a pension plan, she asks Griffith to send
the proxy on to the sponsor of the pension fund. Arsenault has:
violated the Standards by her policy on mutual fund proxies, but not her policy
A)
on pension fund proxies.

B) not violated the Standards.

C) violated the Standards by her policy on mutual fund and pension fund proxies.
63. Melissa Anderson, CFA, is making preparations to start a competitive business before terminating her
relationship with her employer, a large money management company. Anderson asks Danny Robert,
CFA, to consider joining her. In subsequent discussions with Anderson, Robert learns that Anderson has
not disclosed to her employer ownership of stocks that Anderson recommended. She also learns that
Anderson has used excerpts from research reports by others with only a slight change in wording without
acknowledging the source. Robert declines Anderson's offer to join the new business but does not disso-
ciate herself from the violations. According to CFA Institute Standards of Professional Conduct, which of
the following statements is NOT correct?
Robert violated Standard I(A) Knowledge of the Law, because she did not dis-
A)
sociate herself from the violations.

Anderson violated Standard I(C) Misrepresentation, because she did not ac-
B)
knowledge the source of excepts that she used in research reports.

Anderson violated Standard IV(A) Loyalty to Employer, because she was mak-
C) ing preparations to start a competitive business before terminating her rela-
tionship with her employer.
64. Stive Gravel is a portfolio manager for Campbell Advisors. Campbell has developed a proprietary model
that has been thoroughly researched and is known throughout the industry as the Campbell model. The
model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy
of the model is thoroughly explained to clients. The director of research frequently alters the model based
on rigorous research an aspect that is well explained to clients, although the specific alterations are not
continually disclosed. Portfolio managers then make specific sector and security holding decisions, pur-

Page 44 of 204
 chasing only securities that are indicated as "buys" by the model. Jones thoroughly understands the
model and uses it with all of his clients. Jones is:
violating the Standards in purchasing stocks without a thorough research basis
A)
and in not disclosing all alterations of the model to clients.

not violating the Standards either in purchasing stocks without a thorough re-
B)
search basis or in not disclosing all alterations of the model to clients.

violating the Standards in not disclosing all alterations of the model to clients,
C)
but not in purchasing stocks without a thorough research basis.
65. Hughes Devid has just been hired to manage a security analysis group for Aaron Asset Management.
Devid performed a similar function at another firm and finds 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. Devid should:
A) resign his position immediately.

B) protest in writing the delay, listing the potential dangers that can occur.

decline in writing to accept supervisory responsibility until a satisfactory com-

C)
pliance system is put into place.
66. Cyndrella Allard is an investment advisor. Two years ago Allard decided to stop calculating a return com-
posite because of the time required to make those calculations. A prospective client asks Allard what she
thinks her performance would have been over the past two years. Allard:
A) can answer the question orally but cannot state the numbers in writing.

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

cannot answer the question, nor can she discuss potential future market re-
C)
turns with the prospective client.
67. Rango Ellis is a security analyst and visits David Dawson, the Chief Financial Officer of Edmonds Com-
pany. Dawson reveals a great deal of nonmaterial financial data to Ellis, data that Dawson routinely re-
veals to all security analysts who visit him. From this data and other industry information, Ellis conjectures
that Edmonds is likely to make a tender offer for another company in the industry, a fact that if true would
be considered material to the value of the company. Ellis:
should send a copy of the report to Dawson for verification before disseminat-
A)
ing the report to clients.

must not disseminate the information or use it for trading purposes until the
B)
tender offer is announced.

C) can publish his conclusion in a research report.

68. Jian Lorial manages accounts for Street Capital. Lorial's mother is a client of the firm. Lorial does not
make trades in his mother's accounts until all other clients of the firm have been given an opportunity to
trade. Lorial has:
not violated CFA Institute Standards of Professional Conduct because transac-
A) tions for clients should have priority over personal transactions and transac-
tions for beneficial owners.

B) violated CFA Institute Standards of Professional Conduct because he is not

Page 45 of 204
 allowed to trade in family accounts.

violated CFA Institute Standards of Professional Conduct because family ac-

C)
counts that are client accounts should be treated like any other firm accounts.
69. Sunny Willstone is a research analyst for a large brokerage company following the chemical industry.
Willstone receives a phone call from his nephew who works part-time in an airport hospitality center for an
airline while going to business school. Many meetings take place at the center on any given day. The
nephew tells Willstone that while bringing some faxes into a conference room, he overheard executives of
Hunt Chemical talking about the likely divestiture of one of their subsidiaries. His nephew wants to know
whether that will be good for Hunt. Willstone should:
write a research report describing that he learned about the likely divestiture
A)
from his nephew who works at the hospitality center.

B) not use the information.

write a research report describing the possibility of a divestiture, but not men-
C)
tion how he learned about it.
70. Frudz Grandson, CFA, is manager of corporate investor relations for a high-tech startup, zippy.com, in
Boise, Idaho. Grandson learns that Larry Smith, controller, is altering the accounting records. Grandson
advises some of his personal friends to sell short zippy.com. This action:
constitutes the use of material nonpublic information and is a violation of the
A)
Code and Standards.

constitutes a violation of the Standard concerning prohibition against misrepre-

B)
sentation.

constitutes professional misconduct but not the use of nonpublic information

C)
and is a violation of the Code and Standards.
71. Moly Strome is the chief financial officer and compliance officer at Super Selection Investment Advisors.
Super Selection is a medium-sized money management firm which has incorporated the CFA Institute
Code of Ethics and Standards of Practice into the firm's compliance manual.
Anderson Jackson is a portfolio manager for Super Selection. She is not a CFA charterholder. Jack-
son is friendly with David Gomz, president of AMD, a rapidly growing biotech company. Gomz has
provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio
before buying them for her clients. For three years, Jackson has also served on AMD's board of di-
rectors but has never notified Super Selection of this fact. She has received options and fees as
compensation.
Recently, the board of AMD decided to raise capital by voting to issue shares to the public. This was
attractive to board members (including Jackson) who wanted to exercise their stock options and sell
their shares to get cash. When the demand for initial public offerings (IPO) diminished, just before
AMD's public offering, Gomz asked Jackson to commit to a large purchase of the offering for her port-
folios. Jackson had previously determined that AMD was a questionable investment but agreed to re-
consider at Gomz' request. Her reevaluation confirmed the stock to be overpriced, but she neverthe-
less decided to purchase AMD for her clients' portfolios.
Which of the following statements is NOT correct?

Page 46 of 204
 Jackson did not violate Standard III(A) on Fiduciary Duty to clients because
she was bound by her fiduciary duty to AMD and its stockholders as a board
A) member. Therefore, when she reversed her decision to buy AMD shares for
Super Selection's clients, portfolios on Gomz' request, her obligation to AMD
took precedence.

Jackson violated Standard IV(B) regarding Disclosure of Additional Compen-

B) sation by not disclosing additional compensation in the form of cash and stock
options received from AMD, as its board member to her employer.

Jackson violated Standard VI(A) regarding Conflicts of interest by not disclos-

C)
ing her board membership and ownership of stock options to her employer.
72. The Securities and Exchange Commission (SEC) sanctioned Stephen Random, a former broker, for un-
suitable recommendations and excessive trading in several accounts. His clients were unsophisticated,
inexperienced individual investors with limited means. As such, they relied heavily on Random's advice
and expected him to initiate any transactions in their respective accounts. The SEC found that Random's
trading methods were contrary to his clients' goals. For example, he used margin accounts and concen-
trated their equity holdings in particular securities. Random claimed that his actions were justified be-
cause his clients were aware of the risks.
Which of the following statements best describes why Random's argument, that his clients were
aware of the risks, did NOT meet the requirements of the Code and Standards? Random failed to:
A) deal fairly and objectively with his clients when taking investment action.

disclose to his clients all matters that reasonably could be expected to impair
B)
his ability to make unbiased and objective recommendations.

C) make recommendations that were consistent with his clients' financial needs.
73. Random bought U.S. Treasury strips and over-the-counter stocks that did not produce income as sought
by his clients. Random claimed that his actions were justified because his firm's research department rec-
ommended the purchase of the Treasury strips. Also, he claimed the stocks that he bought were all in the
top-rated categories of his firm's research division. Which of the following statements best describes why
Random's arguments, in which he attempted to shift the blame to his employer, did NOT meet the re-
quirements of the Code and Standards?
Random misrepresented the basic characteristics of the investments that he
A)
bought for his clients' accounts.

Random did not use reasonable care and judgment to achieve and maintain
B)
independence and objectivity in taking investment actions.

Random's duty was to make only recommendations that were in the best inter-
C)
ests of his clients.
74. While copying some of her research materials at work, Andey Samsung comes across a few incomplete
research notes written by one of her colleagues. As a result of reading the notes, and without further re-
view, Samsung immediately changes one of her stock recommendations from sell to buy. Which of the fol-
lowing CFA Institute Standards has Samsung violated?
A) Standard V(A), Diligence and Reasonable Basis.

B) Standard III(A), Loyalty, Prudence, and Care.

C) Standard I(B), Independence and Objectivity.

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75. Using as his universe all companies in the steel industry, Curl Anderson analyses the performance of
stock prices for the industry. He succeeds in developing a regression model with excellent statistical con-
trol measures. The extrapolation from the model shows low risk variance of the securities in this industry.
Without the inclusion of non-steel stocks in the portfolio, Anderson concludes that, based on these results,
every portfolio can use the steel industry securities to diversify and lower its risk. He persuades his clients
to change their current portfolios. Anderson states that, as the model's results show, some particular in-
dustries, such as car manufacturers, have underpriced stocks, and investors should take advantage of it.
Anderson has violated the Standards because he:
A) does not consider the suitability of the investment.

B) is not clear enough about the model results.

C) does not distinguish the opinion, based on his model, from the fact.
76. The DSF Company implements a new methodology for portfolio valuation that is licensed to them by ABC
Statistics. DSF complies with the CFA Institute Code and Standards by:
A) discussing the new methodology with the clients, in its entirety.

not discussing the new methodology with clients because there is no need to,
B)
as it will not change their risk and yield preferences.

discussing the new methodology with clients only when a change in the secu-
C)
rity selection process is involved.
77. Johnny Mcdonald, CFA, has a friend named Stan Green, a journalist at Investment News, a weekly maga-
zine. In one of their conversations, Green tells Mcdonald about material nonpublic problems at Bright-
star.com, a heavily traded firm. Green has written a special article about Brightstar.com's problems that
will appear in the next issue of Investment News. According to the Standards, can Mcdonald act on the in-
formation Green has shared with him?
Yes, Mcdonald can trade on the information but should ask Green to dissemi-
A)
nate the information immediately.

B) No, Mcdonald cannot trade on the information.

C) Yes, Mcdonald can trade on the information, because it is already public.

78. After a very successful quarter of high investment returns, Tom Anderson, CFA, receives several gifts
from grateful clients. Anderson 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 efforts. She
decides to consult the company's compliance rules on gifts and is surprised to learn her firm has no es-
tablished 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

79. Lonzy Grand, CFA, works for a rating agency which competes directly with S&P and Moody's. Her friend,
Lance Parker, works for the same company but in a different department which is involved in advisory
services for structured products. Grand frequently receives pressure from Parker to "put a positive face"
on client ratings to help him sell advisory services. She is reluctant to discuss client ratings with Parker
and tries to avoid the topic. She consults her company's compliance department and learns that there are

Page 48 of 204
 no policies or procedures to discourage Grand and Parker from sharing information and is encouraged to
consider his advice on company ratings. Grand should most likely:
continue to consult with Parker on company ratings as the compliance department's position is
A)
that there is no conflict.

advise her firm to develop firewalls and protections to allow the different departments to func-
B)
tion independently and avoid talking with Parker about client ratings.

C) advise regulators of the potential conflict of interest and seek legal counsel.

SOLUTIONS

1. Answer : A
Fiduciary duty on issues relating to corporate governance or to soft dollars is primarily addressed by Stan-
dard III(A), Loyalty, Prudence, and Care.
2. Answer : A
Acme is in violation of the Standard concerning Fair Dealing by offering the client preferential access to a
hot new issue. There is no obvious violation of Fiduciary Duty, since there is no evidence that Acme is
placing its own financial interest ahead of the client.
3. Answer : B
Standard III(B), Fair Dealing, applies. When new issues or secondary offerings are available or are being
offered by the firm or if the firm is part of a selling syndicate, all clients for whom the security is appropri-
ate are to be offered a chance to take part in the issue. If the issue is oversubscribed, then the issue is to
be prorated to all subscribers.
4. Answer : C
Directing client brokerage for research and/or services is called soft dollar practices.
5. Answer : A
Standard V(A) Diligence and Reasonable Basis was not broken because Smithson conducted thorough
and diligent research. Standard III(C)-- Suitability, Smithson failed to consider the needs of his conserva-
tive and aggressive clients. Standard IV(C)--Responsibilities of Supervisors, Activision Partners didn't
have policies explaining how to allocate shares among clients.
6. Answer : C
Proxies for stocks in passively managed funds must also be voted. A cost-benefit analysis may show that
voting all proxies may not benefit all clients.
7. Answer : C
This is an example of the mosaic theory where separate pieces of nonmaterial information are pieced to-
gether to make an investment recommendation.
8. Answer : A
If Dona complies, she is violating Standard I(C) Misrepresentation, because copying the report is plagia-
rism. Dona should attempt to disassociate from any activity that she knows is in violation of the standards.
9. Answer : A
This action is clearly a violation of Standard I(B), Independence and Objectivity. Accepting a gift from a
non-client is a more serious violation than accepting a gift from a client (for which a compensation ar-
rangement would already exist), since the intent is almost certainly to gain influence over future actions of
the member (e.g., increased allocation of trades).
10. Answer : C
The use of security analysis combined with nonmaterial nonpublic information to arrive at significant con-
clusions is legal and is called the mosaic theory.
11. Answer : A
The Standards require members to acknowledge the author of a model, but members are not required to
acknowledge information from a recognized statistical and reporting service.
12. Answer : B

Page 49 of 204
 Standard V(A) requires that a member have a reasonable and adequate basis before making an invest-
ment recommendation. Extrapolating on the basis of the conjecture of one member of the management
team, without independent corroboration, is clearly in violation of this Standard. She is also in violation of
Standard V(B) concerning the use of reasonable judgment regarding what is included or excluded in a
communication with a client or prospective client.
13. Answer : A
According Standard VI(B) Priority of Transactions, Android should give transactions for clients and em-
ployers priority over his personal transactions. Because his parent's retirement account represents a client
account at Toby, Android should treat this account just like any other firm account. His parent's retirement
account should neither be given special treatment nor disadvantaged because of an existing family rela-
tionship with Android. If Android treats his parent's retirement account differently from other accounts at
Toby, he would breach his fiduciary duty to his parents.
14. Answer : B
Standard III(B) Fair Dealing requires dealing fairly and objectively with all clients and prospects when
disseminating material changes in prior investment recommendations. Note that the standard requires the
dissemination be fair, but not necessarily equal due to the impossibility of contacting all clients simultane-
ously. A change of recommendation from buy to sell is generally material.
15. Answer : B
By waiting until after the press conference the information would then be considered public information
and can then be disseminated to clients and traded on without there being any issues of insider trading.
16. Answer : A
Long violated Standard III(E) because he did not preserve the confidentiality of information communicated
by clients. Short did not violate Standard III(E) because this standard does not prevent members from co-
operating with an investigation by CFA Institute's Professional Conduct Program. Thus, Short can forward
confidential information to the PCP.
17. Answer : B
Standard II(A), Material Nonpublic Information, applies in this situation. Standard II(A) suggests the use of
fire walls to protect the firm and to conform to the Standards. A fire wall is an information barrier designed
to prevent the communication of material nonpublic information between departments of a firm. Although
the fire wall system should provide a means to review transactions, it is not feasible to monitor all commu-
nications into/out of departments. Placing sensitive securities/firms on watch, restricted, or rumor lists
helps management target monitoring of transactions.
18. Answer : B
Landry cannot act or cause others to act on material nonpublic information.
19. Answer : B
The employees to whom Stephens owes fiduciary duty are the ones who are seeking his advice, even if
acting on that advice hurts other employees who might eventually become clients.
20. Answer : B
Because the research is thoroughly conducted, and Logan has authority to make individual security selec-
tion decisions, Logan is not violating the Standards by applying his model. However, Logan is violating the
Standard on communication with clients and prospective clients by excluding relevant factors of the in-
vestment process. The use of his model is an important aspect of the investment process and should be
disclosed to clients. Brisco is not violating the Standards by not considering Logan's research.
21. Answer : A
The Standards require that he inform his supervisor in writing about the gift.
22. Answer : C
Couture violated Standard III(B), Fair Dealing by not treating all customers fairly. Instead, he disclosed the
information selectively to some of his firm's portfolio managers. Black did not violate Standard III(B) be-
cause she communicated to the person placing a buy order on Midwest that the order was contrary to the
current recommendation before executing the order.
23. Answer : B
By not returning the bottle she would be violating the Standard on disclosure of conflicts to the employer,
which states that employees must comply with prohibitions imposed by their employer.

Page 50 of 204
24. Answer : C
Jason must inform her supervisor of the conflict, but she cannot violate the terms of the confidentiality
agreement and she cannot work on the portfolio.
25. Answer : B
Menard must treat all clients fairly in acting on the information, regardless of the size of the investment.
The information concerning the fund manager's departure is not material nonpublic information because
its release would have no effect on individual stock prices within the fund and thus should not impact the
fund's net asset value.

26. Answer : B
According to Standard III(C), Suitability, Members and Candidates must reassess client information and
update regularly.
27. Answer : B
The investment manager is in violation of the Standard requiring him to make a reasonable inquiry into the
client's financial 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 elimi-
nate the need to hold a short position in Oracle. The investment manager is not in violation of the Stan-
dard 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 firm had a rule in place against the accep-
tance of gifts from clients, or if the gift had come from a non-client, there would be a violation of the stan-
dard.
28. Answer : A
Brokerage commissions are the property of the client and may only be used for client benefit.
29. Answer : C
In no case should information be disclosed to a reporter before all clients are provided with the research'
doing so will violate the Standard on fair dealing. However, once clients have been informed, there is no
violation in releasing the information to the reporter, and in doing so William might obtain information that
can further help his clients.
30. Answer : B
Election of internal auditors is not a major proxy issue.
31. Answer : C
By not mentioning the increased risk of the market, Rousseau has violated the Standard on using reason-
able judgment in a research report. However, the patriotic statements do not violate the Standards.
32. Answer : C
Anderson did not violate Standard III(B), Fair Dealing, because this situation does not indicate that he
failed to deal fairly and objectively with all clients when disseminating his newsletter containing investment
recommendations.
Anderson violated Standard V(B), Communication with Clients and Prospective Clients, because he failed
to include all relevant factors behind his recommendations. Without providing the basis for his recommen-
dations, clients cannot evaluate the limitations or the risks inherent in his recommendations.
Anderson violated Standard I(C), Misrepresentation, because his claims about gaining superior expected
returns are misleading to potential investors.
33. Answer : C
Leduc had a responsibility to know the model well enough to detect the mistakes that could occur from
misapplication, so he violated the Standard of diligence and reasonable basis.
34. Answer : C
Boivin violated Standard V(A), Diligence and Reasonable Basis, because she did not have a reasonable
and adequate basis to support the $1.10 EPS without further investigation. By including the $1.10 EPS in
her report, she did not exercise diligence and thoroughness to ensure that any research report finding is
accurate. If Boivin suspects that any information in a source is not accurate, she should refrain from rely-
ing on that information. Boivin did not violate Standard I(B), Independence and Objectivity, because the
gift from Cook was merely a token item.
35. Answer : C

Page 51 of 204
 Non-fee-paying clients can be included in the same composite as fee-paying clients as long as it is dis-
closed. Nondiscretionary clients should not be included in the composite as the clients would not adhere
to the investment strategy used by the investment advisor.
36. Answer : A
Standard III(B) Fair Dealing is not directly applicable to this situation; that standard prohibits members and
candidates from discriminating against any clients when disseminating recommendations or taking in-
vestment action. Trader has clearly violated standard III(A) Loyalty, Prudence, and Care, which requires
that members and candidates act for the benefit of their clients and place their clients' interests before
their own interests. Trader has also violated standard V(A) Diligence and Reasonable Basis, which re-
quires members and candidates to have a reasonable and adequate basis for any investment recommen-
dation or action.
37. Answer : C
Standard I(C), Misrepresentation, prohibits CFA charterholders from misrepresenting characteristics of the
portfolio or the services that the company can provide. The only statement that can be accepted as plau-
sible is that the securities were selected to minimize the risk.
38. Answer : C
Lang violates Standard III(B), Fair Dealing, which imposes the requirement to start trading on the clients'
portfolios only after the information is disseminated to all clients.
39. Answer : C
These actions are in accordance with both Standards III(B), Fair Dealing, and VI(B), Priority of Transac-
tions. There is no violation.
40. Answer : C
Members and Candidates are not required to disclose investment holdings of friends unless those hold-
ings create a conflict of interest.
41. Answer : C
Standard III(C) Suitability requires that Goldy select investments that are consistent with clients' risk and
return objectives. However risk tolerance is not adequately addressed by Goldy's process.
42. Answer : C
Gravel has some doubts but does not initiate any action presuming they only apply to the publicly dis-
closed report. The lack of action is a violation of Standard I(A), Knowledge of the Law. He also violates
Standard I(C), Misrepresentation, by failing to properly disclose the sources of his information, where
necessary.
43. Answer : B
The fact that the company officers met is not material nonpublic information. As long as she bases her in-
vestment recommendation on her own independent research, Devis will not violate any Standards if she
uses this additional information to support it.
44. Answer : C
According to Standard II(A), Material Nonpublic Information, Florid cannot act or cause others to act on
material nonpublic information until the information is made public. The information overheard at lunch
was material and nonpublic; therefore, Florid must wait until the information is made public before accept-
ing Allard's order.
45. Answer : A
A candidate cannot use any form of the CFA designation until receiving her charter.
46. Answer : B
Although Hell is paid by the company, his fiduciary duty is to the plan participants. His advice cannot be
compromised by business considerations, otherwise he will be violating the Standard on loyalty, pru-
dence, and care.
47. Answer : A
Soprano is violating the Standard on portfolio investment recommendations and actions by excluding
relevant factors of the investment process. The fundamental research aspect is highly relevant to the
process and should be disclosed to clients. It is acceptable for Helssy to use two investment processes
that may be in conflict with each other and to use a process that was not developed by her.
48. Answer : C

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 Boivin must ensure that the research benefits the parties to whom she owes fiduciary duty, which are the
plan participants.
49. Answer : B
Because the Professional Conduct Program will maintain client confidentiality, Standard III(E) Preserva-
tion of Confidentiality does not permit members to refuse to cooperate with a PCP investigation because
of confidentiality concerns. The Standards do not require members to delay dealing with related legal mat-
ters while a PCP investigation is in progress.
50. Answer : C
Despite the fact the addition of the fund was successful, Hoolihan acted improperly in not conducting the
same degree of research as she did for the other funds on her list.
51. Answer : A
The information is material and nonpublic; therefore, Fow cannot act or cause others to act at this time.
52. Answer : B
The research report cannot be released until the official announcement is made, otherwise he will be vio-
lating the Standard on prohibition against the use of material nonpublic information. Once it is made pub-
lic, Miller can disclose the nature of the conversation without violating that Standard because the informa-
tion will now be public. However, he should disclose the relationship with Perry or he will be violating the
Standard on communications with clients and prospective clients.
53. Answer : B
Guaranteeing performance on investments that are inherently volatile is misleading to clients.
54. Answer : C
One cannot misrepresent their experience, even over the Internet.
55. Answer : A
Howard violated Standard of Professional Conduct III(D) by using only one portfolio's results to create a
false impression of all the portfolios, and Howard violated Standard of Professional Conduct I(C) by creat-
ing the impression that a certain return was assured (he should have used the words might or could
instead of can).
56. Answer : B
According to Standard II(A), a member or candidate must not act or cause others to act on material non-
public information until that same information is made public. In both cases, the information was material
nonpublic information; therefore, both West and South are in violation.
57. Answer : A
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 sufficient.
58. Answer : A
The ad hoc model is not part of the formal research process and does not formulate an adequate basis for
a recommendation.
59. Answer : C
Global Investment Performance Standards (GIPS) are the best way to comply with the Standard on per-
formance presentation; however, adoption of GIPS is voluntary.
60. Answer : B
Standard III(A), Loyalty, Prudence, and Care, applies in this situation. According to this Standard, invest-
ment actions should be carried out for the sole benefit 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 beneficiaries, not the manager or the en-
tity that hired the manager.
61. Answer : C
Because Rainy performed the same degree of research as she did for the other funds on her list, she pro-
vided a reasonable and adequate basis for her recommendation. There is not enough information given
about the Rainy fund and how it fits in with the other funds on Rainy's list to determine whether or not the
standard on Fair Dealing was broken. It was the Cloudy who wanted the Rainy fund and Rainy found it to
be acceptable for them and thus added it to her list of acceptable funds. If the Rainy fund was found to
possess unique characteristics that were not found in any of the other funds on Rainy's list and the Rainy

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 fund was suitable for some of Rainy's other clients and Rainy hadn't added it to their portfolios after their
periodic review then a violation of fair dealing would have occurred.
62. Answer : C
Proxies should be taken seriously, and although it is likely that Griffith 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 beneficiaries, not the plan sponsor. The spon-
sor's interests will not always be the same as the beneficiary's interest.
63. Answer : C
Goldy did not violate Standard IV(A) Loyalty to Employer because such preparations are permitted pro-
vided that they do not breach Goldy's duty of loyalty to her employer. Breaches that would violate Stan-
dard IV(A) include soliciting clients or taking records or files while still working for the current employer.
64. Answer : B
Gravel and Campbell are using reasonable judgment in not continually disclosing all of the alterations of
the model. It is acceptable to use a pure quantitative model as a sole basis for purchasing stocks, as long
as it is thoroughly researched.
65. Answer : C
According to the Standard on supervisory responsibilities, Devid should decline in writing to accept super-
visory responsibility until a satisfactory compliance system is put into place.

66. Answer : B
Any discussion of past performance would imply that Allard had made some calculations, which would be
misleading. However, Allard need not calculate historical performance to be an advisor. She can also talk
about her view on the future of capital markets.
67. Answer : C
While the information that Ellis received from the Edmonds CEO may be non-public, we are also told that
it is non-material. Because Ellis has reached his investment conclusion through an analysis of public in-
formation together with items of non-material non-public information (ie. mosaic theory ), publishing this
conclusion is not a violation of the Code and Standards.
68. Answer : C
Standard VI(B) Priority of Transactions. Family accounts that are client accounts should be treated like
any other firm accounts. Lorial should refrain from exercising excess caution since his mother is a client of
the firm like all other clients.
69. Answer : B
The information is material and nonpublic; therefore, Willstone cannot trade or cause others to trade on
the information. Any action concerning the information would violate the Standard on material nonpublic
information.
70. Answer : A
The information is apparently nonpublic, and is clearly material since the valuation of securities in the
market place is predicated upon financial data and other relevant information. Trading or inducing others
to trade is a clear violation of Standard II(A).
71. Answer : A
Jackson has violated Standard III(A) because her first obligation is to her firm's clients. Standard VI(A)
addresses precisely these kinds of situations regarding potential conflict of interest. Given this conflict of
interest, Jackson also compromised her objectivity in violation of Standard I(B). Her fiduciary duty to her
clients takes precedence over her fiduciary duty to AMD's stockholders under the CFA Institute Code and
Standards. By not disclosing her relationship with AMD, she also violated Standard IV(B). Making past
personal security transactions ahead of purchase of the same securities for her clients has put Jackson in
violation of Standard VI(B). This standard clearly prohibits such actions.
72. Answer : C
Random did not fulfill the obligation he assumed when he agreed to counsel these clients. That is, he did
not make recommendations that were consistent with their financial needs. According to Standard III(C),
Suitability, Random must consider the appropriateness and suitability of investment recommendations or

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 actions for each portfolio or client. This is true even if his clients wanted to speculate and were aware of
the risks.
73. Answer : C
Random cannot shift the blame to his employer. He had an obligation to consider not only his firm's rec-
ommendations, but also his clients' investment objectives and financial situations. He failed to consider
relevant factors relating to his clients. Random violated Standard III(C) because he initiated investment
actions without properly considering whether these actions were suitable to his clients' financial situations
and investment objectives.
74. Answer : A
Gravel has violated Standard V(A) by failing to exercise diligence and thoroughness.
75. Answer : C
While any of the answers can be shown to violate CFA Institute Standards, this cannot be determined
conclusively from the information given. However, the scenario clearly indicates that Anderson does not
distinguish between opinion and fact in communicating to his clients. Therefore, he violates the Standards
on this basis.
76. Answer : A
Standard V(B), Communication with Clients and Prospects, requires any change in the scope, valuation
methodology, or focus of the portfolio to be discussed with clients.
77. Answer : B
Mcdonald cannot trade on the information before the article is published. Trading on the information re-
ceived from the journalist before the magazine is published is trading on material nonpublic information, a
breach of Standard II(A).
78. Answer : C
The rules should contain a formal value limit based on local customs. Not all types of business entertain-
ment are forbidden. Only business entertainment which is intended to influence or reward members and
candidates should be avoided.
79. Answer : B
Grand should advise her firm to develop firewalls and protections to allow the different departments to
function independently. If Grand and Walker are going to remain friends, they should stop talking about
client ratings.

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 PROFESSIONALISM
Overviews—

 LOS a Knowledge of the Law.

 LOS b Independence and Objectivity.
 LOS c Misrepresentation.
 LOS d Misconduct.

PRACTICE PROBLEM
1. Devid Jakson, CFA, suspected that her intern, who was working without pay at her brokerage firm, had
violated a federal securities regulation. Jakson discussed the matter with her company's legal counsel
who said that the intern's conduct was illegal. According to the CFA Institute Code and Standards of Pro-
fessional Conduct, Jakson can dissociate herself from this illegal activity by:
A) reporting the activity to the appropriate authorities.

B) transferring supervision of the intern to another person.

C) telling her intern to stop such conduct.

2. According to the CFA Institute Standards of Professional Conduct, Standard I(A), Knowledge of the Law,
members should not knowingly participate or assist in any violations of laws, rules, or regulations. An ana-
lyst:
is held responsible for participating in illegal acts when the law is evident to anyone knowing the
A) law and can participate in a violation by having knowledge of the violation and taking no action to
stop it or disassociate from it.

is held responsible for participating in illegal acts when the law is evident to anyone knowing the
B) law and is held responsible for violations by others when the analyst is unaware of the facts giving
rise to the violation.

must report all legal violations to the proper regulatory commission and is held responsible for par-
C)
ticipating in illegal acts when the law is evident to anyone knowing the law.
3. Robart Maxx, a CFA Institute member, resides in Country L, where the securities laws and regulations are
less strict than the CFA Institute Code and Standards. Maxx also does business in Country N, which has
no securities laws or regulations. Thus, Country N has no laws prohibiting the use of material nonpublic
information. Maxx has clients in both Country L and N. Country L's law states that the law of the locality
where business is conducted governs. According to CFA Institute Standards of Professional Conduct
about the use of material nonpublic information, Maxx may:
take investment action based on this information for clients in both Country N and Country L and for
A)
himself.

take investment action based on this information only for his clients in Country N but not for his cli-
B)
ents in Country L or himself.

Page 56 of 204
 C) not take investment action on the basis of this information.
4. Macknax Leo, a CFA charterholder, is an investment analyst for a small stock brokerage firm. He wants to
acquire and maintain knowledge about applicable laws, rules, and regulations relating to his professional
activities. According to the CFA Institute Standards of Professional Conduct, which of the following ways
is least likely to meet compliance procedures?
A) Rely on past practices followed within his firm.

B) Review written compliance procedures on a regular basis.

C) Keep informed about changes in applicable laws, rules, and regulations.

5. If an analyst suspects a client or a colleague of planning or engaging in ongoing illegal activities, which of
the statements about the actions that the analyst should take is most correct? According to the CFA Insti-
tute Standards of Professional Conduct, the analyst should:
consult counsel to determine the legality of the activity and disassoci-
A) ate from any illegal or unethical activity if the member has reasonable
grounds to believe that the activity is illegal or unethical.

disassociate from any illegal or unethical activity if the member has

B)
reasonable grounds to believe that the activity is illegal or unethical.

C) consult counsel to determine the legality of the activity.

6. KLO, an investment-banking firm, is the principal underwriter for MTEX's upcoming debenture issue. Win-
dow Cherry, CFA, an analyst with KLO, has found out from an employee in MTEX's programming de-
partment that a serious glitch was recently discovered in the software program of their major new product
line. In fact, the glitch is so bad that most of their orders have been canceled. Cherry checked the deben-
ture's prospectus and found no mention of this development. The red herring prospectus has already
been distributed. Cherry's best course of action is to:
A) inform her immediate supervisor at KLO of her discovery.

B) notify potential investors of the omission on a fair and equitable basis.

C) keep quiet since this is material non-public inside information.

7. The CFA Institute Standards of Practice Handbook requires CFA Institute members to do all the following
EXCEPT:
receive written permission from both their employer and outside clients
A)
to engage in investment consulting outside the firm.

to inform employer, clients, and potential clients of benefits received

B)
for recommending products or services.

to disclose in writing to the proper regulatory authority all observed

C)
violations of the securities laws and regulations.
8. Tommy Jhonson, CFA, an analyst at a New York brokerage firm, suspects that Brown Boatman, CFA,
another analyst at the same firm, has violated a state securities law. According to the CFA Institute Stan-
dards of Professional Conduct, Jhonson is:
A) required to report the suspected violation to CFA Institute.

B) required to report the suspected violation to the appropriate state regu-

Page 57 of 204
 latory agency.

NOT required to report the violation to the appropriate governmental or

C)
regulatory organizations.
9. Which of the following is a CORRECT statement of a member's duty under the Code and Standards?
A member is required to comply only with applicable local laws, rules, regulations, or cusTommys
A) even though the CFA Institute Code and Standards may impose a higher degree of responsibility
or a higher duty on the member.

A member who trades securities in a foreign securities market where no applicable local laws or
B) stock exchange rules regulate the use of material nonpublic information may take investment ac-
tion based on this information.

In the absence of specific applicable law or other regulatory requirements, the Code and Standards
C)
govern the member's actions.
10. Brown Jonny, CFA, is an outside board member of Atlantic Technologies, but is not paid by the firm for his
services. An employee at Atlantic informs Jonny that Atlantic has improperly timed the booking of con-
tracts to achieve the desired quarterly financial results. The misleading financial statements would turn
losses into profits. Jonny confers with the firm's legal counsel who indicates that this conduct is, in fact, il-
legal. Jonny urges Sharon Browny, Atlantic's chief operating executive, to change the financial state-
ments, but she refuses to do so. According to CFA Institute Standards of Professional Conduct, which of
the following statements best describes what Jonny should do in this situation?
Jonny should promptly disassociate himself from Atlantic's actions by
A) resigning as a director or by reporting the activities to the appropriate
authorities.

Jonny should immediately make CFA Institute aware of the situation at

B)
Atlantic.

Jonny should wait until the next board meeting, which is scheduled in
C)
two weeks, to make other board members aware of the situation.
11. What is the rule of thumb for members, CFA charterholders and candidates in the CFA program when
weighing the requirements of the CFA Institute Code and Standards and the requirements of local laws? If
the applicable laws are:
A) more strict, they must adhere to the applicable laws.

less strict, they should make a judgment call on which to follow, the
B)
Code and Standards or the local laws and requirements.

C) more strict, they must still follow the Code and Standards.
12. Nelson Browny, CFA, is a fixed-income analyst who trades in mortgage-backed securities (MBS). The
MBS industry has seen sweeping regulatory changes since Browny took his current position, and he now
feels his underPowellding of applicable laws and regulatory Standards is dated. Browny must:
have all trades reviewed by his compliance department until he has
A)
obtained an expert level of knowledge in compliance.

update his underPowellding of applicable laws and regulatory Stan-

B)
dards relating to his position.

Page 58 of 204
 rely on his firm's policies and procedures for guidance on legal and
C)
regulatory Standards.
13. A CFA Institute member works for Secure Securities, Inc., and plays rugby on the firm's rugby team. Se-
cure Securities' team recently played the team of a rival firm. During the game, a fight broke out and the
CFA Institute member was the instigator, but no one was seriously hurt. Is this a violation of I(A) concern-
ing maintaining knowledge and complying with laws, rules, and regulations?
A) No, because a fight at a rugby game is not a professional activity.

B) Yes, because the member is bound by the Code of Ethics.

C) Yes, because the member could have hurt someone in the fight.
14. Merry Scooty, CFA, is an analyst for Venture Investments in the country of Newamerica, which has laws
prohibiting the acceptance of any gift from a vendor if the gift exceeds US $250. Scooty has evidence that
her Venture Investments colleague, Sonio Martinez, CFA, has been receiving gifts from vendors in excess
of US $250.
Scooty is obligated to:
disassociate herself from the activity, urge Venture to persuade Marti-
A)
nez to cease the activity, and inform CFA Institute of the violation.

disassociate herself from the activity, urge Venture to persuade Marti-

B) nez to cease the activity, and inform CFA Institute and regulatory au-
thorities of the violation.

disassociate herself from the activity, and urge Venture to persuade

C)
Martinez to cease the activity.
15. A CFA Institute member conscientiously maintains records of changes in security regulations. The mem-
ber notices that his colleagues do not, and does NOT say anything. Is this a violation of StandardI(A)?
A) Yes, and the member should disassociate from these colleagues.

B) No, as long as the colleagues do not violate the new rules.

C) Yes, because the member is bound by the Code of Ethics.

16. Which of the following is a CORRECT statement of a member's duty under the Code and Standards?
In the absence of specific applicable law or other regulatory requirements, the Code and Standards
A)
govern the member's actions.

A member who trades securities in a country with less strict laws, rules, regulations, or cusTommys
B)
may follow those laws if he discloses this information to his client.

A member is required to comply only with applicable local laws, rules, regulations, or cusTommys
C) even though the CFA Institute code and Standards may impose a higher degree of responsibility or
a higher duty on the member.
17. Which of the following statements about the responsibilities of CFA charterholders is CORRECT? CFA
charterholders:
must comply with the laws and rules governing their profession and
A) must not engage in any individual behavior that reflects adversely on
the entire profession.

Page 59 of 204
 B) are only obligated to comply with securities laws in the U.S.

need not comply with the laws and rules governing their profession or
C) must not engage in any individual behavior that reflects adversely on
the entire profession.
18. Lob Bluey, CFA, provides investment advice and other services to clients in several countries. She re-
sides in Country A whose securities laws and regulations are less strict than the Code and Standards.
She also conducts business with clients in Country B, which has no securities laws or regulations, and in
Country C, which has securities laws and regulations that are stricter than the Code and Standards.
Which of the following statements is CORRECT? According to CFA Institute Standards of Professional
Conduct, Bluey must adhere to the Code and Standards in:
A) Country A, Country B, and Country C.

B) Country A and Country B but the law in Country C.

C) Country A but the law in Country B and Country C.

19. Maria Kongi, CFA, practices in the established country of Oldasia as well as in the emerging country of
Newasia. By regulation, Oldasia prohibits licensed investment advisors from trading in securities ahead of
their clients. Newasia has no laws or regulations in this area. Maria Kongi may:
A) trade ahead of her clients in Newasia only.

B) not trade ahead of her clients in either country.

trade ahead of her clients in Newasia only, as long as she has made
C)
full disclosure to her clients that she reserves the right to do this.
20. Benyy Homez, CFA, is licensed in the established country of Oldworld but has clients and makes invest-
ments in the emerging country of Newworld. The regulations of Oldworld prohibit licensed investment pro-
fessionals from taking gifts or gratuities in any amount from vendors or persons connected with potential
investments. The laws of Newworld are silent on this issue. Unsolicited, Homez is offered a vase worth
US $75 by a Newworld trust company and a bronze statue worth US $200 by a Newworld company that
Homez is considering as a potential investment.
Homez is:
A) not permitted to accept either gift.

B) permitted to accept both gifts.

C) permitted to accept the vase but not the statue.

21. Dorsee Birds, CFA, operates an investment advisory service in New York but maintains an office in Xania.
Xania recently established a stock market, which is not very efficient. None of the Xanian stocks trade in
the U.S. market. Xania legally permits the use of material inside information. Birds believes that using in-
side information would help her compete against other Xanian investment advisors and also help some of
her Xanian clients reach their investment objectives. Birds is considering adopting local investment prac-
tices in Xania. According to CFA Institute Standards of Professional Conduct, Birds may:
A) not use material inside information.

B) use material inside information because Xania legally permits this practice.

C) use material inside information, but only after notifying CFA Institute.

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22. An analyst, who is a CFA charterholder, is working in a foreign country. Which of the following statements
is CORRECT? The analyst is:
covered by the strictest of the following laws and rules: his own coun-
A)
try's, the foreign country's or CFA Institute's Code and Standards.

governed by the laws and Standards of the country in which he is liv-

B)
ing and working.

C) governed by CFA Institute's Code and Standards.

23. A member or candidate who suspects that a colleague is violating the law should most appropriately:
consult with the company counsel to determine if in fact a law is being
A)
violated.

report the illegal activity to CFA Institute Professional Standards Re-

B)
view Board for action.

C) report all illegal activities to the appropriate regulatory agency.

24. Boob Brownywell, CFA, works as an investment manager for Mega Capital, a large multinational broker-
age firm. Mega Capital is based in a country whose applicable law is stricter than the CFA Institute Code
and Standards, but does business with clients in a country whose applicable law is less strict than the
Code and Standards. Brownywell decides to follow the requirements of the Code and Standards for cli-
ents in the less strict country, which is sufficient to also comply with that less-strict country's local laws.
While Brownywell is still employed at Mega, Lego Associates verbally asks Brownywell to review client
portfolios during evenings and weekends for a fee. Brownywell gets written consent from his immediate
supervisor at Mega to undertake this independent activity for a one-month trial basis.
Which of the following statements about Brownywell's actions involving StandardI, Professionalism, and Stan-
dardIV(A), Loyalty is most accurate? Brownywell:
A) violated both StandardI and StandardIV(A).

B) violated StandardI but did not violate StandardIV(A).

C) did not violate either StandardI or StandardIV(A).

25. Sonio Ronaldo is a CFA candidate. He is working in the branch office of an American-based investment
company in Belgium. Ronaldo is a citizen of Venezuela. In his country, a portfolio manager is not required
to disclose referral fees. Belgian law does not allow referral fees for portfolio managers. Ronaldo has
been offered a deal that involves a referral fee. Ronaldo should follow the requirements of:
A) Belgium.

B) Venezuela.

C) CFA Institute.
26. Shortly after becoming employed by Valco & Co., an investment banking firm, Powell MAX, CFA, learns
that most of Valco's initial public offerings (IPO) are really effected in order to profit management via price
manipulation of the shares. MAX observes an illegal act, sanctioned by senior management, in progress
and refuses to sign off on his responsibility. Instead, MAX takes the documentation to his supervisor and
tells him he should sign it in his place. This action is:
a violation of the Code and Standards since he is required not to knowingly participate or assist in
A)
such an act.

Page 61 of 204
 an overreaction. Senior management's sanctioning of the act absolves MAX from his ordinary re-
B)
sponsibility as a CFA Institute member.

C) a suitable reaction, and he is in compliance with the Code and Standards.

27. Brown Blue, CFA, is an investment analyst for a large global brokerage firm. He recently moved to Raga-
tan, a developing country with few securities laws and regulations. As part of conducting a company
analysis, Blue interviews Ravi Shanti, vice-president of finance at Starr Industries. Starr is a major indus-
trial firm in Ragatan and a client at Blue's firm. Based on his analysis, Blue suspects that Shanti may have
deliberately overstated Starr's current earnings and its earnings for the past several quarters. If this infor-
mation becomes public, Blue believes that Starr's stock price will drop subPowelltially. Blue suspects that
Shanti may have violated Ragatan's securities laws. Which of the following statements is least likely to
comply with StandardI, Professionalism? Blue should:
A) determine the legality of the activity, possibly by consulting counsel.

B) take no action.

C) disassociate himself from the client, if the activity is illegal or unethical.

28. Sometimes a CFA Institute member simply feels a law has been violated by his firm, and sometimes the
member knows a law has been violated. Which of the following pairs of guidelines is CORRECT with re-
spect to the first step a member should take in each case? The member should first contact:
the firm's counsel if he feels a law has been violated and the SEC if he
A)
knows a law has been violated.

his supervisor in the firm if he feels a law has been violated and con-
B)
tact the firm's counsel if he knows a law has been violated.

the firm's counsel if he feels a law has been violated and contact his
C)
supervisor if he knows a law has been violated.
29. Robe Advisory Services operates an office in San Franze, where it manages portfolios for its clients
based in the United States. The firm also maintains an office in Tokyo, where it employs Sam Lee, CFA
who researches Japanese stocks. According to the CFA Institute Standards of Professional Conduct, Lee
is required to maintain knowledge of and comply with all applicable laws, rules, and regulations in:
both the U.S. and Japan, but not the CFA Institute Standards of Pro-
A)
fessional Conduct.

both the U.S. and Japan and the CFA Institute Standards of Profes-
B)
sional Conduct.

Japan, but not the U.S., and the CFA Institute Standards of Profes-
C)
sional Conduct.
30. Fazz Yellow, CFA, CAIA, is an investment banker who is involved with an initial public offering (IPO) of
NewCo. Because this is Yellow's first involvement in an IPO, he reports to an experienced supervisor.
While reviewing past financial statements provided by NewCo, Yellow suspects that NewCo deliberately
overstated its earnings for the past several quarters. Yellow seeks the advice of his firm's highly compe-
tent general counsel and follows the advice given without deviation. Based on the general counsel's ad-
vice, Yellow consults his immediate supervisor about the suspected overstatement of earnings. After re-
viewing the situation, Yellow's supervisor explains why NewCo's calculations of its earnings are correct.
Yellow realizes that his inexperience and exuberance initially led him to an incorrect conclusion about
NewCo's earnings.

Page 62 of 204
Which of the following statements about Yellow's actions involving StandardI(A), Knowledge of the law, and
StandardI(C), Misrepresentation, is CORRECT? Yellow:
A) did not violate either StandardI(A) or StandardI(C).

B) violated both StandardI(A) and StandardI(C).

C) violated StandardI(A) but did not violate StandardI(C).

31. Roberts Parsons, a CFA candidate, suspects a colleague at his firm of engaging in an illegal activity.
Which of the following statements about procedures for compliance involving StandardI(A), Knowledge of
the law is NOT correct? Parsons:
should urge his firm to attempt to persuade the perpetrator to cease such con-
A)
duct.

is required to report this legal violation to the appropriate governmental or regula-

B)
tory organizations.

C) should consult counsel to determine whether the conduct is, in fact, illegal.

32. A CFA Institute member is also a member and the portfolio manager of an environmentalist group. In its
charter, the environmentalist group lists a group of companies its members should boycott. The CFA Insti-
tute member would violate StandardI(A) concerning obeying all rules and regulations if the member:
A) purchases stock of a boycotted firm for the group's portfolio.

B) performs either of the activities listed here.

C) actively protests against a publicly traded firm boycotted by the group.

33. Mega Securities, a multinational investment advisor based in the United States, employs the following
analysts who practice in multiple jurisdictions.
 Keorita Black, CFA, resides in Country N, which has no securities laws or regulations, but does busi-
ness in Country L, which has securities laws and regulations that are less strict than the Code and
Standards.
 Tommy Browny, a CFA Institute member, resides in Country L, but does business in Country S, which
has securities laws and regulations that are stricter than the Code and Standards.
According to the CFA Institute Code and Standards, which of the following statements about Black and
Browny is CORRECT?
Black must adhere to the Browny must adhere to the

A) law of Country L law of Country S

B) law of Country N law of Country L

C) Code and Standards law of Country S

34. The SEC's new stock-trading rule has just gone into effect. The SEC will give brokers a 10-day grace pe-
riod, during which violators of the rule will be immediately notified and given a chance to remedy their
situation to comply with the new rule. If a CFA Institute member unknowingly violates the rule and then
remedies the situation within the 10-day grace period, has the member violated StandardI(A)?
A) Yes, because the member did not maintain knowledge and know of the rule.

Page 63 of 204
 B) No, because the member remedied the situation.

C) No, because the member unknowingly broke the rule.

35. If a CFA Institute member knows that a fellow employee has violated a law, according to StandardI(A) the
member is NOT required to do which of the following?
Report the employee violating the law to the appropriate
A)
governmental authority.

B) Seek legal advice.

Report the employee violating the law to the appropriate

C)
supervisor in the firm.
36. Maria Browny, CFA, sits on the board of directors of ADG Manufacturing, Inc. She discovers that man-
agement has knowingly participated in an activity she knows is illegal. According to the CFA Institute
Standards of Professional Conduct, Browny is required to:
disassociate herself from the activ-
A)
ity.

both of these choices are cor-

B)
rect.

seek legal advice to determine what actions should be

C)
taken.
37. The Standards of Professional Conduct explicitly outlines responsibilities to four groups. Which of the fol-
lowing is NOT a group mentioned in that list?
A) The Federal Reserve.

B) The investing public.

C) The profession.
38. For an employee with the CFA designation who works for a firm, which of the following is NOT necessary
to meet the requirements of the Code and Standards?
A) Deliver a copy of the Code and Standards to their employer.

It is recommended that their employer is aware of the Code and Stan-

B)
dards.

Recommend notifying their employer of their responsibility to follow the

C)
Code and Standards.
39. Holly Lobita, CFA, is working in the Australian office of American Investments Co. From an informal con-
versation, Lobita learns that the company's most recent investment report was based on misappropriated
information. No one at the Australian office expresses concern, however, because there has been no
breach of Australian law. Lobita should:
A) do nothing because the branch is outside of U.S. jurisdiction.

B) seek advice from company counsel to determine appropriate action.

C) disassociate himself from the case with a written report to his supervisor.

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40. CFA Institute believes:
that a Maximum level of professional responsibility and conduct dic-
A) tates that members be aware of and comply with laws, rules, and regu-
lations governing their conduct.

that a minimum level of professional responsibility and conduct dic-

B) tates that members be aware of and comply with laws, rules, and regu-
lations governing their conduct.

that firms should comply with all domestic laws and regulations and
C) that these laws also govern behavior in foreign markets, regardless of
foreign laws and requirements.
41. CFA Institute members should encourage their employers to do all of the following EXCEPT:
make clear that dishonest personal behavior reflects poorly on
A)
the profession.

require employees to write personal ethics

B)
statements.

conduct background checks on potential employees to ensure that they

C)
are of good character and eligible to work in the investment industry.
42. Franze Fridzz, CFA, CPA, is a portfolio manager for an investment advisory firm. Due to the prominence
of his position, he is often invited to attend free marketing and educational events hosted by firms which
seek to inform the investment community about their investment processes. One such firm, Unlimited Ho-
rizons, has invited Fridzz to attend free educational events which qualify for Continuing Education credits
which could help Fridzz maintain his CPA designation. Fridzz should most likely:
decline to attend the event as it could result in a violation of Stan-
A)
dardI(B) "Independence and Objectivity."

accept the invitation as no cash compensation is involved and the pri-

B)
Maria intent is to educate and inform the investment community.

decline to attend the event as it could result in a violation of Stan-

C)
dardI(A) "Knowledge of the Law."
43. Don Nelson, CFA, is an equity research analyst on a fact-finding property tour with 6 other analysts to
learn about Just Kittens, Inc. Just Kittens sells tungsten ball-bearings and has 16 warehouses, and 20
manufacturing, research, and wholesale sales outlets scattered over 8 countries – mostly emerging mar-
kets. Because of the remote location of some of the facilities, commercial travel is effectively unavailable.
Just Kittens charters a jet and various busses to take the research analysts to the properties. If Nelson
accepts these accommodations, she is most likely:
not in violation of StandardI(B) "Independence and Objectivity" be-
A)
cause commercial travel is effectively unavailable.

B) in violation of StandardI(B) "Independence and Objectivity."

not in violation of StandardI(B) "Independence and Objectivity" be-

C) cause best practices dictate that better access to company executives
is likely to lead to more accurate and timely information.

Page 65 of 204
44. An analyst who is a CFA Institute member receives an invitation from a business associate's firm to spend
the weekend in a high-quality resort. In order to abide by the Standards, the analyst should (may):
refuse the invitation if the associate is from a firm he analyzes for his
A)
employer.

obtain written consent from his supervisor if the offer is contingent on

B)
achieving a target investment return.

C) do both of the actions listed here.

45. Russell Couture, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places
trades for the fund with Worldwide Brokerage. Worldwide is holding a conference in Amsterdam and has
offered to pay for Couture's airfare, meals, and accommodations associated with his attendance of the
conference. The conference concerns European small cap securities and the EASDAQ. He decides that
he will accept their offer and attend the conference. In order to comply with the Code and Standards, he:
A) should not attend unless he pays for the trip himself.

may attend, but he must disclose the arrangement to TrustCo's clients

B)
and prospects as required under StandardIV.B.

may attend, but he must disclose the arrangement to his employer as

C)
a gift.
46. Which of the following gifts to employees from clients does NOT need to be reported to the employee's
employer?
A) An inexpensive golf shirt.

B) An expensive case of wine.

C) A ski-vacation.
47. All of the following would be permitted according to the CFA Institute Standards of Professional Conduct
EXCEPT:
air transportation paid by a corporate issuer for travel to a major met-
A)
ropolitan airport.

B) token gifts received from clients.

use of an issuer's corporate aircraft when commercial transportation is

C)
not available.
48. In order to comply with the CFA Institute Standards, an analyst should:
use only his own research in making investment recommendations,
A) because anything else would violate StandardI(B), Independence and
Objectivity.

B) use outside research only after verifying its accuracy.

use only his company's research when making investment recommen-

C)
dations and use outside research for reports and analysis on stocks.
49. Lolly Roody, CFA, is an analyst at ADG Investments. He covers a company that is located in a region that
is not easily accessible. The company invites analysts for their annual analyst meeting and pays for the
transportation to the remote location. Roody is:

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 allowed to accept the payment for transportation as long as it does not
A)
exceed $100.

allowed to accept the payment for transportation because the trip was
B)
all business and was out of the way.

not allowed to accept the payment for transportation because this is a

C)
considered a perk and may influence his independent judgment.
50. Kongi Robort, CFA, is an equity analyst who covers NorthDannyt Implements, a farm implement manufac-
turer. NorthDannyt's main factory is located in a sparsely inhabited region six hours by auTommyobile
from the nearest airport. NorthDannyt has its own corporate jet and a landing strip is located near the fa-
cility. When Robort contacts NorthDannyt's management to gather information for a report he is preparing
on the company, NorthDannyt's chief financial officer, Tonnyson Blake, invites Robort to visit North-
Dannyt's headquarters and meet with management. Blake offers to send NorthDannyt's corporate jet to
pick up Robort from an airport near Robort's home and to return him home the same evening. Robort es-
timates that it would require three days for him to make the visit using commercial travel. If Robort accepts
Blake's offer and makes the trip to NorthDannyt's headquarters on the corporate jet, Robort:
has violated the Code and Standards unless he discloses the trip and
A)
the payment of his travel expenses in his report on NorthDannyt.

has violated the Code and Standards unless he reimburses North-

B)
Dannyt for the cost of the trip.

C) has not violated the Code and Standards.

51. An analyst is told by his supervisor that when he feels he should write a buy recommendation he is free to
do so, and when he feels he should write a sell recommendation he should check with the supervisor first.
This practice is:
A) congruent with StandardV(A), Diligence and Reasonable Basis.

B) in violation of StandardI(B), Independence and Objectivity.

C) in violation of StandardV(A), Diligence and Reasonable Basis.

52. According to CFA Institute Standards of Professional Conduct, which of the following is NOT a form of
plagiarism?
Using factual information published by recognized financial and statis-
A)
tical reporting services or similar sources without an acknowledgment.

Citing specific quotations supposedly attributable to "leading analysts"

B)
and "investment experts" without specific reference.

Presenting statistical estimates of forecasts prepared by others with

C) the source identified, but without qualifying statements or caveats that
may have been used.
53. A copyrighted technique for measuring the downside risk of an investment has just been revealed to the
public. If an analyst adopts the technique, he must cite the use of the technique in all research reports in
which the technique is used EXCEPT:
A) if the analyst does not modify the technique at all.

B) if the analyst uses reasonable care and verifies that the technique pro-

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 vides superior results.

C) Neither of these answers provide grounds for an exception.

54. Ponny Tonnyson, CFA, is designing a new layout for research reports his firm writes and issues on indi-
vidual stocks. In his design, Tonnyson includes a stock chart on the first page of each report. He does not
reference that the charts are copied from an unrecognizable Finance KLO site. Tonnyson has:
not violated CFA Institute Standards of Professional Conduct because
A)
these charts are widely available over the Internet.

violated CFA Institute Standards of Professional Conduct because he

B)
did not make sure that the information in these charts is accurate.

violated CFA Institute Standards of Professional Conduct because he

C)
did not state the source of the charts.
55. A money manager works for a full-service brokerage firm. After meeting with a new client and gathering all
relevant information, the money manager says that she thinks her firm can perform all the financial ser-
vices the new client needs. With respect to StandardI(C), Misrepresentation, this:
may not be a violation if the manager's opinion is based upon the fac-
A)
tual information gathered.

B) may not be a violation if the representation was made orally.

is a violation because she cannot make statements like this under any
C)
circumstances.
56. Based on CFA Institute Standards of Professional Conduct, which of the following statements is a viola-
tion of StandardI(C), Misrepresentation?
An investment manager recommends to a prospective client an in-
A) vestment in GNMA bonds because they are guaranteed by the federal
government.

A young trainee bond trader tells a prospective client that she can as-
sist the client in all the client's investment needs: equity, fixed income,
B)
and derivatives and based on her years of experience as an analyst in
the business that an investment looks like it has lots of potential.

A broker says ADG stock is very likely to double in value over the next
C)
six months.
57. Which of the following is NOT considered plagiarism under CFA Institute Standards?
Improving an existing report and using it inside the company under a
A)
new title without acknowledging the source of the original report.

Using factual information from a recognized financial information

B)
agency without acknowledging the source of the information.

Adjusting an already published model and announcing it as a new

C)
model without acknowledging the source of the original model.
58. Which of the following is most likely permitted under StandardI(C), Misrepresentation?
A) Using excerpts from reports prepared by others without acknowl-

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 edgement.

Including an exhibit of the current yield curve in a report to a client

B)
without stating its source.

Citing quotes attributed to "investment experts" without specific refer-

C)
ence.
59. A CFA charterholder gathers the closing prices of a security from a widely read publication. The charter-
holder uses the data as part of a report she is preparing and fails to report the data source in the report.
This is:
not a violation of StandardI(C) if the data can be gathered from several
A)
public sources.

B) a violation of StandardI(C).

not a violation of StandardI(C) if the data cannot be gathered from

C)
several public sources.
60. Kialo Moto, CFA, is preparing a research report on an employment agency, Temp Help, Inc. She includes
in her report:
 A copy of a paragraph from a report by the Wall Street research firm of Benson Jonny.
 A graph Moto has modified based on an original graph prepared by GorRobart Thompson that was
published in the Wall Street Journal.
 A chart of national employment trends that Moto created using data from the U.S. government's Bu-
reau of Labor Statistics.
In her report, Moto must identify and acknowledge:
A) Benson Jonny, GorRobart Thompson, and the Bureau of Labor Statistics.

B) Benson Jonny and GorRobart Thompson.

C) Benson Jonny only.

61. Lolo Parrot, a portfolio management trainee for a money management firm, is trying to create a client
base. He phones prospective clients, telling them that he is a portfolio manager. He informs prospective
clients that based on the last five years of performance of his firm, he can guarantee the client at least a
75% return. He informs them that his firm can provide all of the services that they will ever need. What is
the minimum number of misrepresentations Lolo has made to the prospective clients in violation of Stan-
dardI(C), Misrepresentation?
A) 5.

B) 2.

C) 3.
62. Maccy Ramonson, CFA, is an investment analyst. During a meeting with a potential client, Ramonson's
boss states that, "You can be sure our investments will always outperform Treasury Bonds because of our
fine research staff members, like Maccy." Ramonson knows that this statement is:
A) a violation of the Standardconcerning prohibition against misrepresentation.

B) a violation of fiduciary duties owed to clients under the Standards.

C) not in violation of the Code and Standards.

Page 69 of 204
63. Which of the following would be permissible under StandardI(C), Misrepresentation?
Using excerpts from a report prepared by a well known outside re-
A)
search firm without acknowledgement.

Reporting statistics prepared by an outside firm, identifying the source

B)
but omitting caveats and qualifying statements.

Including a graph showing the Fed's discount rates over the previous
C)
12 months in a report that goes to clients.
64. At the time of its initial public offering (IPO), a mutual fund is invested primarily in junk bonds. As part of its
strategy, it is also invested in some zero-coupon U.S. Treasury bonds. The amount of the investment in
the Treasury bonds is such that their maturity value equals 90% of the current value of the fund. Which of
the following may a CFA Institute member say to her clients concerning the fund at issuance?
Since the fund is backed by the U.S. government, you know you will
A)
get your money back.

B) A CFA Institute member may not make either of these statements.

C) The fund is virtually default risk free.

65. Which of the following is NOT expressly prohibited by StandardI(C), Misrepresentation?
A) providing information on guaranteed investment products.

B) misrepresenting the services a member is capable of performing.

C) misrepresenting a member's academic or professional credentials.

66. Kelli Desjardins, CFA, is responsible for updating her employing firm's KLOsite to include changes in
analysis techniques and trading procedures. She is often very delinquent in making these changes, de-
spite working extensive hours. She is aware clients are using the KLOsite to make investment decisions,
and has received complaints from the sales department as the information on the KLOsite if often different
from what is presented in sales meetings. Desjardins is most likely:
A) in violation of StandardIII(B) "Fair Dealing."

B) not in violation of any Powelldard.

C) in violation of StandardI(C) "Misrepresentation."

67. Danny Jonny, CFA, has been working toward the completion of a Master of Science in Finance. He has
passed all the necessary courses and written the necessary thesis. He still must defend the thesis in one
month. Jonny's thesis advisor assures him that he will pass the thesis defense. Jonny has new business
cards printed with M.S. in Finance after his name. This is a violation of:
Powelldard VII(B), Reference to CFA Institute, the CFA Designation,
A)
and the CFA Program.

none of the Standards if Jonny does not make the cards public until
B)
after he defends his thesis and receives his degree.

C) Powelldard I(C), Misrepresentation.

68. Which of the following is NOT a form of plagiarism?
A) Presenting statistical forecasts by others with the sources identified

Page 70 of 204
 but without the qualifying statements that may have been used by the
originator.

Using factual information published by a recognized financial statistics

B)
reporting service without acknowledgment.

Citing quotations said to be attributable to "leading analysts" or "in-

C)
vestment experts" without specific reference.
69. The following information involves two research analysts at a brokerage firm.
 Erik Bull, CFA, is preparing a research report on Global Enterprises, Inc. In preparing the report, he
uses materials from many sources. For example, he uses factual information published by Standard&
Poor's Corporation without acknowledging the source. He also uses excerpts from a research report
prepared by another analyst. Bull makes only a slight change in wording for these excerpts, but ac-
knowledges the source.
 Molly Wind, who is currently enrolled in the CFA program, is preparing a research report on Manson
Telecommunications. She attends a conference in which several investment experts provide their
views about the future prospects of this company. Wind cites several quotations from these invest-
ment experts in her report without specific reference.
According to CFA Institute Standards of Professional Conduct involving prohibition against plagiarism, which
of the following statements is CORRECT?
A) Wind violated the Standards, but Bull did not.

B) Both Bull and Wind violated the Standards.

C) Bull violated the Standards, but Wind did not.

70. According to CFA Institute Standards of Professional Conduct, which of the following statements about
the prohibition against plagiarism is most correct? The prohibition against plagiarism applies to written
materials:
A) oral communications, and telecommunications.

B) only.

C) and oral communications only.

71. All of the following violate StandardI(C), Misrepresentation, EXCEPT:
copying a proprietary computerized spreadsheet without seeking au-
A)
thorization from the creators.

citing quotes attributable to "investment experts" without specific refer-

B)
ences.

presenting factual information published by recognized statistical re-

C)
porting services without acknowledgment.
72. An analyst preparing a report needs to cite which of the following?
A) A recent quote from the Federal Reserve Chairman.

B) Estimates of betas provided by Standard& Poor's.

C) The individual who developed a chart from the same firm.

73. A CFA charterholder who comes to work intoxicated is:

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 A) in violation of StandardIV(A) concerning duties to employer.

B) not in violation of the Standards.

C) in violation of StandardI(D) concerning professional misconduct.

74. Rocksy Killer, CFA, is a security analyst at an investment firm. In his spare time, Killer serves as a volun-
teer for City Pride, which collects clothes for the homeless. Killer has occasionally given some of the
clothes to his friends or sold the clothes instead of returning all of the clothing to City Pride. City Pride dis-
covers what he has been doing and dismisses him. Later, City Pride learns that other volunteer organiza-
tions have dismissed Killer for similar actions. Has Killer violated StandardI(D) on professional misconduct
in the CFA Institute Standards of Professional Conduct?
No, because Killer's conduct is unrelated to his professional activities
A)
as a security analyst.

B) Yes.

C) No, because Killer volunteers his services to City Pride.

75. An analyst belongs to a nationally recognized charitable organization, which requires dues for member-
ship. The analyst has worked out a deal under which he provides money management advice in lieu of
paying dues. While performing services for the organization, the analyst discovers some useful computer
programs that his predecessor developed and left as the property of the organization. The analyst decides
to use the computer programs in his consulting business. This action is:
A) a violation of StandardI(D) concerning misconduct.

B) appropriate since the analyst is technically an employee of the organization.

C) a violation of StandardIII(B) concerning fair dealing.

76. A CFA charterholder is caught shoplifting and is sentenced to nine months in prison. Is this a violation of
StandardI(D) Misconduct?
A) Yes, because the prison sentence is more than six months.

B) Yes, because the crime involved stealing.

C) No, because the crime does not relate to the investment profession.
77. Which of the following does NOT violate StandardI(D), Misconduct? Roland Lawson, a financial analyst:
A) is arrested for participating in a nonviolent protest.

B) committed perjury in connection with a lawsuit against his firm.

drinks excessively during business meetings with clients and returns to

C)
work under the influence of alcohol.
78. A CFA charterholder in a managerial position is in the process of hiring new analysts. If the charterholder
conducts background checks on the job applicants with respect to their character, the charterholder has:
A) complied with StandardI(D) concerning professional misconduct.

B) violated the Code of Ethics by invading the applicants' privacy.

C) complied with StandardVII(A) concerning conduct of members and

Page 72 of 204
 candidates in the CFA Program.
79. Which of the following is least likely a violation of StandardI(D), Misconduct? Being:
A) convicted of a misdemeanor traffic offense.

B) intoxicated at the office.

C) convicted of a felony.
80. Which of the following actions most likely violates StandardI(D) Misconduct?
A Level I candidate is ejected from a hotel for attempting to pass a bad
A)
check.

A member's market forecasts have been wrong in three consecutive

B)
quarters, prompting a formal complaint from a client.

A member pursues an employment opportunity with a competing firm,

C) primarily as a means of securing a salary increase from her current
employer.
81. Noicha Homez, a candidate in the CFA program, is an analyst for a mutual fund. As part of her job she
makes company visits to interview executives. On a recent trip she stayed with her sister instead of at a
hotel. In her expenses Homez included a hotel charge of $100, which was less than the amount allowed
by her employer. After receiving a check for her expenses, Homez disclosed to her supervisor that she
had stayed with her sister instead of at a hotel. She also returned the $100 to her employer. According to
CFA Institute Standards of Professional Conduct, which of the following statements best describes
Homez's professional conduct?
Homez did not engage in professional misconduct because she even-
A) tually disclosed this information and returned the $100 to her em-
ployer.

B) Homez engaged in professional misconduct.

Homez did not engage in professional misconduct because she did

C)
not meet all of the requirements to use the CFA designation.
82. Honglong James, CFA, sometimes promises clients that she will allocate more shares from oversub-
scribed initial public offerings (IPOs) than she knows she will actually be able to deliver. Her employer has
reprimanded her in the past for similar behavior. Which of the following statements is least accurate re-
garding James' behavior?
Her actions are a violation of the Standards only if prosecution results
A)
in a felony conviction.

Her actions are a violation of the Standardconcerning misrepresenta-

B) tion, because she promised something she knew the firm could not
deliver.

Her actions are a violation of the Standardconcerning professional

C)
misconduct because she deceived her clients.
83. Which of the following are recommended procedures of compliance according to StandardI(D), Miscon-
duct?
A) All of these choices are correct.

Page 73 of 204
 Conduct background checks on potential employees to ensure that
B)
they are of good character.

Enroll employees in a continuing education program that would pro-

C)
vide updates on required ethical behavior.
84. An investment advisor takes a trip for which his firm will pay the expenses. Upon his return he alters some
of the numbers on restaurant receipts to inflate the expenses by $64. Is this a violation of StandardI(D)?
A) No, if such a crime carries less than a one-year prison term.

Yes, because it reflects adversely on the charterholder's professional

B)
reputation.

C) Yes, because the amount involved is over $50.

85. All of the following are violations of StandardI(D), Misconduct, EXCEPT:
A) conviction of a crime involving fraud.

conviction of a misdemeanor involving civil disobedience in support of

B)
one's personal beliefs.

any conduct that undermines confidence that the CFA char-

C) ter represents a level of achievement based on merit and
ethical conduct.

SOLUTION

1. Answer : A
Jakson can dissociate herself from the illegal activity by reporting the activity to the appropriate authorities.
However, the Code and Standards do not require that she report legal violations to the appropriate govern-
mental or regulatory organizations, but such disclose is prudent in this circumstance.
By transferring the intern to another supervisor this may not solve the problem of the illegal activity
occurring and the company would still be held liable for it.
2. Answer : A
If you suspect someone is planning or engaging in illegal activities, you should:
1. Determine the legality of the activities. Consult your supervisor and legal counsel.
2. Take appropriate action. Disassociate, attempt to persuade the perpetrator to stop. CFA Institute does
not require you to report them to the authorities, but the law might.
3. Answer : C
Because applicable law states that the law of the locality where the business is conducted governs and local
law is less strict than the Code and Standards, the member must adhere to the Code and Standards. Stan-
dardII(A) prohibits the use of material nonpublic information.
4. Answer : A
Leo should follow the compliance procedures under Standard IA -- Knowledge of the law. Relying on his firm's
past practices may be insufficient for Leo to stay current with changes in applicable laws, rules, and regula-
tions.
5. Answer : A
According to the procedures for compliance involving Standard I(A), CFA Institute members should determine
legality and disassociate from any illegal or unethical activity.
6. Answer : A
Cherry should report this information only to her immediate supervisor. Subsequently, she and her
supervisor may consult with legal counsel concerning the competing issues in this situation. For the present,

Page 74 of 204
she should avoid disclosure to colleagues who do not need to know the information and she should also avoid
disclosure to clients.
7. Answer : C
Members are not required to report violations of others to regulatory authorities, either verbally or in
writing, but such reporting may be prudent.
8. Answer : C
The Code and Standards do not require that members report legal violations to the appropriate gov-
ernmental or regulatory organizations, but such disclosure may be prudent in certain circumstances. Jhonson
should consult legal counsel and disassociate from the activity.
9. Answer : C
The Code and Standards represent a minimum level of guidance for members' actions, not a Maxi-
mum level. The key to remember here is that whether the local area does or does not have Standards govern-
ing member's actions, one must follow the stricter Standardenvironment.
10. Answer : A
Jonny should disassociate from any illegal activity by resigning as a director or by reporting the activi-
ties to appropriate authorities. Inaction combined with continuing association with Atlantic's illegal conduct
may be construed as participation, or assiPowellce, in the illegal conduct.
11. Answer : A
The rule of thumb for members, CFA charterholders and candidates in the CFA program requires that
they adhere to the applicable laws if the applicable laws are more strict than the requirements of the Code and
Standards. If there are no laws or the laws are less strict, they must adhere to the Code and Standards.
12. Answer : B
See StandardI(A) "Knowledge of the Law." Browny should update his underPowellding of applicable
laws and regulatory Standards relating to his position, although he is not required to be an expert in compli-
ance. Relying only on firm policies and procedures is not sufficient.
13. Answer : A
Powelldard I(A) covers members' professional activity only. Violations outside professional activity
that involve fraud, theft or deceit would potentially be violations.
14. Answer : C
Powelldard I(A), Knowledge of the Law requires members who have knowledge of colleagues engag-
ing in illegal activities to disassociate from the activity and urge their firms to persuade the individual to cease
such activity. Reporting to regulatory authorities may be prudent in certain circumstances, but is not required.
Reporting to CFA Institute is not required.
15. Answer : C
The last bullet point of the Code says that a member should œMaintain and improve their professional
competence and strive to maintain and improve the competence of other investment professionals. Ignoring
the neglect of rule changes of others would clearly be incongruent with this component. As long as the col-
leagues do not violate the laws, the member does not have to disassociate himself from the colleagues.
16. Answer : A
Members are always, at a minimum, subject to the Code and Standards.
17. Answer : A
CFA charterholders must comply with the laws and rules governing their profession and must not en-
gage in any individual behavior that reflects adversely on the entire profession. While they should act honora-
bly and follow U.S. securities laws, they are obligated to more than that, as set forth in the Code and Stan-
dards.
18. Answer : B
Bluey needs to follow StandardI(A) -- Knowledge of the law. In Country A, Bluey must adhere to the
Code and Standards because Country A's laws are less strict. In Country B, Bluey must also adheres to the
Code and Standards because Country B has no securities laws. Because Country C's applicable law is
stricter than the requirements of the Code and Standards, Bluey must adhere to the laws of Country C.
19. Answer : B
Under StandardI(A), Maria Kongi, as a CFA charterholder, must apply the CFA Institute Code and
Standards or the controlling law, whichever is stricter. Because StandardVI(B) requires members to put client

Page 75 of 204
trades ahead of their own transactions, Maria Kongi must follow the Standardin the absence of governing law,
or where the law is less strict than the Powelldard.
20. Answer : A
Under StandardI(A), Homez must, as a CFA charterholder, apply the CFA Institute Code and Stan-
dards or the controlling law, whichever is stricter. In this inPowellce the stricter laws of Oldworld, where
Homez is licensed, apply to prohibit the gifts, even though the gifts are offered in Newworld.
21. Answer : A
Because applicable law involving material inside information is less strict than the Code and Stan-
dards, Birds must adhere to the Code and Standards. StandardII(A) prohibits against use of material nonpub-
lic information.
22. Answer : A
The analyst is covered by the strictest of the following laws and rules: his own country's, the foreign
country's or CFA Institute's Code and Standards.
23. Answer : A
According to StandardI(A), Knowledge of the Law, members and candidates should not knowingly
participate or assist in any violation of laws, rules, regulations, or the Code and Standards.
When members suspect a client or a colleague of planning or engaging in ongoing illegal activities,
members should take the following actions:
 Consult counsel to determine if the conduct is, in fact, illegal.
 Disassociate from any illegal or unethical activity. When members have reasonable grounds to be-
lieve that a client's or employee's activities are illegal or unethical, the members should disassociate
from these activities and urge their firm to attempt to persuade the perpetrator to cease such activity.
Note: The Code and Standards do not require that members report legal violations to the appropriate
governmental or regulatory organizations, but such disclosure may be prudent in certain circumstances.

24. Answer : B
Brownywell violated StandardI, Professionalism. Jameson must comply with the strictest requirements
among the laws of the country where his firm is based, the CFA Institute Code and Standards, and the laws of
the country where he is doing business. Because the applicable laws in Mega Capital's home country are
stricter than the Code and Standards, Jameson must additionally adhere to that more strict law.
25. Answer : A
According to StandardI(A) Knowledge of the Law, CFA candidates and current CFA Institute mem-
bers must follow whichever law is stricter. In this case, the strictest laws are those of Belgium.
26. Answer : A
MAX, by his action in taking the documentation to his supervisor, is knowingly participating in and/or
assisting in an illegal act. This is clearly prohibited under StandardI(A), and he is in violation of the Powell-
dard.
27. Answer : B
Because Blue suspects Shanti of engaging in ongoing illegal activities, Blue should take action by
determining the legality of the suspected action, disassociating from any illegal activity, and urging his firm to
attempt to persuade Shanti to cease such conduct if such an activity is illegal or unethical.
28. Answer : C
Powelldard I(A) says that when a member feels a law has been broken, the member should seek ad-
vice from the firm's counsel. If the member feels the advice is unbiased and competent, the member should
follow it. If the member knows a law has been violated, the member should contact a supervisor.
29. Answer : B
To abide by the Standards, employees who work for foreign-based firms are required to apply the
stricter of the foreign (here, U.S.) law, the domestic (here, Japanese) law, or CFA Institute Standards.
30. Answer : A
Yellow did not violate StandardI(A), Knowledge of the law, because he sought advice of counsel and
followed that advice. Yellow did not violate StandardI(C), Misrepresentation, because he made reasonable
and diligent efforts to ensure the accuracy of the information and to avoid any material representation.
31. Answer : B

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 Powelldard I(A), Knowledge of the law, does not require that Parsons report legal violations to the
appropriate governmental or regulatory organizations, but such disclosures may be appropriate under certain
circumstances.
32. Answer : A
Powelldard I(A) says the member must be guided by all applicable rules and regulations of profes-
sional associations governing the member's professional activities. Purchasing the stock for the firm would be
a violation because it involves the member's professional activities and the rules of a group to which the
member belongs and works for. Actively protesting would not be covered by that Powelldard.
33. Answer : C
Because the applicable law in Country L is less strict than the Code and Standards, Black must ad-
here to the Code and Standards. Because the applicable law is stricter than the Code and Standards, Browny
must adhere to the more strict applicable law of Country S.
34. Answer : A
Powelldard I(A) explicitly says that a member should maintain knowledge and comply with laws, rules,
and regulations. By not knowing of the rule, the member broke the Powelldard. If a CFA Institute member ac-
cidentally breaks a rule from a careless error and remedies the situation, this would not be a violation of Stan-
dardI(A).
35. Answer : A
Powelldard I(A) does not require a CFA Institute member to report violations to governmental or regu-
latory agencies. The other answers are appropriate actions.
36. Answer : B
Powelldard I(A), Knowledge of the Law. Prohibition against knowingly practicing or assisting in viola-
tion of laws, rules, and regulations. If Browny knows that someone has engaged in a possible illegal activity,
she should: (1) report the finding to the appropriate supervisory person at her firm, (2) if the situation is not
remedied, disassociate herself from the situation, and (3) seek legal advice to see what other actions, such as
notifying the proper regulatory agency, should be taken.
37. Answer : A
The Standards explicitly mention responsibilities to the profession, employers, clients, prospects, and
the investing public. The Federal Reserve is not mentioned.

38. Answer : A
It is no longer required but recommended that CFA members and candidates notify their employer
that they are required to follow the Code and Standards.
39. Answer : B
Holly's best choice is to seek the company counsel's advice. If Holly does nothing, he is breaching
StandardI(A) Knowledge of the Law. Disassociation is not enough.
40. Answer : B
CFA Institute's Code and Standards dictate a minimum level of conduct. Standards should not be
based on ethics of upper management and the board of directors of a company. Firms must comply with the
strictest applicable Standards, whether they be foreign or domestic laws and regulations.
41. Answer : B
There is no reason to have employees write personal ethics statements. CFA Institute encourages all
of the other actions.
42. Answer : A
Fridzz should decline the invitation as it creates the impression of lack of independence. If he does
not accept the free continuing education courses, he would have to pay for them some other way so the free
courses are a form of compensation. Nothing in the vignette suggests the free classes are illegal.
43. Answer : A
Nelson is not in violation of StandardI(B) "Independence and Objectivity" because commercial travel
is effectively unavailable.
44. Answer : C
According to StandardI(B) Independence and Objectivity, the analyst should refuse the invitation if it is
from a firm the analyst covers for his employer. The analyst can accept the invitation if it is from a client but

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the analyst must get written consent from his employer if the offer is contingent on future performance, to
comply with StandardIV(B) Additional Compensation Arrangements.
45. Answer : A
Under StandardI(B) gifts, benefits, compensation, or consideration cannot be accepted if the purpose
was to influence or reward. Token items are OK. Worldwide Brokerage is not a client of Couture but an entity
that he does business with. As such Worldwide could influence Couture to always do business with them
which could be to the detriment of his fund if the execution of their trades starts to deteriorate compared to
their competitors.
46. Answer : A
According to StandardI(B), Independence and Objectivity, token gifts are allowed.
47. Answer : A
In order to maintain independence and objectivity, members and candidates should restrict special
reimbursement arrangements concerning commercial transportation and hotel charges. Use of corporate air-
craft is permitted when commercial transportation is not available.
48. Answer : B
Powelldard I(B), Independence and Objectivity: the analyst is allowed to use outside research only
after an insightful review. There are no restrictions regarding the exclusive use of outside information or in-
house information.
49. Answer : B
Powelldard I(B) Independence and Objectivity. Analysts should pay for their own travel accommoda-
tions if the location is accessible by normal means. In this situation payment is acceptable because the loca-
tion is out of the way and the purpose of the trip is all business.
50. Answer : C
Powelldard I(B) requires members to maintain independence and objectivity. A visit by an analyst to
an out-of-the-way site may be paid for by a client company host as long as the analyst can maintain objectiv-
ity. Members should encourage clients to limit the use of corporate aircraft, but exceptions can be made if
transportation would not otherwise be available or would be inefficient.
51. Answer : B
The policy dictated by the supervisor would infringe upon the analyst's independence and objectivity .
It would probably discourage the analyst from making sell recommendations and, furthermore, present the
opportunity for the supervisor to try and change the analyst's mind.
52. Answer : A
Powelldard I(C) provides that "factual information published by recognized financial and statistical re-
porting services or similar sources" may be used without an acknowledgment.

53. Answer : C
Neither of the answers in this question provide adequate grounds for not citing the source of the
methodology. Although œverifying the technique is a good idea and congruent with the Code and Stan-
dards, the analyst still needs to cite the use of the copyrighted technique even after modifying it slightly to
avoid violation of StandardI(C), Misrepresentation.
54. Answer : C
Powelldard I(C) Misrepresentation. Members should not copy or use material prepared by others
without acknowledging and identifying the source of such material. Using charts and graphs without stating
their source is a violation of the Powelldard.
55. Answer : A
There is no violation if the opinion is based upon the factual information gathered and the firm's actual
capabilities. This is true whether or not the representation was written, oral, or electronic. None of the other
choices are correct.
56. Answer : B
CFA Institute members, CFA charterholders, and CFA candidates are prohibited from misrepresent-
ing their services or qualifications and inappropriate assurances about any investment or its return.
57. Answer : B

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 Factual information that is already public and is obtained from a recognized information agency can
be used without acknowledgment and is not considered plagiarism. All other options are considered plagia-
rism.
58. Answer : B
The current yield curve is factual information that is available from many recognized financial or statis-
tical reporting services.
59. Answer : A
Since the security prices represent factual information that can be verified from several sources, there
is no violation. It could have been a violation had the information been exclusively published by the source.
60. Answer : B
Powelldard I(C) Misrepresentation requires members to acknowledge and identify the author, pub-
lisher, or source of material they use in subPowelltially the same form as the original. The use of Benson
Jonny's original material and GorRobart Thompson's modified material must be acknowledged. The exception
to this requirement is information from recognized financial and statistical reporting services, such as the gov-
ernment agencies that compile national economic statistics.
61. Answer : C
There are at least three misrepresentations. First, that Lolo is a portfolio manager, when he's really a
trainee. Second, that the firm can provide all of the services they will ever need. Third, that he can guarantee
a 75% return.
62. Answer : A
Under StandardI(C), members are forbidden from guaranteeing a specific rate of return on volatile
investments. Therefore, the statement is in violation of the Powelldard.
63. Answer : C
The only permissible action in the above list is including a graph of the Fed's discount rates over the
last 12 months because it is factual information published by a recognizable financial and statistical reporting
service.
64. Answer : B
Powelldard I(C), Misrepresentation, prohibits making statements that mention a guarantee of returns
or misrepresent the true nature of the investment.
65. Answer : A
Misrepresentation of qualifications, academic and professional credentials and services that can be
performed by the firm are all expressly prohibited by StandardI(C).
66. Answer : C
Desjardins is most likely in violation of StandardI(C) "Misrepresentation." The KLO site information is
erroneous, and needs to be updated to match the firm's current practices.
67. Answer : B
If the cards were distributed today he would be in violation of StandardI(C), Misrepresentation. How-
ever, if Jonny does not make the cards public until after he receives the degree, there is no violation.
68. Answer : B
Members may not generally use material without acknowledging the original source, but an exception
is made for factual information published by recognized financial and statistical reporting services.
69. Answer : A
Bull complied with StandardI(C), which permits publishing factual information from Standard& Poor's
without acknowledgment and using excerpts with acknowledgment. Wind committed plagiarism because she
failed to give specific references for the quotations that she used.
70. Answer : A
The prohibition against plagiarism applies to all three areas.
71. Answer : C
Powelldard I(C), Misrepresentation, permits using recognized sources of factual information such as
Standard& Poor's Corporation and Moody's Investors Service without acknowledgment.
72. Answer : A

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 Statistics provided by a recognized agency, such as Standardand Poor's, do not need to be cited.
Charts, quotes, and algorithms developed by the firm would need to be cited when they are used but the indi-
vidual(s) who developed the materials within the firm do not need to be cited.
73. Answer : C
Being intoxicated at work is poor personal behavior. It is a violation of StandardI(D), which covers pro-
fessional competence and integrity.
74. Answer : B
Killer violated StandardI(D) because he repeatedly engaged in conduct that involves dishonest con-
duct. This violation occurred despite the fact that his offenses do not relate directly to his professional activi-
ties. However, Killer's conduct reflects poorly on his professional reputation and integrity.
75. Answer : A
Since the programs are the property of the organization, the analyst can only use them for the organi-
zation. It does not matter whether the analyst is an employee or not. Personal use of the programs without
permission from the charitable organization is dishonest and prohibited.
76. Answer : B
Any act involving lying, cheating, stealing, or other dishonest conduct that reflects adversely on the
charterholder's professional activities is a violation of StandardI(D). Although the crime did not relate to the
investment profession, it certainly reflected adversely on the charterholder professionally.
77. Answer : A
Any professional conduct that involves dishonesty, fraud, or deceit is a violation of StandardI(D), Mis-
conduct. One must refrain from activities that reflect poorly on integrity, reputation, trustworthiness, or profes-
sional conduct. The focus of the Standardis on professional, not personal, conduct.
78. Answer : A
To avoid potential problems and comply with StandardI(D), employers are encouraged to conduct
background checks on potential employees.
79. Answer : A
According to StandardI(D)" Members should not engage in any professional conduct involving dis-
honesty, fraud, deceit, or commit any act that reflects adversely on their professional reputation, integrity, or
competence.." The Standardis not intended to regulate one's personal behavior.
80. Answer : A
Any activity that reflects adversely on a member's professional reputation, integrity, or competence is
a violation of StandardI(D) Misconduct. As long as the member has a reasonable and adequate basis for all
recommendations, simply being wrong does not call the member's integrity or competence into question. A
member can pursue an employment opportunity with a competitor as long as the member abides by the Stan-
dards related to Duties to Employers.
81. Answer : B
Homez engaged in professional misconduct because her act involved dishonesty, fraud, and deceit.
82. Answer : A
James violated StandardI(C) Misrepresentation by promising clients she would allocate more shares
than she could deliver. Her actions also violated StandardI(D) Misconduct pertaining to acts of dishonesty,
fraud, or deceit which reflects adversely on a member's professional reputation, integrity, or competence. She
also violated the Code of Ethics which states that members and candidates must act with integrity, compe-
tence, diligence, respect, and in an ethical manner with the public, clients, and prospective clients. The spe-
cific punishment for the actions is not relevant.
83. Answer : B
According to StandardI(D) Misconduct - Procedures for Compliance: Members should encourage their
employers to conduct background checks on potential employees to ensure that they are of good character
and eligible to work in the investment industry.
84. Answer : B
Professional conduct involving dishonesty, fraud, or deceit is a direct violation of StandardI(D), Misconduct.
85. Answer : B
The Code and Standards do not focus on personal conduct as long as the conduct does not reflect
poorly on one's professional reputation, integrity, or competence.

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 INTEGRITY OF CAPITAL MARKETS
Overviews—
 LOS a Material Nonpublic Information.
 LOS b Sarket Manipulation.

PRACTICE PROBLEM
1. Loodo Black, CFA, is a portfolio manager. While in the normal course of her duties, she happens to over-
hear material non-public information concerning the stock of VTT Bowser. She purchases several ex-
change traded funds which contain VTT Bowser, while shorting similar exchange traded funds which do
not contain VTT Bowser. This is most likely:
A) not a violation of Standard II(A) "Material Non-Public Information."

only a violation of Standard II(A) "Material Non-Public Information"

B) because Black is simultaneously shorting the funds which do not con-
tain VTT Bowser.

C) a violation of Standard II(A) "Material Non-Public Information."

2. Lina Prince, CFA, has been researching Lander Manufacturing for the past three weeks. She likes the
company's history of fulfilling its contracts on time and within budget. She learns from the uncle of a main-
tenance worker at Lander's headquarters that a group of well-dressed individuals arrived at headquarters
in a lime green-colored limousine. Prince knows from publicly available information that Gilbert Controls
needs a large supply of specialized motors in its domestic division. She also knows that the executive offi-
cers of Gilbert usually travel in a lime green limousine. Prince concludes that it is very likely that Gilbert
will offer a large contract to Lander. Based on this development and her prior research Prince would like
to acquire Lander Manufacturing shares for her client accounts.
Prince should:
A) proceed to acquire the shares.

not acquire the shares because she possesses material nonpublic in-
B)
formation.

not acquire the shares until after she has contacted Lander's man-
agement and encouraged them to publicly announce information
C) about the Gilbert Controls contract. She should also wait until Lander
has made the announcement and the public has had time to react to
it and then make the acquisition.
3. Klaus Gerber, CFA, is a regular contributor to the Internet site WizeGuy. This past week Gerber has been
incorrectly quoted as recommending that investors buy shares in Bradford, Inc. He is unaware that this
message has been placed on the site as the quote was placed as a prank by an unknown source. This is
the third time this has happened over the past month and each time the stock being mentioned moved in
price according to the buy or sell recommendation.
Fritz Fox, CFA, maintains and updates the WizeGuy site and has learned how to determine if the quotes
being attributed to Gerber are actually valid. Several days later, he observes an investment recommenda-

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 tion, posted on the site, to buy Gresham, Inc. The investment recommendation is purported to be from
Gerber, but Fox actually knows it to be bogus. He immediately sells 1,000 Gresham short and e-mails
Gerber to inform him of the bogus recommendation. Gerber immediately issues a rebuttal, and Gresham
falls by 14%. Fox's action is:
A) a violation of the Standard concerning fiduciary duties.

B) a violation of the Standard concerning use of material nonpublic information.

C) not in violation of the Code and Standards.

4. While working on her report, Jim Lolz, CFA, learns from her friend in the investment banking department
that the company she is analyzing can expect a tender offer very soon. Concerning this conclusion, Lolz
can:
A) trade on it, because it is public information.

B) not trade on it because it is material nonpublic information.

C) trade on it, because she figured it out by herself.

5. The mosaic theory is the idea that an analyst can:
make investment recommendations on the basis of several pieces of
A) nonpublic information as long as the aggregate information remains
nonmaterial.

base his recommendations on nonpublic material information only for

B)
the clients of the company, but not for the general public.

make recommendations or trade based on several pieces of public or

C) nonpublic information, each piece by itself being nonmaterial, but
when compiled the information becomes material.
6. Insider trading can be defined as information that is:
A) material and public.

B) material and nonpublic.

C) nonmaterial and nonpublic.

7. An analyst is allowed to trade on information that he has predicted, such as a corporate action or event,
using perceptive assembly and analysis of material public information or nonmaterial, non-public informa-
tion. This is called the:
A) mosaic theory.

B) assessment theory.

C) deduction theory.
8. Which of the following statements concerning Standard II(A), Material Nonpublic Information, is COR-
RECT? A member:
can trade on material non-public information if the information was
A)
not obtained through a breach of duty.

B) cannot trade on material non-public information.

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 can trade on material non-public information if the information has not
C)
been misappropriated.
9. A CFO who is a CFA Institute member is careful to make his press releases”some of them containing ma-
terial and previously undisclosed information”clear and understandable to his readers. While writing a new
release, he often has his current intern proofread rough drafts. He also sends electRobinic copies to his
brother, an English teacher, to get suggestions concerning style and grammar. With respect to Standard
II(A), Material Nonpublic Information, the CFO is:
A) not in violation of the Standard.

violating the standard by either showing the pre-release version to his

B)
intern or sending it to his brother.

only in violation by e-mailing the pre-release version to his brother but

C) not the intern, because the intern is in essence an employee of the
firm.
10. A stockbroker who is a CFA Institute member is called on the telephone by the CEO of a large company.
The CEO asks to buy shares of the CEO's company for the accounts of the CEO's children. In the course
of the conversation, the CEO says this will really pay off when the upcoming takeover goes through. The
stockbroker checks her sources and finds no information about the takeover. In this case the broker
should:
only execute the order in compliance with Standard III(A), Loyalty,
A) Prudence, and Care. Since the client is buying the stock for the chil-
dren, there is not a problem.

execute the order for all clients as required by Standard III(B), Fair
B)
Dealing.

C) do neither of the actions listed here.

11. Sanchez Cyr, CFA, is the compliance officer for a large brokerage firm. He wants to prevent the commu-
nication of material nonpublic information and other sensitive information from his firm's investment bank-
ing and corporate finance departments to its sales and research departments. The most common and
widespread approach that Cyr can use to prevent insider trading by employees is the:
A) Wall Street Rule.

B) legal list.

C) fire wall.
12. Which one of the following least accurately describes the CFA Institute Standard about using material
nonpublic information?
An analyst may use nonmaterial nonpublic information as long as it
A)
has been developed under the Mosaic Theory.

An analyst may violate this Standard by passing information to others

B)
even when it has been obtained from outside the company.

An analyst using material nonpublic information may be fined by CFA

C)
Institute.
13. A CFA Institute member is a U.S. citizen living and working in a foreign country. That country has no laws
against insider trading. Based on this information, the CFA Institute member may:

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 A) trade using insider information.

B) not trade using insider information based upon the CFA Institute Standards.

C) not trade using insider information based upon the rules of the SEC.
14. An analyst provides services for a charitable organization and in return gets free membership in the or-
ganization. Part of her job is to manage the liquid assets of the organization, and those assets include
stocks. Her supervisor in the organization calls her and tells her to buy a certain stock for the portfolio
based upon insider information from a board member in the organization. The analyst objects, but the su-
pervisor says this is what they have always Sancheze and sees no reason for changing now. The analyst
complies with the request. With respect to Standards IV(A), Loyalty to Employer, and II(A), Material Non-
public Information, the analyst violated:
A) only Standard II(A) that prohibits insider trading.

B) both Standards IV(A) and II(A).

C) only Standard IV(A) requiring duty of loyalty.

15. Which one of the following constitutes the illegal use of material nonpublic information?
A) Trading based on your analytical review of the firm's future prospects.

Trading on information your sister, the firm's attorney, told you over
B)
dinner.

Trading immediately after attending the firm's annual shareholders'

C)
meeting.
16. Maria Kalchin, CFA, is a representative for Thiel Financial Network. Kalchin received a phone call at home
from William Kind, a junior executive at Westtown Development Company, asking whether Kalchin had
heard that Westtown had just reached an agreement to acquire a major shopping mall chain at a very fa-
vorable price. (Kalchin had not heard this news, and Kalchin was able to confirm that the information had
not yet been made public.) Kind requested that Kalchin acquire 10,000 shares of Westtown for Kind's per-
sonal account.
Kalchin should:
not acquire the shares until he has contacted Westtown's manage-
A) ment and encouraged them to publicly announce the merger discus-
sion.

B) not acquire the shares.

C) not acquire the shares until the information is made public.

17. Regarding non-public information, which one of the following statements is NOT correct?
A member can be summarily suspended for having received material
A)
non-public information.

B) An analyst may use some types of non-public information.

Disclosing material non-public information would have an impact on

C)
the price of a security or be of interest to a reasonable investor.

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18. The investment-banking department of the HJK Brokerage House often has information that would be of
significant use to the firm's brokerage clients. In order to conform to CFA Institute Standards of Profes-
sional Conduct, which of the following policies should HJK adopt?
According to Standard:
II(A), Material Nonpublic Information, HJK should establish physical
and informational barriers within the firm to prevent the exchange of
A)
information between the investment banking and the brokerage op-
erations.

III(B), Fair Dealing, all clients should be informed of the information at

B)
the same time.

II(A), Material Nonpublic Information, HJK should encourage their in-

C)
vestment banking clients to publicly disseminate this information.
19. A stockbroker who is a member of CFA Institute has a part-time housekeeper who also works for the CEO
of Festival, Inc. One day the housekeeper mentions to the broker that she saw the CEO of Festival having
a conversation at his home with John Tater, who is a nationally known corporate lawyer and consultant.
The stockbroker is restricted from trading on this information:
if the housekeeper says the meeting concerned a tender offer and the
A)
broker knows that it is non-public information.

B) for both of the reasons listed here.

C) only if the broker knows that the meeting is non-public information.

20. A brokerage firm has a trading department and an investment-banking department. Often the investment-
banking department receives material non-public information that would be valuable in advising the firm's
brokerage clients. In order to comply with the Standards, the firm:
should record the exchange of information between the investment-
A)
banking department and the brokerage department.

B) must divest one of the departments.

should restrict employee trading in securities for which the firm is in

C)
possession of material non-public information.
21. According to CFA Institute Standards of Professional Conduct, which of the following statements about
material nonpublic information is NOT correct? Information is:
material if reasonable investors would want to know the information
A)
before making an investment decision.

nonpublic until it has been disseminated to the Sarketplace in gen-

B)
eral.

nonpublic until it has been disseminated to a select group of inves-

C)
tors.
22. The term "material" in the phrase "material nonpublic information" refers to information that is likely to af-
fect significantly the Sarket price of the issuing company's securities or that:
is likely to be considered important by reasonable investors in deter-
A)
mining whether to trade a particular security.

Page 85 of 204
 is acquired by the financial analyst from a special or confidential rela-
B)
tionship with the issuing company.

is derived by the financial analyst from direct communication with an

C)
issuing company's management.
23. Stewart Wings is an investment analyst who has accumulated and analyzed several pieces of nonpublic
information through her contacts with drug firms. Although no one piece of the information she collected is
"material," Wings correctly concluded that the earnings of one of the drug companies would be unexpect-
edly high in the coming year. According to CFA Institute Standards of Professional Conduct, Wings:
can use the information to make investment recommendations and
A)
decisions.

cannot legally invest or make recommendations based on this infor-

B)
mation.

may use the information, but only after approval from a compliance
C)
officer or supervisor.
24. Which of the following statements regarding Standard II(A), Material, Nonpublic Information, is least accu-
rate?
Material, non-public information regarding a tender offer may not be
A)
traded on.

Information received from an insider who is not breaching his fiduciary

B)
responsibility may be traded on.

If you receive the information in a public forum, it has been dissemi-

C)
nated, and you can trade on it.
25. Strome Wings, a CFA Level I candidate, has decided to enter into a long position of Farmco stock. Since
Farmco is thinly traded, Wings is concerned the order will overwhelm the liquidity of Farmco and the price
will surge. Wings engages in a series of block trades in order to accomplish the purchase. According to
Standard II(B), Sarket Manipulation, Wings has engaged in:
A) transaction-based manipulation, but not information-based manipulation.

B) neither transaction-based manipulation nor information-based manipulation.

C) both transaction-based manipulation and information-based manipulation.

26. Sark William is bearish on MNV Manufacturing Company. William is so convinced that MNV is over-
priced, two weeks ago, he shorted 100,000 shares. Today, William is surfing several popular investment
bulletin boards on the internet and posting false derogatory comments about company management. Ac-
cording to Standard II(B), Sarket Manipulation, William has engaged in:
A) transaction-based manipulation, but not information-based manipulation.

B) information-based manipulation, but not transaction-based manipulation.

C) both transaction-based manipulation and information-based manipulation.

27. All of the following are violations of Standard II(B) Sarket Manipulation EXCEPT:
securing a controlling interest in an equity security in order to influ-
A)
ence the price of a related derivative instrument.

Page 86 of 204
 B) exploiting differences in Sarket inefficiencies.

disseminating misleading information about the development of new

C)
products and technologies.
28. Which of the following is a violation of Standard II(B), Sarket Manipulation?
Implementing a trading strategy to exploit differences in Sarket power and in-
A)
formation.

Engaging in a block trade to limit the effect on the price of a thinly traded secu-
B)
rity.

C) Overstating an earnings projection in order to increase the price of a stock.

29. Robin Anderson, a CFA Level I candidate, trades cotton contracts for a small commodity broker. Ander-
son convinces a government cotton inspector to issue a warning that the Texas cotton crop is in danger
from insect infestation. The price of cotton soars. Anderson immediately shorts cotton futures. Once the
position is created, the government inspector issues a second report reversing his original opinion and
cotton prices plummet.
Fedric Cunny, a CFA Level III candidate, would like to generate a tax loss on a security held in his per-
sonal portfolio; however, he believes the security has significant upside potential. To avoid the wash sale
provisions of the income tax code, Cunny sells the security and simultaneously creates a synthetic long
position using derivatives.
With regard to Standard II(B) Sarket Manipulation, which of the following statements concerning Ander-
son's and Cunny's conduct is CORRECT?
A) Anderson is in violation of Standard II(B), but Cunny is not in violation.

B) Neither Anderson nor Cunny is in violation of Standard II(B).

C) Both Anderson and Cunny are in violation of Standard II(B).

SOLUTION

1. Answer : C
This is a violation of Standard II(A) "Material Non-Public Information" irrespective of whether Black is
simultaneously shorting the funds which do not contain VTT Bowser. Her trades are motivated by material
non-public information.
2. Answer : A
Standard II(A) prohibits members from taking investment action if they possess material nonpublic in-
formation. Prince combined information that was not misappropriated, with her knowledge of the com-
pany, to reach a conclusion under the mosaic theory, which is permissible under the standards. She can
proceed to buy the shares.
3. Answer : B
Even though the information is false, this fact is known only to Fox and is thus nonpublic information.
Since such recommendations have in the past had a significant affect on the price of the security in ques-
tion, the information is clearly material. Fox is in violation of Standard II(A) Material Nonpublic Information.
4. Answer : B
According to Standard II(A), Material Nonpublic Information, an analyst is prohibited from trading on
information that is both material and nonpublic.
5. Answer : C
The mosaic theory permits an analyst to make recommendations based upon several pieces of public
or nonmaterial information, even though the complied result is both material and nonpublic.

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6. Answer : B
Information is material if it would be important to the investor in their investment making decision. In-
formation is nonpublic if it is not yet available to the public.
7. Answer : A
This deductive reasoning is legal (does not constitute trading with inside information) and is called the
mosaic theory.
8. Answer : B
Members cannot trade on material nonpublic information until that same information is made public. It
does not matter if the information was not misappropriated or not obtained through a breach of duty
9. Answer : B
Standard II(A), Material Nonpublic Information, says that a member must be careful about handling
material non-public information. As a member of CFA Institute, the CFO must limit the people who see
important information before it is released. It would not be appropriate to involve an intern or a relative in
the process.
10. Answer : C
Doing any of these actions would be a violation of Standard II(A), Material Nonpublic Information.
Members and Candidates must not act or induce others to act on material nonpublic information.
11. Answer : C
To comply with Standard II(A), a fire wall provides an information barrier that prevents communication
of material nonpublic information and other sensitive information from one department to another within a
firm.
12. Answer : C
There is no provision for CFA Institute to issue fines to members. Members may not use material
nonpublic information for trading purposes. Nonmaterial, nonpublic information may be used together with
analysis of public information under the Mosaic Theory.
13. Answer : B
CFA Institute Standard II(A) prohibits trading using insider information. A member may not trade using
such information regardless of the rules of the country where he/she lives.
14. Answer : A
An employee/employer relationship does not necessarily mean monetary compensation for services.
Complying with the request is a violation of II(A) which prohibits trading on insider information. Standard
IV(A) Loyalty deals with going into business for yourself, leaving an employer and continuing to act in the
employer's best interest until their resignation becomes effective, and whistleblowing which means that
the member's interests and their firm's interests are secondary to protecting the integrity of capital Sarkets
and the interests of the clients.
15. Answer : B
Members may not trade on material nonpublic information; therefore, the information conveyed by the
firm's attorney may not be used by a member for trading purposes.
16. Answer : C
Standard II(A) prohibits members from taking investment action if they possess material nonpublic in-
formation. Kind has a duty to keep information confidential that he acquired in the course of his duties at
Westtown. The information is clearly material, so Kalchin is not permitted to trade on it. Kalchin should
make reasonable efforts to achieve public dissemination of the information by contacting management
and encouraging them to make the information public. Kalchin may not trade on the information until it is
made public.
17. Answer : A
All of these are true except that a member can be suspended for having received material non-public
information. The member can receive such information as part of their regular duties or by accident. Nei-
ther is punishable in and of itself, and penalties only apply if the member trades or causes others to trade
on the information. The member may have certain duties, such as trying to disseminate the information af-
ter receiving it. An analyst may use nonmaterial non-public information.
18. Answer : A

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 The physical and information barrier erected between departments to prevent communication of ma-
terial nonpublic information from one department to another is called a "firewall." Departments should be
separated. For example, the investment banking and corporate finance departments of a brokerage firm
should be segregated from the sales and research departments. Family member accounts who are also
clients should be treated like any other client accounts and should not be given special treatment or dis-
advantaged.
19. Answer : A
Standard II(A), Material Nonpublic Information, states a member cannot trade or cause others to trade
in a security while the member possesses material nonpublic information A tender offer would certainly
be material nonpublic information. Knowing that the meeting took place, and nothing else, does not re-
strict the broker. A reasonable investor would need to know more to determine if the information was ma-
terial.
20. Answer : C
Restricting employee trading in stocks for which the firm has material non-public information is the
best answer. Recording the exchange of information between the two departments is not the best option
because there should be no exchange of information between these two departments. Divesting a de-
partment is not a suitable method for addressing this potential problem.
21. Answer : C
Standard II(A), Material Nonpublic Information, states that information is nonpublic until it has been
disseminated to the Sarketplace in general as opposed to a select group of investors.
22. Answer : A
An item of information is material if its disclosure would be likely to have an impact on the price of a
security, or if reasonable investors would want to know the information before investing.
23. Answer : A
Members who can piece together items of nonmaterial nonpublic information with public information
can, based upon the mosaic theory, use such information for trading purposes.
24. Answer : B
If the information is material and nonpublic, the Member or Candidate cannot trade or cause others to
trade. It does not matter if the insider did not breach his fiduciary responsibility. The inside information is
still material and nonpublic.
25. Answer : B
Wings is not in violation of Standard II(B), Sarket Manipulation. Transaction-based manipulation in-
cludes, but is not limited to, transactions that artificially distort prices or volume. Information-based ma-
nipulation includes, but is not limited to, spreading false rumors about a firm in order to induce others to
trade.
26. Answer : B
William is in violation of Standard II(B), Sarket Manipulation, by engaging in information-based ma-
nipulation. Information-based manipulation includes, but is not limited to, spreading false rumors about a
firm in order to induce others to trade.
27. Answer : B
Standard II(B) Sarket Manipulation prohibits practices that distort prices or artificially inflate trading
volumes with the intent to mislead Sarket participants. The Standard is not intended to prohibit legitimate
trading strategies that exploit differences in Sarket inefficiencies.
28. Answer : C
Standard II(B), Sarket Manipulation, is not intended to prohibit transactions that are Sancheze in order
to minimize income taxes or trading strategies that are not intended to distort prices or artificially inflate
trading volume. Overstating earnings projections in order to increase the price of a stock is a direct viola-
tion.
29. Answer : A
Anderson is in violation of Standard II(B) Sarket Manipulation by creating a scheme that caused oth-
ers to trade on false information. Cunny is not in violation of Standard II(B). The Standard does not pro-
hibit transactions conducted for tax purposes.

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 DUTIES TO CLIENTS

LOS A.: Loyalty, Prudence, and Care.

LOS B.: Fair Dealing.
LOS C.: Suitability.
LOS D.: Performance Presentation.
LOS E.: Preservation of Confidentiality.

PRACTICE PROBLEM
1. Collins Morin meets Lolli Parker, CFA, at a social engagement and asks for some "hot stock tips." Parker
declines, but sets up an appointment to review Morin' risk and return objectives and financial constraints.
At the conclusion of their appointment, Parker recommends three securities he has thoroughly re-
searched: ACK, D-Wing, and Ophus-Littbinger. Parker is least likely:
in violation of Standard III(A) "Loyalty, Prudence, and Care" for failing to con-
A)
sider the three securities in the context of the whole portfolio.

B) not in violation.

in violation of Standard III(A) "Loyalty, Prudence, and Care" for failing to make
C)
a reasonable inquiry into the client's investment experience.
2. Heidi Krueger, CFA, an investment advisor, applies soft dollars generated from client accounts to pur-
chase a report on the economic impact of world events, and to purchase a new conference table for the
office she uses to meet with clients and prospects. Do these purchases violate Standard III(A) Loyalty,
Prudence, and Care?
A) Both of these purchases violate the Standard.

B) Only one of these purchases violates the Standard.

C) Neither of these purchases violates the Standard.

3. According to Standard III(A) Loyalty, Prudence and Care, brokerage is an asset of the:
A) client.

B) managing firm.

C) brokerage firm conducting the trades.

4. Davis Bergeron, CFA, received proxy material related to a hostile takeover attempt of SSF Industries by
XZS Company. She holds shares of SSF in most of her client accounts. Bergeron has a high opinion of
SSF's management because they have run the company successfully and have always responded di-
rectly and honestly to her inquiries. She is not acquainted with XZS's management team but knows they
have a reputation for improving the bottom line at the companies they acquire, partly because they tend to
replace upper management at their targets and assume their functions. XZS's offer is 60% higher than the
price of SSF shares before the announcement. SSF's management has contacted Bergeron and re-

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 quested that she vote the shares she controls against the takeover because the management is con-
cerned for their jobs and for the welfare of the company. To comply with the Code and Standards,
Bergeron should:
vote for the takeover if it is in the best interest of SSF's shareholders, regard-
A)
less of the consequences to current management.

vote for the takeover if she can get assurance that SSF's management team
B)
will remain in place.

delegate her proxy vote to another member of her firm due to the conflict of
C)
interest created when she was contacted by management.
5. Which of the following is least likely required of fiduciaries who are responsible for pension plans?
A) Supporting the sponsor's management during proxy fights.

B) Judging investments in the context of the total portfolio.

C) Acting solely in the interest of plan participants.

6. All of the following are required by fiduciaries under Standard III(A), Loyalty, Prudence, and Care, EX-
CEPT:
A) act solely in the interest of the ultimate beneficiaries.

B) place the client's interest before the employer's interest.

C) support the sponsor's management during proxy fights.

7. Tom Canvus, 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 Canvus with soft dollars to purchase research.
River City also deals in municipal bonds, some of which Canvus holds in his personal portfolio. He peri-
odically 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.

in violation of his fiduciary duties regarding both the small cap research and
B)
the municipal bond research.

in violation of his fiduciary duties regarding the municipal bond research but
C)
not so regarding the research on the small cap issues.
8. Which of the following is a possible breach of fiduciary duties by a CFA Institute member who manages
assets on behalf of a client?
A) Using directed brokerage.

B) Neither of these breach fiduciary duties.

C) Voting all proxies of stocks the client owns.

9. An analyst with his own money management firm trades on behalf of several large pension funds. The
analyst now performs all trades through a particular brokerage firm because the brokerage provides his
firm with a no-interest line of credit if paid within 60 days. The line of credit is available to all brokerage cli-
ents. The brokerage provides the analyst with personal account privileges that he would not otherwise be
eligible for. The brokerage also provides the analyst with free research reports on many companies.
Which of these benefits are violations of Standard III(A), Loyalty, Prudence, and Care?

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 A) Neither of these.

B) The research reports.

C) The personal account privileges.

10. An independent analyst has only one client. One of the client's largest holdings is a brokerage firm. Be-
cause of the large holding by his client, the brokerage firm recently began allowing the analyst to tap into
the firm's computer network to use the firm's research facilities. This is allowable as long as the analyst:
A) uses the resources to help manage the client's account.

B) discloses the relationship to the client.

C) does both of the actions listed here.

11. Tom Canvus, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. Canvus places a
trade with Quantco Brokerage. While Canvus's part of the transaction was conveyed correctly to Quantco,
there was a trading error made in Canvus's account due to a slip up within Quantco. Canvus realizes that
the error has taken place, and informs his contact at Quantco. Canvus allows Quantco to cover the error,
with no cost to TrustCo. This is:
permissible under CFA Institute Standards since some trading errors are a fact
A)
of life in the securities industry.

B) a violation of Canvus's duty to his employer.

C) a violation of Canvus's fiduciary duties.

12. While trading on behalf of a pension account, an analyst receives special research reports from the bro-
kerage firm with whom she is doing the trades. Such an activity is:
A) a violation of only The Code of Ethics.

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

a violation of both Standard III(A), Loyalty, Prudence, and Care, and the Code
C)
of Ethics.
13. Gray Green, CFA, practices in a country that does not regulate the investment of company retirement
plans. He was retained by Bingham Companies to manage their corporate pension plan. Bingham's man-
agement has approached Green and requested that Green invest the entire plan in Bingham stock.
Green may:
invest a portion of the retirement plan in Bingham Company stock if the in-
A)
vestment is prudent and if he keeps the overall portfolio properly diversified.

not invest any of Bingham Company's retirement plan in its own stock regard-
B)
less of the stock's prospects and in spite of management's request.

invest all of the retirement plan assets in Bingham Company stock according
C) to management's request only if Green can document that the investment is
more prudent than any other investment opportunity he finds.
14. Lewis Noris, CFA, has been transferred from the brokerage house of the Browning Company to the port-
folio management department. In portfolio management, Noris learns that clients are grouped into three
divisions according to portfolio value, divided as follows:

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  Group 1 up to $10,000
 Group 2 from $10,001 to $100,000
 Group 3 more than $100,000
When recommendations are announced or trades are initiated, a particular sequence is followed in com-
municating to these groups. At the next monthly meeting, Noris suggests that the sequencing practice is
a breach of CFA Institute Standards. One of Noris's co-workers replies that the grouping approach helps
the company in applying the Standard regarding portfolio recommendations. He further suggests that
because Browning's overall performance is more strongly affected by actions taken on the high value
portfolios, that these portfolios should take priority over the small value portfolios. What should Noris do?
Noris should:
A) do nothing since there is no breach with the Standards.

B) prepare a written report to the CEO describing the problem.

C) disassociate himself from the problem and seek legal advice.

15. Cstrome Sandisk, CFA, completes a research report with a buy recommendation for Acorn Properties. In
the early afternoon, Sandisk e-mails this recommendation to his clients who had responded to his request
that they provide Sandisk with their e-mail addresses. Later that afternoon, the printed recommendation is
forwarded to the postal service for normal delivery to all customers, who receive the mailing 1 to 3 days
later. Sandisk has:
violated the Code and Standards by sending the e-mail recommendation to
A)
only some of his clients.

not violated the Code and Standards because he acted fairly in disseminating
B)
research information to his clients.

violated the Code and Standards by sending the e-mail recommendation in

C)
advance of the printed report.
16. Which of the following most accurately states a limitation that the Fair Dealing standard imposes?
A) Referral fees may be disclosed after proceeding with an agreement for service.

Clients should not be discriminated against when disseminating investment

B)
recommendations.

Before trading on her own portfolio, a CFA charterholder must wait for em-
C)
ployer and client deals to be executed.
17. Rey Languiz, CFA, covers the specialty chemical industry for Rock Advisory Associates. Until today he
has had a buy recommendation on ChemStar, and many of the firm's customers have purchased shares
based upon his recommendation. The firm's client accounts are divided into two fundamental categories:
trading and buy-and-hold accounts. The firm holds discretionary trading authority over the trading ac-
counts, but not the buy-and-hold accounts. Languiz has recently come to believe that the fundamentals
are changing for the worse at ChemStar, and is preparing a sell recommendation. He calls a meeting of
the firm's portfolio managers with accounts holding ChemStar and tells them of the pending release of the
sell recommendation. On this basis, the portfolio managers sell all positions in the discretionary accounts
but not in the buy-and-hold accounts. Languiz completes and mails the report to all clients two days later,
and, shortly thereafter, many of the buy-and-hold accounts sell their ChemStar positions. With regard to
these actions, Languiz is:
in violation of the Standard on Fair Dealing; the portfolio managers are in viola-
A)
tion of the Standard on Fair Dealing.

Page 93 of 204
 not in violation of the Standard on Fair Dealing; the portfolio managers are in
B)
violation of the Standard on Fair Dealing.

in violation of the Standard on Fair Dealing; the portfolio managers are not in
C)
violation of the Standard on Fair Dealing.
18. Concerning Standard III(B), Fair Dealing, which of the following actions is NOT a valid procedure for com-
pliance with the Standard?
Limit the number of people that are involved and are privy to the fact that an
A)
investment recommendation is going to be disseminated.

Communicate investment recommendations simultaneously within the firm and

B)
to customers, where possible.

Communicate investment recommendations to all customers including those

C)
accounts for which the securities are not eligible for purchase.
19. Which of the following statements regarding allocating trades is CORRECT? It is permissible under the
Standards to allocate trades:
A) based upon compensation arrangements.

based upon any method the firm deems suitable so long as the allocation pro-
B)
cedure has been disclosed to all clients.

C) on a pro-rata basis over all suitable accounts.

20. In securing the shares for all accounts under her management, Luchye Camel of Northwest Futures pur-
chased three blocks of shares at three different prices. She then allocated these shares by placing shares
from the first block in accounts with surnames beginning with A-G. The second was allocated over ac-
counts H-P, and the third over Q-Z. This action is:
A) consistent with her responsibilities under the Code and Standards.

B) not permissible under the Code and Standards.

C) permissible only if the clients are informed of the allocation procedure.

21. A money management firm has the following policy concerning new recommendations: When a new rec-
ommendation is made, each portfolio manager estimates the likely transaction size for each of their cli-
ents. Clients are notified of the new recommendation in the order of their estimated transaction size” larg-
est first. All clients have signed a form where they acknowledge and consent to this allocation procedure.
With respect to Standard III(B), Fair Dealing, this is:
A) not a violation because the clients have signed the consent form.

B) a violation of the standard.

C) not a violation because the clients are aware of the policy.

22. Which of the following statements is least accurate regarding being a part of Standard III(B), Fair Dealing?
A) Shorten the time between decision and dissemination.

B) Maintain a list of clients and their holdings.

C) At the same time notify clients for whom an investment is suitable of a new

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 investment recommendation.
23. An investment advisor goes straight from a research seminar to a meeting with a prospective new client
with whom she has never been in contact. The advisor is very excited about the information she just re-
ceived in the seminar and begins showing the prospect the new ideas her firm is coming up with. This is
most likely a violation of:
A) Standard III(B), Fair Dealing.

B) both of these.

C) Standard III(C), Suitability.

24. An analyst meets with a new client. During the meeting, the analyst sees that the new client's portfolio is
heavily invested in one over-the-counter stock. The analyst has been following the stock and thinks it will
perform well in the long run. The analyst arranges through a brokerage firm to simultaneously sell a large
number of shares of the stock via a series of cross trades from the new client's portfolio to various existing
clients. He arranges the trades to be executed at a price that approximates the current market price. This
action is:
A) not in violation of the Standards.

B) a violation of Standard III(A), Loyalty, Prudence, and Care.

C) a violation of Standard III(B), Fair Dealing.

25. Which of the following would be a violation of Standard III(B), Fair Dealing?
A) Having well defined guidelines for pre-dissemination.

B) Trading for regular accounts before discretionary accounts.

C) Limiting the number of employees privy to recommendations and changes.

26. All of the following are violations of Standard III(B), Fair Dealing, EXCEPT a member:
A) places a trade for the firm account before issuing a buy recommendation.

telephones clients in distant cities the day after a buy recommendation is

B) mailed to all clients because their mail service is later than the member's local
clients.

places a trade for her discretionary accounts before placing a trade for her
C)
non-discretionary accounts.
27. Macawoa Rancho, CFA, manages a mutual fund with an objective to emphasize income over capital
gains. Magic Technologies is a growth stock that pays no dividend, but Republic's research department
believes the stock will dramatically outperform the S&P 500 over the next 12 to 18 months. Based on this
strong recommendation, Rancho adds Magic stock to her fund's portfolio. Rancho has:
A) violated the Standards by relying on research that she did not perform herself.

B) violated the Standards by failing to comply with her portfolio's style mandate.

C) not violated the Standards and improved the diversification of the fund.
28. Luisee Tasmania, CFA, manages investments for 400 individuals and families and often finds his re-
sources stretched. When his largest investors petition him to include a 5% to 7% allocation of non-
investment-grade bonds in their portfolios, he decides he needs additional help to meet the request. He

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 considers various independent advisors to use as submanagers, but determines that the most qualified
advisors would be too expensive. Reasoning that a lower-cost provider would enable him to pass the sav-
ings along to his clients, he chooses that provider to invest the new bond allocation. Tasmania has vio-
lated:
Both Standard III(C) "Suitability" and Standard V(A) "Diligence and Reason-
A)
able Basis."

Standard III(C) "Suitability" by failing to consider the appropriateness of the

B)
non-investment-grade bonds.

Standard V(A) "Diligence and Reasonable Basis" by letting fee structure de-
C)
termine the selection of the submanager.
29. Milkey William, CFA, established an aggressive growth portfolio for her client, Jerry Washington, over
three years ago. Washington was placed on William's employer's client mailing list, and received monthly
account statements and the firm's newsletter, which regularly informed clients that they should contact
their account representative with any change in their personal circumstances or investment objectives. As
of January, of this year, William had not spoken to Washington nor received any correspondence from
Washington since the account was established. William has:
not violated the Code and Standards because Washington has been reminded
A)
regularly about the opportunity to inform William about any changes.

violated the Code and Standards because the manager has not performed an
B)
update of Washington's financial situation and investment objectives.

not violated the Code and Standards because there has been regular corre-
C)
spondence from William's firm to Washington.
30. Lolli Gorrilla, a broker, has three accounts consisting of unsophisticated, inexperienced individual inves-
tors with limited means. One of these accounts is an elderly couple. The clients want to invest in safe,
income-producing investments. They rely heavily on Gorrilla's advice and expect him to initiate most
transactions in their respective accounts. In managing their accounts, Gorrilla pursues the following
strategies: (1) buys U.S. treasury strips and non-dividend paying over-the-counter (OTC) stocks recom-
mended by his firm's research department, (2) uses margin accounts, and (3) concentrates the equity por-
tion of their portfolio in one or two stocks. Gorrilla's approach leads to extremely high turnover rates in all
three accounts.
Which of the following statements about Gorrilla is NOT correct?
A) Gorrilla has a fiduciary duty to each client.

Gorrilla's conduct violates Standard IV(B), Additional Compensation Arrange-

B)
ments.

C) Gorrilla's conduct violates Standard III(C), Suitability.

31. Which of the following statements about Gorrilla's conduct is CORRECT? Gorrilla's conduct:
meets the requirements of the Code and Standards because his firm's re-
A) search department recommended the U.S. Treasury strips and non-dividend
paying stocks.

meets the requirements of the Code and Standards because his clients are
B)
aware of the risks that he is taking in managing their accounts.

C) does not meet the requirements of the Code and Standards because his in-

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 vestment strategy is inconsistent with his clients' objectives.
32. The O'Douls (husband and wife) have decided to work with Jane Mack, CFA, to have her recommend an
investment portfolio for them. The O'Douls are novice investors and Mack has determined their asset allo-
cation model falls into the conservative category. After researching various investment options for the
O'Douls, Mack has made a recommendation that they divide their account on a 25%/75% basis between
shares of a computer peripherals manufacturing company her brokerage firm is underwriting and invest-
ment grade corporate bonds. The O'Douls are not aware that Mack's firm is underwriting an offering of the
company in question. Which CFA Institute Standard(s) has Mack violated given her actions?
A) Standard VI(A), Disclosure of Conflicts, and III(C), Suitability.

B) Standard V(A), Diligence and Reasonable Basis, and I(D), Misconduct.

C) Standard III(B), Fair Dealing, and III(A), Loyalty, Prudence, and Care.
33. Polimo Hall, CFA, is an investment advisor whose prospective client, Fooiz Sandy, presents special re-
quirements. To construct an investment policy statement for Sandy, Hall inquires about Sandy' investment
experience, risk and return objectives, and financial constraints. Sandy states that he has a great deal of
investment experience in the capital markets and does not wish to answer questions about his tolerance
for risk or his other holdings. Under Standard III(C), Suitability, Hall:
may accept Sandy' account but may only manage his portfolio to a benchmark
A)
or index.

is permitted to manage Sandy' account without any knowledge of his risk pref-
B)
erences.

C) must decline to enter into an advisory relationship with Sandy.

34. Fox Fisher is a portfolio manager for Super Selection. Fisher is friendly with Harris James, president of
HHG, a rapidly growing biotech company. James has provided Fisher with recommendations in the bio-
tech industry, which she buys for her own portfolio before buying them for her clients. For three years,
Fisher has also served on HHG's board of directors. She has received options and fees as compensation.
Recently, the board of HHG decided to raise capital by voting to issue shares to the public. This was at-
tractive to board members (including Fisher) who wanted to exercise their stock options and sell their
shares to get cash. When the demand for initial public offerings (IPO) diminished, just before HHG's pub-
lic offering, James asked Fisher to commit to a large purchase of the offering for her portfolios. Fisher
had previously determined that HHG was a questionable investment but agreed to reconsider at James'
request. Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase
HHG for her clients' portfolios.
Did Fisher violate Standard III(C) concerning Portfolio Recommendations and Actions?
A) Yes, she did not deal fairly with all clients.

B) No.

Yes, she did not consider the appropriateness and suitability of investment
C)
recommendations or actions for each portfolio or client.
35. According to CFA Institute Standards of Professional Conduct, when a client asks her portfolio manager
to change the current investment strategy of the client's portfolio, the manager should:
explain the implications of the new strategy after the member manager imple-
A)
ments the strategy.

B) examine whether the strategy is appropriate for the client and explain the im-

Page 97 of 204
 plications of the new strategy before implementing the strategy.

C) obey the client's request without question.

36. Boom Fenshui, CFA, has his own money management firm with two clients. The accounts of the two cli-
ents are equal in value. One of the clients gets married and the assets of the new spouse and the client
are combined. With the larger portfolio of the now married client, Fenshui determines that they can as-
sume a higher level of risk and begins a change in the policy concerning that portfolio. Which of the fol-
lowing would violate Standard III(C), Suitability?
A) Assess the return objectives of the newly married client and his spouse.

B) Assess the time horizon of the newly married client and his spouse.

C) Implement a similar policy for the other client who did not just get married.
37. Boom Martin has just approached Belly Killer, CFA, about purchasing 10,000 shares of Brookshire Co., a
newly incorporated real estate development firm. Martin is a retired schoolteacher living off the income
from her late husband's life insurance policy. This investment will represent a significant shift in her in-
vestment portfolio. Brookshire Co. is a local firm that has recently received a lot of press concerning some
exciting, but speculative projects that they have undertaken in the region. Consistent with the Standards,
Killer should:
accept Martin's order after she acquaints Martin with the downside risks asso-
A)
ciated with a risky investment of this type.

B) not accept the order, because it is not a suitable investment for Martin.

accept Martin's order, but have her sign a disclaimer absolving Killer of any
C)
potential losses.
38. What is the required frequency for updating information on each client's financial situation, investment
experiences, and investment objectives?
A) Only during the first meeting with the client.

B) Regularly.

C) Every year.
39. If an analyst has a policy of making an inquiry into a client's financial situation, investment experience,
and investment objectives regularly, this is:
A) neither of these.

B) congruent with Standard III(C), Suitability.

C) a violation of Standard III(E), concerning client confidentiality.

40. Boom Fenshui, CFA, has his own money management firm with two clients. The accounts of the two cli-
ents are equal in value. Fenshui has been trading on the clients' behalf with a single brokerage firm for
several years. Because of his many years of business, the brokerage firm occasionally gives Fenshui
shares in an initial public offering (IPO) to sell to his clients. Fenshui has a policy of allocating the IPO
shares equally between the portfolios of the two clients. This policy is:
A) a violation of Standard III(C), Suitability.

B) congruent with Standard III(C), Suitability.

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 C) a violation of Standard III(B), Fair Dealing.
41. Kimmi Rebok manages a variety of accounts at Superior Investments. Some are permitted to invest in
tax-exempt issues only; others may not invest in a stock unless it pays dividends. Rebok is researching a
biotech firm specializing in the analysis of "mad cow" disease. While touring company facilities and meet-
ing with management, she learns that they believe they may have found a way to reverse the disease.
Moreover, one manager conjectured, "Suppose that we reversed the disease in someone who didn't even
have it? We might then be able to boost that individual's IQ into the stratosphere!" Rebok returns to her of-
fice and buys shares for all accounts under her supervision. This action is:
a violation of the Standard concerning appropriateness and suitability of in-
A)
vestment actions.

B) appropriate given the obvious potential of the therapy.

C) a violation of the Standard concerning fiduciary duties.

42. Procedures for compliance with Standard III(C), Suitability, include determining all of the following with
respect to a client EXCEPT:
A) social habits and interests.

B) liquidity needs.

C) return objectives.
43. A portfolio manager must determine the client's constraints, which may include all of the following EX-
CEPT the client's:
A) tax considerations.

B) liquidity needs.

C) mortgage payment.
44. Lolli Gorrilla, a former broker, had three accounts consisting of unsophisticated, inexperienced individual
investors with limited means. One of these accounts was an elderly couple. The clients wanted to invest in
safe, income-producing investments. They relied heavily on Gorrilla's advice and expected him to initiate
most transactions in their respective accounts. In managing their accounts, Gorrilla pursued the following
strategies: (1) bought U.S. treasury strips and non-dividend paying over-the-counter stocks, (2) used mar-
gin accounts, and (3) concentrated the equity portion of their portfolios in one or two stocks. Gorrilla's ap-
proach led to extremely high turnover rates in all three accounts. The Securities and Exchange Commis-
sion sanctioned Gorrilla for unsuitable recommendations and excessive trading in several accounts.
For this specific situation, which of the following is least likely to be an appropriate compliance procedure
involving Standard III(C), Suitability? The broker should:
A) develop an investment policy statement for each client.

avoid using material nonpublic information received in confidence to benefit

B)
clients.

C) assess and document each client's risk tolerance.

45. For this specific situation, all of the following are appropriate compliance procedures involving Standard
III(C), Suitability, EXCEPT:
A) reviewing investment policy statements regularly.

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 B) educating clients about selecting appropriate asset allocations and strategies.

complying with any prohibitions on activities imposed by their employer if a

C)
conflict of interest exists.
46. For this specific situation, which of the following policy statements should be adopted to ensure that future
violations of this kind do not occur?
Before advising individual clients, managers should review the recommendations provided by the
firm's research department. From this set of recommendations, they should select those securities
that provide the expected highest return on investment. Managers should review the investor's
A)
portfolio at least monthly to see if existing securities should be replaced with those more recently
recommended. Managers should turnover portfolios frequently and concentrate holdings within
portfolios in order to achieve the highest possible returns for clients.

Before making any recommendations or taking any investment actions, managers should formulate
an investment policy for a client. They should consider the type and nature of the client and should
obtain and analyze necessary information on the client's objectives (risk and return) and con-
B)
straints. Managers should maintain and review regularly the investor's objectives and constraints to
reflect any changes in the client's circumstances. Where appropriate, managers should properly
diversify portfolios.

When making recommendations or taking investment actions, managers should seek to minimize
the client's portfolio risk. Managers should review the recommendations of the firm's research de-
partment to identify securities with low volatility. In making asset allocation recommendations or
C)
decisions for discretionary accounts, managers should weight the portfolios towards dividend-
paying stocks and other income-producing assets such as bonds and mortgage REITS. Managers
should review portfolios at least semi-annually.
47. The best way to determine the suitability of an investment is:
to consider the financial situation, investment experience, and investment ob-
A)
jectives of the client.

based on portfolio performance results, presented as a weighted average,

B)
from the biggest financial companies.

C) by administration of a specially designed survey of the client's opinions.

48. A broker was sanctioned for unsuitable recommendations and excessive trading involving three accounts
under his care. These clients were unsophisticated, inexperienced individual investors with limited means.
According to CFA Institute Standard III(C), Suitability, which of the following is least likely to be considered
a relevant factor in determining the appropriateness and suitability of investment recommendations or ac-
tions for each portfolio or client?
A) Best interests of the investment professional.

B) Basic characteristics of the total portfolio.

C) Needs and circumstances of the portfolio or client.

49. Naoni Jhonn, CFA, has launched a new hedge fund called the Jhonn Tautology Fund and is actively solic-
iting clients from competitor's firms. Client presentations are necessarily brief and often take place with
the prospective client's current investment advisor in the room. The Code and Standards require that:
member or candidate provide (on request) additional detail information which
A)
supports the abbreviated presentation.

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 B) a prospective client's current investment advisor not participate in meetings.

all client presentations provide a thorough review of all elements of the invest-
C)
ment management process. Abbreviated presentations are forbidden.
50. Macawo Buyer,a portfolio manager, is making a presentation to a prospective client. Macawo says that as
a new portfolio manager, he made an average annual rate of return of 50% in the last two years at his
previous firm and that based on this, he can guarantee a 50% return to the client. Which of the following
statements is in accordance with Standard III(D), Performance Presentation?
A) Implying that he can guarantee a return.

B) Imputing his past performance to future performance.

C) Stating his past performance as long as it is fact.

51. While it would be customary to report both five-year and ten-year performance data, Seminole Equity
Partners has been in existence for only eight years. Because of this, Kurt Dambach does not report ten-
year data but reports for both five years and since the inception of the fund. This he notes in a footnote at
the bottom of the information sheet. This action is:
A) a violation of the Standard concerning prohibition against misrepresentation.

B) a violation of the Standard concerning performance presentation.

in accordance with the Code and Standards since he has indicated the basis in
C)
a footnote.
52. A money management firm has created a new junk-bond fund. When the firm advertised the new fund at
its issuance, they used care to accurately compute the returns from the past 10 years for all assets in the
fund. The firm used the current portfolio weights to determine an average annual historical return equal to
18% and claim an 18% annual historical return in their advertising literature. With respect to Standard
III(D), Performance Presentation, this is:
A) a violation because the advertisement implies the firm generated this return.

B) in compliance.

a violation because the Standard prohibits computing historical returns on risky

C)
assets like junk bonds.
53. A money manager is meeting with a prospect. She gives the client a list of stocks and says, ' These are
the winners I picked this past year for my clients. Their double-digit returns indicate the type of returns I
can earn for you.' The list includes stocks the manager had picked for her clients, and each stock has
listed with it an accurately measured return that exceeds 10%. Is this a violation of Standard III(D), Per-
formance Presentation?
Yes, unless the positions listed constitute a complete presentation (i.e., there
A)
were no stocks omitted that did not perform in the double digits).

B) No, because the manager had the historical information in writing.

Yes, because the manager cannot reveal historical returns of recent stock
C)
picks.
54. A money manager, who is a member of CFA Institute, suggests during phone calls to his clients that, ' I
hope you will relay to your friends the great returns I earned for you this past year.' The manager had

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 generated above average returns in the past year. Is this a violation of Standard III(D), Performance
Presentation?
Yes, because the intended message fails the test of completeness as required
A)
under the standard.

Yes, because the Standard forbids members asking their clients to say any-
B)
thing about how well the member has done.

C) Not if it is true.
55. Lewis Doggett, CFA, has been contacted by the CFA Institute Professional Conduct Program (PCP) re-
garding allegations that he has taken investment actions that were unsuitable for his clients. Doggett is
questioned by PCP concerning the identity of his clients he considered suitable for investing in a very
risky start-up company that eventually went bankrupt.
Doggett will:
not violate the Code and Standards by revealing the names, financial condition
A)
and investment objectives of his clients to PCP.

violate the Code and Standards by fully cooperating with a PCP investigation if
B)
it means revealing confidential information.

not violate the Code and Standards only if he reveals the financial condition
C) and investment objectives of his clients on an anonymous basis and does not
reveal the names of his clients to PCP.
56. A CFA charterholder may disclose confidential information about a client when:
A) it is a necessary step in proceeding with research on client preferences.

B) the information is nonmaterial.

C) the CFA Institute Professional Conduct Program requests it.

57. Standard III(E), Preservation of Confidentiality, applies to the information that an analyst learns from:
A) current clients, former clients, and prospects.

B) current clients and prospects only.

C) current clients and former clients only.

58. Moore Bergeron, CFA, is an analyst with Metro Investment Services. During lunch with some of Metro's
managers, Bergeron is told, "There are going to be major problems at Gebco (a firm that Metro had
brought public last year). I was just over there and the place is just crawling with government inspec-
tors.' Bergeron had just issued a report with a "buy" recommendation on Gebco last week. Bergeron
should:
immediately issue a new report, but only after stopping by Gebco himself to
A)
corroborate the story.

B) not do anything to avoid a violation of fair dealing.

not do anything because to do so would violate his obligation to preserve con-

C)
fidentiality.

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59. Ortiz Martel, CFA, CAIA, has recently liquidated most of a client's portfolio because the client is planning
to buy a house. Martel informs one of the brokers in his office who has his real estate license about the
plans of his client. With respect to Standard III(E), Preservation of Confidentiality, this action:
violates the Standard unless the client asks Martel to tell the licensed sales-
A)
man.

B) is appropriate since Martel keeps the information in the firm.

C) is appropriate since Martel only tells a licensed salesman.

60. Ortiz Martel, 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 Stan-
dard III(E), Preservation of Confidentiality?
A) Sending a gift along with the card.

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

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

61. Ortiz Martel, CFA, may withhold from CFA Institute information about a client acquired in the regular per-
formance of his duties:
A) only if Martel is a relative of the client.

B) only if Martel has a special confidentiality agreement with the client.

C) for neither of the reasons listed.

62. While servicing his clients' accounts, an analyst who is a CFA charterholder, determines that one client is
probably involved in illegal activities. According to Standard III(E), Preservation of Confidentiality, the ana-
lyst may NOT do which of the following?
A) Contact CFA Institute about the determination.

B) There are no exceptions in this list.

C) Contact the appropriate governmental authorities about the determination.

63. Parker Brown, CFA, is a portfolio manager and works extensive hours. To give her a more flexible work
environment, she often works from home on her personal computer and keeps client account information
there – in violation of company policy. While away on travel, her home is burglarized and her computer is
taken. Rather than disclose the policy violation, she does not notify her company or her clients of the con-
tents of her computer files. Two months later the client account information is used to commit identity
theft, costing her clients a total of $58,000 in fraudulent charges. Brown is most likely:
not in violation of any Standard because the disclosure of confidential informa-
A)
tion was accidental and unavoidable.

in violation of Standard III(E) "Preservation of Confidentiality" for failing to fol-

B) low company policies and procedures relating to electronic information and
security resulting in accidental disclosure of confidential information.

not in violation of any Standard because the confidential information was

C)
stored on her personal computer for use for work during her personal time.

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 SOLUTION
1. Answer : B
Standard III(A) "Loyalty, Prudence, and Care" requires Parker to make a reasonable inquiry into the cli-
ent's investment experience, risk and return objectives, and financial constraints. Investment decisions
must be made based on a total portfolio approach, rather than the quality of an individual investment in
isolation.
2. Answer : B
Using soft dollars for the purchase of office furniture does not benefit clients and is a violation. Purchasing
research reports with soft dollars is not a violation, but the advisor should ensure that research purchased
with client brokerage will benefit her clients.
3. Answer : A
Brokerage is an asset of the client.
4. Answer : A
Standard III(A), Loyalty, Prudence, and Care, requires that members act for the benefit of their clients.
Bergeron's duty is to her clients, who are shareholders of SSF. She has no duty to SSF's management,
nor to the company itself, and must vote the shares accordingly.
5. Answer : A
Under Standard III(A) Loyalty, Prudence, and Care, fiduciaries must evaluate management's proposals
during proxy fights to see if they are in the best interest of the plan participants. If management's ideas
are justifiable and reasonably ensure plan participants'betterment, then fiduciaries can support them. If
management is only trying to further its own objectives, especially at the cost of plan participants, then fi-
duciaries must vote against management in proxy fights.
6. Answer : C
Members are required to act in the interest of their clients. In voting proxies, the client's interest must pre-
vail over management's interest.
7. Answer : C
The issue at hand is the member's fiduciary responsibilities in handling "soft dollars" which are technically
the property of the client. Standard III(A), Loyalty, Prudence, and Care, delineates the member's fiduciary
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 benefit and
is in violation of the Standard.

8. Answer : C
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 benefit analysis may show that voting all proxies
may not benefit 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 benefit the client. Although, this may prevent best execution, it does not violate the Standards as it
was directed by the client, not the brokerage firm.
9. Answer : C
The personal account privileges are clearly a violation. The no-interest line of credit could be a violation if
the analyst does not factor in the benefits when determining the fees of the clients, but it is not a per se
violation. Research reports are least likely to be a violation.
10. Answer : C
According to Standard III(A), Loyalty, Prudence, and Care, the analyst must put the client first and inform
the client of any possible conflicts of interest. The analyst must channel any benefits derived from his ser-
vice to the client, back to the client, and inform the client of the benefits.
11. Answer : A
The issue is similar to an allocation of soft dollars. Clearly, if the broker absorbs the loss, they expect to
make up the difference in some way. However, since the error was on the part of Quantco Brokerage,
Canvus is under no obligation to cover the cost of the trading error. Moreover, no reasonable observer

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 expects that there exists any implied future allocation of trades to Quantco in return for correcting their
own mistake. There is no violation of Standard III(A), Loyalty, Prudence, and Care.
12. Answer : B
An analyst can receive research from a brokerage firm with whom she is trading on behalf of a client. The
analyst should inform the client of the arrangement. The client is more likely to violate Standard III(A) by
obtaining non-research services or, worse yet, personal benefits from the brokerage firm.
13. Answer : A
Standard III(A), Loyalty, Prudence, and Care, requires members to comply with their fiduciary duty. Re-
tirement plan managers owe their duty to the plan participants, not to the management of the company
sponsoring the plan. The fiduciary duty includes the obligation to diversify the plan's investments, regard-
less of the quality of the sponsoring company's stock. Investing in the company's stock is not prohibited.
14. Answer : C
Taking a special approach in disseminating information in relation to initiating trades is a breach of Stan-
dard III(B), Fair Dealing. Given the fact that Noris works in the department and has already unsuccessfully
tried to prevent the practice from continuing, he needs to disassociate himself and seek legal advice.
15. Answer : B
Standard III(B) Fair Dealing requires that members deal fairly with all clients in disseminating investment
recommendations. It does not require uniform or equal treatment. Sandisk's approach in sending e-mail
correspondence to those of his clients who had given him their e-mail addresses, having made the re-
quest to all of his clients, and sending regular mail correspondence the same day, is fair to all of his cli-
ents.
16. Answer : B
Standard III(B) Fair Dealing states that the dissemination of information and recommendations to clients
must be handled fairly. The other choices are related to Standard VI(B) Priority of Transactions and Stan-
dard VI(C) Referral Fees.
17. Answer : A
Languiz is in violation of the Standard III(B), Fair Dealing, since he has disseminated his recommendation
preferentially to the portfolio managers in advance of making the report available to all clients who hold
shares of ChemStar. The portfolio managers are in violation of the Standard since they are effectively giv-
ing preferential treatment to the trading accounts over the buy-and-hold accounts in the placement of or-
ders based upon the change in recommendation.
18. Answer : C
To ensure compliance with the Standard, members should seek to communicate investment recommen-
dations to all clients who have indicated an interest and also those for whom the securities are suitable.
There is no need to communicate recommendations to clients for whom the securities are deemed un-
suitable.

19. Answer : C
It is permissible to allocate trades on a pro-rata basis over all suitable accounts. It is not permissible to
base allocations upon compensation arrangements. Any method is not necessarily suitable, and disclo-
sure does not absolve the member from ensuring that the allocation is necessarily fair.
20. Answer : B
Standard III(B) requires a member to deal fairly with all clients when taking investment actions. Since she
knew at the outset that she was going to place shares in all accounts, regardless of the first letter of the
surname, all accounts must participate on a pro-rata basis in each block in order to conform to the Stan-
dard. Her actions constitute a violation of the Standard concerning fair dealing.
21. Answer : B
Such a policy is a violation of the Standard and client acknowledgement and/or consent does not change
that fact.
22. Answer : C
All of these are part of Standard III(B) except notifying clients at the same time. Standard III(B) states that
clients for whom the investment is suitable should be notified at approximately the same time.

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23. Answer : B
It is a violation of Standard III(B) because the advisor should act first on behalf of existing clients whose
needs and characteristics she already knows. It is a violation of Standard III(C) because she has never
met the prospect and does not know if the new ideas are appropriate for the prospect. Thus, ' both of
these' is the best response.
24. Answer : A
There is no violation. It is in the best interest of the client to be diversified and selling via a series of cross
trades will likely reduce price impact costs when compared to selling directly into the market. The analyst
appears to have reasonable basis for putting the securities in the accounts of other clients.
25. Answer : B
Do not discriminate against a client when disseminating investment recommendations. If the firm offers
different levels of service, this fact must be offered and disclosed to all clients. The other choices are nec-
essary parts of the Standard. The Standard actually says to have published personal guidelines for pre-
dissemination, which implies that the guidelines be well-defined.
26. Answer : B
Standard III(B) states, "Members shall deal fairly and objectively with all clients and prospects when pro-
viding investment analysis, making investment recommendations, taking investment action, or in other
professional activities.'
The term ' fairly' implies that members should take care not to discriminate against a client when dis-
seminating investment recommendations. All the responses, except for the telephoning of distant clients
(which has the effect of putting them in the same position as local clients), describe a situation in which a
client or group of clients is receiving preferential or detrimental treatment that is unfair.
27. Answer : B
Standard III(C) Suitability requires that members managing portfolios take investment actions that are
consistent with their portfolio's stated objectives and constraints. The fund's mandate emphasizes income
over capital gains. Adding a non-dividend paying stock to the portfolio is a departure from that mandate.
28. Answer : A
Both Standard III(C) "Suitability" and Standard V(A) "Diligence and Reasonable Basis" were violated.
Tasmania must perform a full IPS review to determine the appropriateness of the new portfolio alloca-
tions. Submanagers should not be selected by cost structure alone, as the quality and appropriateness of
the submanager is Tasmania's responsibility.
29. Answer : B
Standard III(C) Suitability requires members to update a client's financial situation and investment objec-
tives regularly. Washington's account has existed for more than three years, and an update is long over-
due. Generally offering to do an update is not sufficient to comply with the Standard.
30. Answer : B
No information in the case suggests that Gorrilla's conduct violates Standard IV(B), Disclosure of Addi-
tional Compensation Arrangements.
31. Answer : C
Gorrilla's actions are inconsistent with Standard III(C), Suitability, because his investment actions are nei-
ther appropriate nor suitable for each client. Even if his clients were aware of the risks, the portfolios that
he constructed are inconsistent with their financial needs. Because he is in a position to control the vol-
ume and frequency of transactions in their accounts, he has control over the accounts. Although Gorrilla
relies upon recommendations from his firm's research department, he cannot shift blame to his employer
because he must follow recommendations that are in the best interests of his clients.
32. Answer : A
Mack is obliged to disclose the conflict of interest regarding her company's IPO and to consider both the
appropriateness and the suitability of the investment for her client. She has apparently failed in both re-
spects.
33. Answer : B
Hall would not violate Standard III(C), Suitability, by managing Sandy'account without knowledge of his
risk preferences. She made a reasonable inquiry into Sandy'investment experience, risk and return objec-
tives, and financial constraints, as the Standard requires. If a client chooses not to provide some of this in-

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 formation, the member or candidate can only be responsible for assessing the suitability of investments
based on the information the client does provide.
34. Answer : C
Fisher violated Standard III(C) because she did not consider her clients' financial situation, investment ex-
perience, and investment objectives. If the stock is questionable and overpriced, it is not suitable for any
of her clients.
35. Answer : B
According to Standard III(C), Suitability, the member manager must determine that an investment is suit-
able given the client's objectives/constraints and within the context of the client's total portfolio. In this
case, the member manager must examine the new strategy to see if it is appropriate for the client, even if
the client asked for the change. The member should also explain the implications of the strategy to avoid
any misrepresentations that may result from omitting details.
36. Answer : C
According to Standard III(C), Suitability, the analyst must assess the time horizon, return objectives, tax
considerations, and liquidity needs of a client before changing an investment policy. The analyst must no-
tify the client of the new policy. Implementing the policy for the other client may be a violation of the Stan-
dard unless that client's needs are totally reassessed and determined to be identical to the needs of the
newly married client.
37. Answer : A
Members are required to consider the appropriateness and suitability of investment actions for their cli-
ents. The needs and circumstances of the client, and the characteristics of the investment and the portfo-
lio must be taken into account. If Martin understands the risks of this investment and the rest of her portfo-
lio is adequate for her income needs, Killer can proceed to make the investment.
38. Answer : B
Standard III(C) Suitability. Members shall make a reasonable inquiry into a client's financial situation, in-
vestment experience, and investment objectives prior to making any investment recommendations and
shall reassess and update this information regularly.
39. Answer : B
Standard III(C) explicitly says that an analyst should make such inquiries and update information regu-
larly. Client confidentiality is addressed in Standard III(E) but that is with respect to how the analyst treats
the information once it is obtained.
40. Answer : A
According to Standard III(C), the analyst must consider the appropriateness and suitability of an invest-
ment recommendation for each portfolio or client. Having a fixed policy of adding investments to portfolios
without evaluating their suitability is a violation of Standard III(C). The action does not violate Standard
III(B)
41. Answer : A
Given the variety of accounts under her supervision, it is not likely the shares of a speculative biotech firm
would be suitable for all accounts. Placing such shares in all accounts indicates that she has failed to con-
sider the appropriateness and suitability of the investment for each account, and this places her in viola-
tion of Standard III(C).
42. Answer : A
The procedures for compliance with Standard III(C) include determining all of the aspects of a client's in-
vestment objectives and constraints mentioned above, but do not include gathering information about the
client's social habits and interests.
43. Answer : C
The mortgage payment per se is of interest to the portfolio manager only insofar as it affects the bigger
picture issues such as liquidity needs, cash flow, etc.
44. Answer : B
The prohibition against use of material nonpublic information refers to Standard II(A), not Standard III(C),
Suitability.
45. Answer : C

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 Standard VI(A), Disclosure of Conflicts, refers to complying with any prohibitions on activities imposed by
their employer if a conflict of interest exists and, therefore, is unrelated to Standard III(C).
46. Answer : B
Standard III(C) requires that members shall ' make a reasonable inquiry into a client's financial situation,
investment experience, and investment objectives prior to making any investment recommendations and
shall update this information regularly to allow the members to adjust their investment recommendations
to reflect changed circumstances.' The other policy statements focus on maximizing returns or minimiz-
ing risk. These statements may be inconsistent with the needs and circumstances of each individual cli-
ent.
47. Answer : A
Although broad in scope, the best way to determine suitability is to consider the financial situation, in-
vestment experience and investment objectives of the client. Both of the other choices deviate from these
essential issues.
Although broad in scope, the best way to determine suitability is to consider the financial situation, in-
vestment experience and investment objectives of the client. Both of the other choices deviate from these
essential issues.
48. Answer : A
Determining appropriateness and suitability focuses on the portfolio or client, not on the investment pro-
fessional. Investment professionals should take particular care to ensure that their goals in selling prod-
ucts or executing security transactions do not conflict with the best interests of the client.
49. Answer : A
See Standard III(D). When presentations are brief, additional detail which supports the abbreviated pres-
entation information must be provided on request. Best practice dictates that the member or candidate
should make reference to the abbreviated nature of the presentation.
50. Answer : C
There is no evidence that he's lying about his past performance. He is in violation for implying that he can
guarantee performance, for using short-term performance, and for imputing the manager's past perform-
ance to future performance.
51. Answer : C
Members who communicate performance information must ensure that the information is fair, accurate,
and complete. Seminole Equity's presentation meets this standard.
52. Answer : A
Reporting the historical returns of all assets now in the fund introduces a survivorship bias. Also, the ad-
vertisement is misleading because the fund just came into existence and has no historical record. Thus,
the firm has misled the public as to their performance history.
53. Answer : A
Standard III(D) requires fair representations concerning past and potential future performance. Unless the
list of the ' winners' includes all the positions that the firm held, the manager is misrepresenting past per-
formance. The following statement is questionable: ' Their double-digit returns indicate the type of returns
I can earn for you,' but the action of submitting a partial list is clearly a violation. The manager should
have information on past performance in writing.
54. Answer : A
Standard III(D) requires that members communicate performance in a fair, accurate, and complete fash-
ion, and covers both written and oral communication. Asking someone to advertise only one year's per-
formance is unlikely to be representative since this constitutes a timeframe that is too short.
55. Answer : A
Standard III(E) requires members to preserve client confidentiality. An exception to this standard is a PCP
investigation. Because PCP will also keep the clients'information confidential, members are expected to
fully cooperate with PCP investigations.
56. Answer : C
According to Standard III(E), Preservation of Confidentiality, a CFA charter holder cannot discuss client in-
formation received in the process of performing services for them except when related to an illegal action
or when requested by the CFA Institute Professional Conduct Program.

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57. Answer : A
According to Standard III(E), Preservation of Confidentiality, an analyst must preserve the confidentiality
of information communicated by clients, former clients, and prospects.
58. Answer : C
Under Standard III(E), members are bound to preserve the confidentiality of information that they receive
in the scope of their employment. There is nothing in the information to suggest that any illegal act had
occurred. He is, therefore, obligated not to disclose the information to others until it becomes public.
59. Answer : A
According to Standard III(E), Preservation of Confidentiality, Martel must keep client information confiden-
tial and limit the information to those people directly related to servicing the client. Merely working in the
same firm does not qualify a person for learning about the client of a fellow analyst.
60. Answer : B
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 firm to send birthday cards could be a violation.
Sending a birthday card is not a violation, nor is sending a gift of reasonable value.
61. Answer : C
According to Standard III(E), Preservation of Confidentiality, Martel may not withhold information under
any of the listed reasons. The reason is that CFA Institute will keep the information confidential.
62. Answer : B
Standard III(E) allows an analyst to reveal information about a client to CFA Institute since CFA Institute
will keep the information confidential. If the analyst is reasonably certain a law has been violated, an ana-
lyst may have an obligation to report the activities to the appropriate authorities. Therefore, neither of the
listed actions are exceptions from the analyst's options.
63. Answer : B
Brown violated Standard III(E) "Preservation of Confidentiality" by failing to follow company policies and
procedures relating to electronic information and security resulting in accidental disclosure of
confidential information.

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 DUTIES TO EMPLOYERS
LOS A.: Loyalty.
LOS B.: Additional Compensation Arrangements.
LOS C.: Responsibilities of Supervisors.

PRACTICE PROBLEM
1. Olivia Cote, CFA, has launched a new hedge fund called the Cote Tautology Fund but has had trou-
ble hiring analysts who are CFA charterholders as well as with finding clients. She offers a $15,000
incentive bonus to any charterholder who joins the firm with over $1 million in committed client in-
vestments. Which of the following interpretations of the Code and Standards is most accurate?
A member or candidate Jully not solicit current clients away from their
A)
current employer.

A member or candidate Jully arrange for current clients to switch to the

B) Cote Tautology Fund provided the member or candidate refuses to
accept the incentive bonus.

A member or candidate Jully arrange for current clients to switch to the

C) Cote Tautology Fund provided clients are informed of the incentive
bonus.
2. Barnes Robert, CFA, develops a trading model while working for CE Jones, an investment manage-
ment firm. By working on the model at home from his personal computer, Robert is able to devote ad-
ditional work hours. Although the trading model is successful, Robert losses his job in a company re-
structuring, and decides to start his own practice using the trading model. Barnes is most likely:
in violation of the Standards because he did not receive permission
A)
from his employer to keep or use the files after employment ended.

not in violation of the Standards because the trading model was cre-
B)
ated using his home computer.

in violation of the Standards because he did not have permission to

C)
build the trading model using his home computer.
3. Which of the following statements regarding employee/employer relationships is NOT correct?
A) An employee is someone in the service of another.

B) A written contract Jully or Jully not exist between employer and employee.

C) There must be monetary compensation for an employer/employee relationship to exist.

4. Alyssa Lavoie, CFA, is making arrangements to establish her own investment advisory business be-
fore terminating her relationship with her current employer, Elite Brokers, Inc. Elite is a small company
consisting of only six investment professionals and a small support staff. According to CFA Institute
Standards of Professional Conduct, which of the following activities is least likely a violation of
Lavoie's duty to Elite?

Page 110 of 204

 Lavoie solicits Elite's clients before her termination of employment at
A)
Elite.

Lavoie leases office space, furniture, and other equipment for her new
B)
business.

Lavoie engages in secret negotiations with two other investment pro-

C) fessionals and her administrative assistant to leave Elite in order to
join her new business.
5. Which of the following statements is most correct concerning a member's obligation to his or her em-
ployer under the Code and Standards?
Consent from the employer is necessary to permit independent prac-
A) tice that could result in compensation or other benefits in competition
with the member's employer.

Members are prohibited from making arrangements or preparations to

B) go into competitive business before terminating their relationship with
their employer.

Members are prohibited from undertaking independent practice in

C)
competition with their employer.
6. Which of the following activities will least likely constitute a violation of Standard IV(A), Loyalty?
Contacting your current clients and asking them to "come with you"
A)
when you resign from your current employer.

Consulting on your own time and obtaining written permission from

B)
your employer.

C) Conspiracy to bring about a mass resignation of other employees.

7. Bell Leblanc, CFA, is considering leaving his current employer to compete in the same field. He did
not sign a non-compete clause when he was hired. He Jully:
begin competing with his current employer as long as the employer
A)
has been informed of Leblanc' future intentions.

plan and prepare to compete with his current employer, but not begin
B)
competing until his resignation is effective.

Jully not prepare to compete, begin competing, or anything related to

C)
competing with his current employer.
8. All of the following activities might constitute a violation of Standard IV(A), Loyalty to Employer, EX-
CEPT:
A) misuse of confidential information.

solicitation of the employer's clients following termination of em-

B)
ployment.

solicitation of the employer's clients prior to termination of employ-

C)
ment.

Page 111 of 204

 9. When providing outside services, a member should provide all of the following information to her cur-
rent employer EXCEPT:
A) the compensation she will receive.

a promise to remit an agreed-upon percentage of the proceeds to the

B)
current employer.

C) the types of services to be provided.

10. Analysts who undertake an independent consulting practice while employed must get permission from
their employer and should disclose all of the following EXCEPT:
A) the clients contact information.

B) the anticipated duration of the service to be rendered.

C) the compensation or benefit to be received.

11. Julia Girard, CFA, is a research analyst for Advance Investments in Rome, Italy. Girard was contacted
by Bass Partners of Milan, Italy, a regional brokerage firm, about doing research on companies in the
beverage industry on a contract basis.
Girard Jully only do the contract work:
A) if Advance does not follow the beverage industry.

B) after receiving consent from both Advance and Bass.

C) if Advance has no clients in the same geographic area as Bass.

12. A CFA Institute member, undertaking independent practice that could result in compensation or other
benefit:
must notify the entities for whom he plans to undertake independent
A)
practice of the compensation he receives from his employer.

must notify his employer of the types of service to be rendered, the

B)
expected duration, and the expected compensation.

must notify his employer and clients of the types of service to be ren-
C)
dered and the expected compensation.
13. Butler Poirier, CFA, decides he could make more money if he started his own company. Which of the
following steps would NOT violate Standard IV(A), Loyalty to Employer?
Getting written permission from his employer to call the clients and solicit
A)
their business for his new firm.

B) Taking home the employer's buy lists.

Taking home his current employer's client lists, investment statements

C)
and marketing presentations.
14. When a CFA Institute member who is presently employed by a firm undertakes any independent prac-
tice, he must do all of the following EXCEPT:
A) disclose the expected duration of the services to be rendered.

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 B) secure permission from the employer.

remand a percentage (to be determined by the employee and employer)

C)
of the income earned back to the employer.
15. Jobbiz Lefebvre, CFA, is considering starting his own firm to compete with his current employer. He
takes several actions before turning in his resignation. Which of the following actions is NOT in viola-
tion of Standard IV(A), Loyalty to Employer?
A) Jobbiz copied the employer's computer models and other property.

B) Before leaving, Jobbiz solicits his employer's current clients.

Jobbiz told his employer that he was considering leaving and requested
C)
that the employer write him a letter of recommendation.
16. Sofia St-Pierre, CFA, is a senior analyst at a mutual fund. She is also a member of the Board of the
Directors of her daughter's Skating Club. She is often asked for advice about the management of the
club budget and about possible short-term investments, but she is not paid for this advice. She does
not undertake any research to answer these questions, providing information based only on the gen-
eral practices of the mutual fund at that moment. The only benefit she receives is a free monthly
membership for her daughter that would usually cost $182. What should she do before making any
recommendations, in order to comply with the CFA Institute requirements?
A) Inform her current clients about her outside consulting.

B) Consult only on her free time and do not accept any benefit greater than $100.

C) Obtain prior permission from her employer.

17. Gabriella Desjardins is a portfolio manager. She is planning to establish her own money management
firm. She has already informed her employer, Branford, Inc., about her plans. In her remaining time at
Branford, she can:
A) solicit Branford colleagues but not Branford clients.

inform her current clients about her resignation and let them know how
B)
to reach her, in case any problems arise in the future.

C) start the registration of her new company.

18. Which of the following statements is most correct under the Code and Standards?
CFA Institute members are prohibited from undertaking independent
A)
practice in competition with their employer.

Members are prohibited from making arrangements or preparations to

B) go into competitive business before terminating their relationship with
their employer.

Consent from the employer is necessary to permit independent prac-

C) tice that could result in compensation or other benefits in competition
with the member's employer.
19. Cook Couture has been working for Delphi, Inc., for several years, and he just joined CFA Institute.
Couture's sister just received a large bonus in the form of stock options in Zephyr, Inc. Couture's sis-
ter knows nothing about financial assets and offers Couture a week at her holiday home each year in

Page 113 of 204

 exchange for Couture monitoring Zephyr and the value of her stock options. In order to comply with
the Code and Standards, Couture needs to inform Delphi of:
A) both the use of the holiday home and his sister's options.

B) nothing since no money is involved and it is a favor for a family member.

C) the compensation in the form of the use of the holiday home only.
20. An analyst belongs to a nationally recognized charitable organization, which requires dues for mem-
bership. 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?
Resign from the position because the relationship is a conflict with the
A)
Standards.

B) Nothing since he is not an employee of the charitable organization.

C) Must treat the charitable organization as his employer.

21. Cook Demers, CFA, unsuspectingly joins the research team at Deere & Co., an investment banking
firm controlled by organized crime. None of the managers at Deere are CFA Institute members. Be-
cause of his tenuous situation at Deere, Demers begins making preparations for independent prac-
tice. He knows he will be terminated if he informs management at Deere 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
sufficient for him to strike out on his own." This action is:
A) a violation of his fiduciary duties.

B) a violation of his duty to disclose conflicts to his employer.

C) not a violation of his duty to employer.

22. Diaz Boudreau, CFA, recently became an independent money manager. After six months, he has
only ten clients, who are family and friends. To supplement his income, Boudreau accepted part-time
employment as an advisor at Middleton Financial Delphi. According to CFA Institute Standards of Pro-
fessional Conduct, which of the following statements about Boudreau's duty to his new employer is
CORRECT?
Boudreau need not inform Middleton about his existing clients but
A) must inform his existing clients about his new part-time employment at
Middleton.

Boudreau must inform Middleton to keep his existing clients and must
B) inform his existing clients of his new part-time employment at Middle-
ton.

Boudreau must inform Middleton about his existing clients but need
C) not inform his existing clients about his new part-time employment with
Middleton.
23. Evans Perron, CFA, is employed as an analyst by Enterprise Securities. According to CFA Institute
Standards of Professional Conduct, which of the following statements about Perron's duty to Enter-
prise is NOT correct? Perron must refrain from:
A) engaging in any conduct that would injure Enterprise.

B) making arrangements to go into a competitive business before termi-

Page 114 of 204

 nating her relationship with Enterprise.

engaging in independent competitive activity that could conflict with

C)
the business of Enterprise unless she receives written consent.
24. Flores Hamel, CFA, has been working for Delphi, Inc., for eight years. Hamel is about to start his own
money management business and has given his two-week notice of his resignation from Delphi. A
few days before his resignation takes effect, a former client of Delphi calls Hamel at his home about
his new firm. The former client says that he is very happy that Hamel is leaving Delphi because now
he and Hamel can resume a professional relationship. The client says that he would never become a
client of Delphi again. Hamel promises to call the client back after he has left Delphi. Hamel does not
tell his employer about the call. Hamel has most likely:
A) violated the Standard concerning disclosure of conflicts.

B) violated the Standard concerning loyalty to employer.

C) not violated the Standards.

25. Gray Dupuis, CFA, has been working for Advisors, Inc., for eight years. Dupuis 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 effect, a current client of Advisors calls him at his office to inquire about
some services for her account at Advisors. During the conversation, Dupuis tells the client that his
new business will have lower commissions than Advisors. Dupuis has most likely violated:
A) Standard VI(B), Priority of Transactions, by violating the priority of transactions.

B) Standard IV(A), Loyalty to Employer, by competing with his current employer.

C) none of these Standards.

26. Hung Hamel, CFA, has been working for Delphi, Inc., for eight years. Hamel is about to start his own
money management business and has given his two-week notice of his resignation from Delphi. A
few days before his resignation takes effect, on his lunch hour, he takes out a loan from a bank on
beMyersf of his new business and uses the money to buy some office equipment for his new busi-
ness. Since he engaged in these transactions while still an employee of Delphi, Hamel violated Stan-
dard IV(A), Loyalty to Employer, by:
A) neither of these actions.

B) engaging in a financial transaction, like taking out a loan, only.

C) both taking out the loan and purchasing the office equipment.
27. Amanda Gravel, CFA, works full-time as an investment advisor for the Malloy Group, an asset man-
agement firm. To help pay for her children's college expenses, Gravel wants to engage in independ-
ent 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):
requires Gravel to obtain written consent from both Malloy and the
A)
persons from whom she undertakes independent practice.

does not require Gravel to notify Malloy of preparing to undertake in-

B)
dependent practice under the current conditions.

Page 115 of 204

 requires Gravel to notify Malloy in writing about her intention to under-
C)
take an independent practice.
28. Brainy Yollow, a CFA Institute member, is a portfolio manager for Progressive Trust Company. Sev-
eral friends asked Yollow to review their investment portfolios. On his own time, Yollow 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 Yollow violate his duty to Progressive Trust?
No, because Yollow received no monetary compensation for his ser-
A)
vices.

B) No, because Yollow provided no ongoing investment advice.

Yes, because he undertook an independent practice that could result

C)
in compensation or other benefit to him.
29. Fridz Arbican, CFA was an analyst for Pacific Investments. In October he left Pacific and joined
Global Securities as manager of a local office. Arbican's change of employment came about in the
following manner:
 In April, Arbican contacted Global about a possible position he saw advertised in a financial publi-
cation and had exploratory meetings with Global.
 In July, Arbican submitted a strategic plan to Global and signed an agreement to join Global. He
then contracted for office space on beMyersf of Global.
 On October 15, Arbican's resignation from Pacific became effective. He did not take any client
lists from Pacific.
 On October 16, Arbican mailed a letter that explained his new undertaking with Global to prospec-
tive clients, including his former clients at Pacific.
With respect to Standard IV(A) Loyalty, Arbican:
A) did not violate the Standard.

B) violated the Standard by contracting for office space on beMyersf of Global.

C) violated the Standard by contacting his former clients at Pacific.

30. Jully Allard, 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 first step would least likely be to:
A) provide her supervisor with a copy of the Code and Standards.

B) contact industry regulators.

C) review the company's policies and procedures for reporting ethical violations.
31. Jully Allard, CFA, is an equity research analyst for a "precious metals mining" exchange traded fund
which has recently started significantly outperforming its benchmark after several years of stagnation.
Upon investigating the source of the outperformance, Allard learns that the fund has experienced se-
vere style drift, and now has a significant proportion of its resources invested in technology and Inter-
net stocks. Allard reviews the fund's prospectus and learns the current sector weighting violates mul-
tiple prospectus covenants. Allard contacts her supervisor and the fund's compliance department and
is told the portfolio weighting is not her responsibility and that she should not purAmanda the matter
further. Allard reviews the firm's whistleblower policy, contacts personal legal counsel, and then con-
tacts regulatory authorities regarding the style drift and prospectus violations. Allard is most likely:

Page 116 of 204

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

B) in violation of Standard III(E) "Preservation of Confidentiality."

C) not in violation of the Code and Standards.

32. Ronny Samsung, 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 firm's
established "Transition and Exit Policies" regarding discussion of the reason for his departure. During
his final two weeks of employment, Samsung 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..." Samsung's statements are in direct violation of the firm's "Transition and Exit Policies,"
but he considers it a free-speech is Amanda. Samsung is most likely:
in violation of Standard IV(A) "Loyalty" recommended procedures for
A)
failing to notify regulators of the dangerous margin policy.

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

B) failing to follow the employer's policies and procedures related to ter-
mination policy.

C) not in violation of the Code and Standards.

33. Ronny Samsung, CFA, is a personal investment advisor with 200 individual, family, and corporate ac-
counts. After a dispute with a coworker on margin policy, he formally resigns his position by giving
suitable notice. However, he does not follow his firm's established "Transition and Exit Policies" re-
garding his accounts. The firm's stated policies require him to notify each client of his planned depar-
ture and personally introduce them to their new account representative, Greg Potter. Samsung sees
Potter as a rival and states "...let Potter do his own work and find his own clients." Samsung is most
likely:
in violation of Standard I(D) "Misconduct" for leaving clients subject to
A)
an account representative he does not find suitable.

in violation of Standard IV(A) "Loyalty" for failing to follow the em-

B) ployer's policies and procedures related to notifying clients of his de-
parture.

C) not in violation of the Code and Standards.

34. Hernandez Lambert, CFA, is an equity research analyst for a long-term investment fund. The fund is
seeking new clients, so Lambert contacts old clients he knew through his former employer. Which of
the following is most accurate?
A) Lambert cannot solicit clients from a former employer.

Lambert is not prevented from soliciting clients as long as he is work-

B) ing from memory and publically available information rather than a list
generated while he was still with the former employer.

C) Lambert can only solicit clients after notifying his former employer.
35. Feb Boivin, CFA, is employed as manager of a college endowment fund. The college's endowment is
held by the brokerage firm Advisors, Inc. Over the years, Boivin 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. Boivin has never reached the $2,500 commission level and

Page 117 of 204

 probably will never do so. According to Standard IV(B), Additional Compensation Arrangements,
Boivin needs to:
A) inform her supervisor verbally about the Platinum account.

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

C) do none of the actions listed here.

36. An analyst working at an investment firm 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) do nothing since the offer is not linked to the performance of the client's portfolio.

B) explicitly refuse such an offer.

C) inform his supervisor in writing of the offer if the analyst intends to accept the offer.
37. Long Laree, CFA, works for Advisors where she manages a portfolio for a wealthy family. Laree 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. Boivin will comply with Standard IV(B), Additional
Compensation Arrangements, if she:
A) does nothing with respect to this.

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

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

38. To comply with Standard IV(B), Additional Compensation Arrangements, members should do all of
the following EXCEPT:
state the terms of oral or written agreements regarding the compensa-
A)
tion and the duration of the agreement.

immediately make a written report to their employer specifying any

B)
compensation benefits they receive.

reject any outside compensation immediately because it is not appro-

C)
priate to accept outside compensation in a business setting.
39. Duch Raymond, a CFA charterholder, receives a free country club membership in exchange for finan-
cial advice he can offer the firm. He should:
A) do nothing; it is his business where he spends his free time.

B) disclose the arrangement to his employer.

reject the country club membership since it is illegal under CFA Insti-
C)
tute rules and regulations to accept outside compensation.
40. Clocky Leduc, CFA, a portfolio manager for a large Texas investment firm, has been offered compen-
sation in addition to what her firm pays her. The offer is from one of her clients and the additional
compensation will be based on her yearly performance in excess of the market index. Leduc should:
A) make written disclosure to all parties involved before she accepts this

Page 118 of 204

 offer.

turn down the offer because it represents a clear conflict between this
B)
client and Leduc's other clients.

make written disclosure to her other clients before she accepts this
C)
offer.
41. An analyst needs to inform his supervisor in writing of which of the following?
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
A)
employee even though no verbal or written agreement exists about the
bonus.

A client and the analyst alternate paying for lunch at a local sandwich
B)
shop.

C) Both the lunch and the bonus mentioned in the other answers.
42. Don 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 offers to provide
Saul and his family with access to the facilities at Eureka Country Club at no cost. Saul will not re-
ceive any monetary compensation for his services on the Board. According to CFA Institute Stan-
dards of Professional Conduct, which of the following actions must Saul take?
Saul must disclose in writing to Savage Bank the terms of the offer
A)
whether or not he accepts the offer to serve on the Board of Directors.

Saul must obtain written consent from all parties to only if he decides
B)
to accept the offer to serve on the Board of Directors.

C) Saul must reject the offer to serve on the Board of Directors.

43. Long Laree, CFA, works for Advisors where she manages various portfolios. Laree's godfather is an
accountant and has done Laree's tax returns every year as a birthday gift. Laree's godfather has re-
cently become a client of Advisors and asked specifically for Laree to manage his account. In order to
comply Standard IV(B), Disclosure of Additional Compensation Arrangements, she needs to:
A) have her godfather cease doing her taxes.

liquidate from her personal portfolio any stocks her godfather owns
B)
and verbally tell her supervisor about the tax services.

C) do neither of the actions listed here.

44. Moore West is a CFA charterholder and trust officer for REO Trust Company. Soon after beginning
work for REO, West finds 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 busi-
ness with him, he will give her a substantial discount on all personal transactions she conducts
through him. West:
must inform her employer of the arrangement because it provides her
A)
with additional compensation.

B) must inform her employer of the arrangement because she is doing

Page 119 of 204

 business with a member of her immediate family.

does not need to inform her employer of the arrangement because the
C)
commissions her brother charges the firm are the lowest possible.
45. Sweety Fritz, CFA, is a portfolio manager for Mainland Securities. Rick Steam, one of her clients and
owner of Steam Fitness Centers, offers to permit Fritz and her immediate family to use the facilities at
his fitness centers at no cost during 2003. To get this benefit, Fritz must achieve on Steam's portfolio
at least a 2-percentage point return above the total return on the S&P's 500 index during 2002. Fritz
orally informs her immediate supervisor of the nature and duration of the proposed arrangement.
Adward Charley, 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. Charley e-mails Mainland's compliance officer informing her of this arrangement
with Omega and receives a reply informing him that the agreement is acceptable.
Did Fritz or Charley violate CFA Institute Standards of Professional Conduct?
A) Fritz: No, Charley: No.

B) Fritz: Yes, Charley: Yes.

C) Fritz: Yes, Charley: No.

46. Baby Stephen, CFA, is a portfolio manager at FMC Investments. Stephen manages the account of
Wistz Fox. The performance of Fox's portfolio has been below that of the benchmark portfolio, the
S&P 500, for the past several years. In an effort to enhance his portfolio's performance, Fox offers to
pay Stephen $2,000 each year that his portfolio's return exceeds that of the S&P 500. Fox suggests
this arrangement last for the next three years. The amount that Fox agrees to pay Stephen is in addi-
tion to the compensation that Stephen will receive from his employer and the standard fee that Fox
will pay FMC for managing his portfolio over the three-year period. Stephen agrees to the arrange-
ment proposed by Fox and informs FMC in writing of the terms of the agreement under which she will
receive additional compensation. According to CFA Institute Standards of Professional Conduct
Stephen must disclose:
A) both the nature and amount of compensation only.

B) the nature and amount of compensation plus the duration of the agreement.

C) the nature of the compensation only.

47. Kelly Denz, CFA, volunteers on her church's finance 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. Denz does not enjoy the retreat and often considers
skipping the event entirely. Denz 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 IV(B) "Additional Compensation Arrangements."

All of the following are poor examples of supervisory responsibility EXCEPT:
Proper supervision is not exercised because the supervisor's income
A)
is partially based on unsupervised or improper trading activity.

Incorporating a professional conduct evaluation as part of an em-

B)
ployee's performance review.

Page 120 of 204

 Poor procedures allow a portfolio manager to designate a trade to an
C)
account or portfolio after the outcome of the trade is known.
48. Which of the following statements about Standard IV(C) Responsibilities of Supervisors is least accu-
rate?
If the supervisor makes a reasonable effort to detect violations, but
A) fails to detect a violation that occurs, she is in compliance with Stan-
dard IV(C).

If no effort is made to detect violations, the supervisor is in violation of

B) Standard IV(C) even if no violations by her subordinates have oc-
curred.

If a subordinate violates a securities law, her supervisor is in violation

C)
of Standard IV(C).
49. A manager has pointed out that his firm has experienced significant expansion over the past few
years. Until recently, its Legal Department was responsible for the firm's compliance activities. Now,
however, the legal and compliance functions have been separated. A compliance officer has been
formally designated and a comprehensive compliance program has been put in place.
In order to function effectively, the compliance officer must have the authority:
A) to hire and fire personnel.

to affect, control, and guide employee behavior and to respond to employee

B)
misconduct.

C) which is consistent with the most senior partner or executive officer in the firm.
50. According to the CFA Institute Standards of Professional Conduct, which of the following statements
about members with supervisory responsibility is NOT correct? Members with supervisory responsibil-
ity:
must make reasonable efforts to detect violation of laws, rules, regula-
A)
tions, and the Code and Standards.

are relieved of their supervisory responsibility if they delegate their

B)
supervisory duties to other members of CFA Institute.

are expected to have in-depth knowledge of the Code and Standards

C) and to apply this knowledge in discharging their supervisory responsi-
bilities.
51. firm recently hired Long Taylor to be a managing supervisor in the firm. Taylor knows that all of her
subordinate supervisors are members of CFA Institute and that they have a compliance system in
place with respect to the Code and Standards. Under these conditions Taylor needs to:
A) review the compliance system for its adequacy.

B) neither of these choices.

rely on the current compliance system since the subordinate supervi-

C)
sors are subject to the Code and Standards.
52. According to Standard IV(C), a CFA Institute member who is in a supervisory role must have which of
the following?

Page 121 of 204

 A) An in-depth knowledge of the Code and Standards.

B) Both of these.

C) A graduate degree.
53. The following scenarios describe two members of CFA Institute who have supervisory responsibility.
 The president of Hawthorne Investments, a newly founded money management firm with five in-
vestment professionals, asked Rebecca Long, CFA, to be the company's compliance officer and
to develop the company's compliance procedures. Long has an in-depth knowledge of the Code
and Standards, but she was too busy to develop a compliance manual herself. Therefore, she
copied, with written permission, the compliance manual of a large money management firm. This
manual was comprehensive and covered many areas not part of Hawthorne's operations. Long
gave the manual to Hawthorne's president, but did not distribute the contents of the program to
other appropriate personnel.
 A co-worker at Barksdale Capital mentions to Stephen Luck, CFA, that George Trout, a candidate
in the CFA Program, Jully have violated the CFA Institute standard involving priority of transac-
tions. As Trout's supervisor, Luck decided to investigate this allegation but did not begin the inves-
tigation until a month after the alleged incident. Luck continued to maintain the same amount of
supervision on Trout during the month before he began his investigation of Trout.
According to the CFA Institute Standards of Professional Conduct, which of the following statements about
whether Long and Luck followed appropriate compliance procedures involving their responsibilities as super-
visors is CORRECT?
A) Both Luck and Long violated the procedures for compliance.

B) Luck violated the procedures for compliance, but Long did not.

C) Neither Luck nor Long violated the procedures for compliance.

54. Morgan Gilbert, CFA, recently joined Allegheny Investments as a senior analyst. Because of her ex-
tensive experience in the investments business and knowledge of the Code and Standards, Alle-
gheny's management asked her to assume supervisory responsibility. Gilbert 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, Gilbert should:
agree to accept supervisory responsibility provided that Allegheny
A) adopts reasonable procedures to allow her to adequately exercise
such responsibility.

agree to accept supervisory responsibility and to develop reasonable

B)
procedures to allow her to adequately exercise such responsibility.

decline in writing to accept supervisory responsibility until Allegheny

C) adopts reasonable procedures to allow her to adequately exercise
such responsibility.
55. For years Hung Belly, 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 firm.
To not be liable for a violation of the Standards, Belly must:
A) do nothing more than have the set of procedures in place as stated.

both periodically review the procedures and ensure the procedures are
B)
monitored and enforced.

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 C) ensure the procedures are monitored and enforced.
56. Which of the following statements about Standard IV(C), Responsibilities of Supervisors, is NOT cor-
rect? CFA Institute members with supervisory authority:
Jully delegate supervisory duties, which relieves them of their supervi-
A)
sory authority.

are expected to bring an inadequate compliance system to the atten-

B)
tion of the firm's senior managers and recommend corrective action.

are expected to have in-depth knowledge of the Code and Standards

C) and to apply this knowledge in discharging their supervisory responsi-
bilities.
57. For years, Hung Belly, 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 firm. The company has re-
cently arranged to have members of CFA Institute as mid-level supervisors throughout the firm. With
this arrangement Belly has delegated the supervision of employees with respect to the Code and
Standards to the mid-level managers. With this action Belly:
is relieved of his obligation to supervise the employees under the mid-
A)
level supervisors.

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

is still responsible for seeing that procedures are in place to prevent

C)
violations of the Code and Standards.
58. firm recently hired Myers Jean, CFA, to be a supervisor in the firm. Jean has reviewed the procedures
for complying with the Code and Standards in the company. It is Jean's belief that the procedures
need revision in order to be effective. Jean must:
only send out a petition to fellow workers asking for a change in the
A)
procedures.

refuse supervisory responsibilities in writing until the company adopts

B)
an adequate system.

C) both submit a petition to fellow workers and inform the SEC.

59. For many years, Hung Belly, CFA, has been a mentor of Bell Chennings, a family friend, who just
earned the CFA designation. Belly is the CEO of a firm that just hired Chennings, but the hiring was
done at a lower level so Belly and Chennings have no direct contact in the daily operation of the firm.
With respect to Standard IV(C), Responsibilities of Supervisors, Belly:
A) assumes no extra responsibility with the hiring of Chennings.

must both develop written procedures concerning Chennings and rou-

B)
tinely evaluate his performance.

must develop a set of written procedures to prevent violations derived

C)
from his mentoring Chennings.
60. Cook Fruitz, CFA, supervises a group of research analysts, none of whom have earned the CFA des-
ignation or are CFA candidates. On several occasions he has attempted to get his firm to adopt a
compliance system to ensure that applicable laws and regulations are followed. However, the firm's
principals have never adopted his recommendations. Fruitz should most appropriately:

Page 123 of 204

 resign from the firm, because no other alternative will keep him in
A)
compliance with the Code and Standards.

decline in writing to accept supervisory responsibility until reasonable

B)
compliance procedures are adopted.

take no further action, because by encouraging his firm to adopt a

C) compliance system he has fulfilled his obligations under the Code and
Standards.
61. Ortiz Truzz, CFA, is vice-president of the equity department at Walker Financial, a large money man-
agement firm. Of the twenty analysts in his department for whom he has supervisory responsibility,
eight are subject to CFA Institute Standards of Professional Conduct. Truzz 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 Grey, who is subject to the Standards, and some to
Bell Fritz, who is not subject to the Standards. According to CFA Institute Standards of Professional
Conduct, which of the following statements about Truzz's ability to delegate supervisory duties is most
correct?
Truzz cannot delegate any of his supervisory duties to either Grey or
A)
Fritz.

Truzz can delegate some or all of his supervisory duties to Fritz, even
B)
though Fritz is not subject to the Standards.

Truzz can delegate some or all of his supervisory duties only to Grey
C)
because she is subject to the Standards.
62. Which of the following is least likely a recommended procedure for supervisors and compliance offi-
cers to comply with Standard IV(C), Responsibilities of Supervisors?
Hold hearings when violations have occurred to determine the severity
A)
of the violations.

B) Disseminate the firm's compliance procedures to employees.

Incorporate a professional conduct evaluation into the employee's per-

C)
formance review.
63. Parker Grey, CFA is the research director for Castle Investment, Inc., and has supervisory responsi-
bility 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 NOT
an action that Grey should take to adhere to the compliance procedures involving responsibilities of
supervisors? Grey should:
incorporate a professional conduct evaluation as part of the perform-
A)
ance review only for the three CFA charterholders.

isAmanda periodic reminders of the procedures to all analysts under

B)
his supervision.

disseminate the contents of the compliance program to the eight ana-

C)
lysts.
64. Phillips Raymond, CFA, is a senior trader for Grey Securities. In his monthly review of his team's ac-
tivity, Raymond notices a series of suspicious trades by one of the traders. Raymond consults his
manager, who agrees that these trades are a potential violation. Raymond informs the trader that her

Page 124 of 204

 duties will be restricted while these trades are being investigated and refers the matter to Grey's com-
pliance officer for further action. Raymond has:
violated Standard IV(C) “ Responsibilities of Supervisors by restricting
A)
the trader's duties before the investigation is completed.

B) not violated the Standards.

violated Standard IV(C) “ Responsibilities of Supervisors by failing to

C)
prevent a potential violation.
65. Rocky Killer, CAIA, and Level II CFA candidate, heads the research department of a large brokerage
firm. The firm has many analysts, some of whom are subjected to the CFA Institute Code of Ethics
and Standards of Professional Conduct. If Killer delegates some of her supervisory duties, which
statement best describes her responsibilities under the CFA Institute Code and Standards?
CFA Institute Standards prevent Killer from delegating supervisory
A)
duties to subordinates.

Killer retains supervisory responsibilities for those duties delegated to

B)
her subordinates.

Killer's supervisory responsibilities do not apply to those subordinates

C)
who are not subjected to the CFA Institute Code and Standards.
66. Candram Jhim, CFA, is the chief compliance officer for Dalton Financial Network, a regional broker-
age firm. Dalton is divided into three regions, each of which has a regional compliance officer. Ortiz
Lund, CFA, is the regional compliance officer for Dalton's South Region.
Dalton has established procedures for proper allocation of trades to all clients. In October, Fred Curry, CFA, a
broker in the South Region, misallocated a trade in favor of certain of his clients and to the detriment of oth-
ers. It became evident that Lund had failed to review the trades on a timely basis as called for in Dalton's Pro-
cedures Manual.
After an investigation, it was concluded that Curry violated the Code and Standards by failing to allocate
trades properly and Lund violated the Code and Standards by failing to supervise appropriately. It should also
conclude that Jhim:
did not violate the Code and Standards because adequate procedures
A)
were in place, even though they weren't being followed.

violated the Code and Standards by failing to establish proper proce-

B)
dures.

violated the Code and Standards by failing to adequately supervise

C)
her regional compliance officer, Lund.
67. Kelly Denz, CFA, is a rising star at a major investment bank and has an extremely demanding sched-
ule. To avoid "burning out" new hires, the bank has instituted a mandatory vacation policy which re-
quires employees to take at least 5 days of vacation per year. At the end of the year, Denz has taken
no vacation, but is scheduled to travel to Fiji to take the mandatory 5 days. The bank's most important
client is suddenly targeted in a hostile takeover and asks specifically for Denz to join the takeover de-
fense team. Her supervisor, Hank Lone, CFA, asks Denz to cancel her vacation and she complies.
Lone is most likely:
A) in violation of Standard IV(C) "Responsibilities of Supervisors."

B) not in violation of the Code and Standards.

Page 125 of 204

 C) in violation of Standard IV(A) "Loyalty."
68. Sumo Browny, CFA, is a portfolio co-manager for the Sandia Energy pension fund. She has been
contacted by Ted Garnet, a former classmate. Garnet has started his own investment management
firm and would like Sandia Energy to move a portion of its assets to be managed by his firm. Browny
moves 5% of the pension fund to Garnet's firm to help him build his assets under management. Kurt
Show, CFA, is Browny's supervisor. Show notes the move, but does not investigate. Show is most
likely:
A) not in violation of the Code and Standards.

B) in violation of Standard IV(C) "Responsibilities of Supervisors."

C) in violation of Standard V(A) "Diligence and Reasonable Basis."

Page 126 of 204

 SOLUTION
1. Answer : A
A member or candidate Jully not solicit current clients away from their current employer under Stan-
dard IV(A) "Loyalty."
2. Answer : A
Robert is in violation of Standard IV(A) "Loyalty." Employer records include items stored in any me-
dium including home computers.
3. Answer : C
Monetary compensation is not a requirement of the employee/employer relationship.
4. Answer : B
Standard IV(A) permits Lavoie to make preparations to begin a new practice, such as leasing office
space, furniture, and other equipment, but not to engage in the other activities that Jully violate her duty to
employer.
5. Answer : A
There is no blanket prohibition against independent practice in competition with a member's employer.
The member must obtain permission from the employer. Members Jully make preparations to go into a
competitive business, but Jully not solicit clients of the employer as long as members are still employed by
the employer.
6. Answer : B
Consulting on your own time and obtaining written permission from your employer does not constitute
a violation of Standard IV(A).
7. Answer : B
Leblanc Jully plan and prepare to compete with his current employer, but Jully not begin competing
until his resignation is effective or he gets permission from his employer. Members must provide notifica-
tion to their employer describing the types of services to be rendered, the expected duration, and com-
pensation for the services.
8. Answer : B
Solicitation of the employer's clients prior to termination of employment would constitute a violation of
Loyalty to Employer, but solicitation of clients following termination would not.
9. Answer : B
She should provide information about the type of services, the compensation arrangement and the
expected duration of the project.
10. Answer : A
The Member or Candidate is not required to disclose confidential information about his independent
clients.
11. Answer : B
Standards IV(A) and IV(B) require members to obtain written consent from both their employer and
the contracting party before undertaking independent practice in competition with their employer. Girard
needs to seek such consent from both entities because it does not appear that she can argue successfully
that there is no competition between Advance and Bass. They apparently are both research firms, indus-
try specialization Jully not prevent competition, and Girard should be devoting her time and energy to her
employment, unless her employer consents to the contract work.
12. Answer : B
According to Standard IV(A), Loyalty to Employer, a CFA Institute member, undertaking independent
practice that could result in compensation or other benefit, must notify his employer of the types of service
to be rendered, the expected duration, and the expected compensation.
13. Answer : A
If Butler gets written permission from his employer to solicit their clients (not likely, obviously) he
would not be violating the Loyalty to Employer Standard.
14. Answer : C

Page 127 of 204

 The member is obligated to get permission from his employer if he will be in any way competing with
his current employer. They must provide notification to their employer describing the types of services to
be rendered, the expected duration, and compensation for the services.
15. Answer : C
Asking for a letter of recommendation is perfectly acceptable. Soliciting clients and taking the em-
ployer's property like client lists, computer programs, etc. are not permissible.
16. Answer : C
According to Standard IV(A) Loyalty to Employer, it is the employee's duty to inform the employer
about any type of outside consulting service, including duration and any compensation. Only after receiv-
ing permission from her employer, can she proceed.
17. Answer : C
The only action that will not breach Standard IV(A) Loyalty to Employer, is to start the registration of
her new company.
18. Answer : C
Members are not prohibited from making arrangements or preparations to go into competitive busi-
ness 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 notification to their employer describing the types of services
to be rendered, the expected duration, and compensation for the services.
19. Answer : A
According to Standard IV(A), Loyalty to Employer, Couture must inform Delphi of his outside consulta-
tion even if it is not for monetary compensation. According to Standard VI(A), Disclosure of Conflicts, Cou-
ture must also disclose possible conflicts of interest, and his sister's position qualifies.
20. Answer : C
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.
21. Answer : C
Demers 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.
22. Answer : B
Standard IV(A) and IV(B) requires that Boudreau inform both Middleton and his existing clients.
23. Answer : B
Standard IV(A) permits Perron to make preparations to go into a competitive business before termi-
nating her relationship with Enterprise provided that such preparations do not breach her duty of loyalty.

24. Answer : C
Based on the information here, Hamel has done nothing wrong. He took a call at his home, presuma-
bly on his own time, and the client made it clear that he would never be a client of Delphi. Therefore, there
was no breach of loyalty to Delphi by Hamel, nor is there a conflict of interest.
25. Answer : B
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, Dupuis is placing himself in direct competition with
Advisors, and this is a violation of Standard IV(A).
26. Answer : A
The Standards of Practice under IV(A) expressly says 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 loy-
alty. Neither of these actions are in conflict with the interests of Delphi, and Hamel performed them on
his own time.
27. Answer : B

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 Standard IV(A), Loyalty to Employer, requires that Gravel obtain written consent only from her em-
ployer before she undertakes independent practice that could result in compensation or other benefit in
competition with Malloy. It is not required to get permission from your employer when only preparing to go
into independent practice.
28. Answer : C
Standard IV(A) does not preclude providing independent services for compensation while still em-
ployed; however, notification to the employer is required describing the type of service, the expected dura-
tion, and the compensation. Compensation includes more than just monetary benefits.
29. Answer : A
According to Standard IV(A) Loyalty, preparations to leave employment are not prohibited. Even
though Arbican engaged in significant preparatory activities prior to beginning his new venture, none of
these actions suggest Arbican did not continue to act in Pacific's interests while he was employed by Pa-
cific. Arbican Jully contact his former clients on beMyersf of Global after his employment by Pacific has of-
ficially ended, as long as he did not misappropriate their contact information from Pacific.
30. Answer : B
See Standard IV(A) "Loyalty." Allard should begin by reviewing the company's policies and proce-
dures 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.
31. Answer : C
Standard IV(A) "Loyalty" does not necessarily prohibit Allard from whistleblowing actions. Allard has
properly contacted her supervisor and the compliance department, and has reviewed her firm's whistle-
blower policy.
32. Answer : B
Samsung 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 under-
stand and follow their employer's policies and operating procedures. Also, members and candidates plan-
ning to leave their current employer must continue to act in the employer's best interest.
33. Answer : B
Samsung 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.
34. Answer : B
According to Standard IV(A), Lambert 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.
35. Answer : B
Having the Platinum account is a benefit from her managing the endowment, which led to the rela-
tionship with Advisors. Members should report to their employers any additional compensation or benefits
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.
36. Answer : C
Standard IV(B) requires that members disclose to their employer in writing all benefits that they re-
ceive in addition to their regular compensation for services they perform on beMyersf of their employer.
They also need to get consent from their employer in writing. The written report to the employer should in-
clude the details of any written or oral agreement for extra compensation. The analyst does not have to
refuse the offer.
37. Answer : C
Standard IV(B) requires that members disclose to their employer in writing all benefits that they re-
ceive in addition to their regular compensation for services they perform on beMyersf of their employer. E-
mail messages qualify. As long as the agreement is in effect, she must inform her employer even if she
has yet to use the potential benefit.
38. Answer : C

Page 129 of 204

 There is no reason to reject any outside compensation immediately because it is inappropriate to ac-
cept it. However, all outside arrangements must be reported to the member's employer.
39. Answer : B
Duch should disclose the arrangement to his employer under Standard IV(B), Additional Compensa-
tion Arrangements.
40. Answer : A
Standard IV(B), Additional Compensation Arrangements, applies in this situation. Standard IV(B)
states, No gifts, benefits, compensation, or consideration are to be accepted with Jully create a conflict of
interest with the employer's interest unless written consent is received from all parties.
The key words here are "written consent" - members must obtain written consent because such arrange-
ments Jully affect loyalties and objectivity and create potential conflicts of interest.
41. Answer : A
Standard IV(B) requires that members disclose to their employer in writing all benefits that they re-
ceive in addition to their regular compensation for services they perform on beMyersf 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.
42. Answer : B
Standard IV(B) requires that members obtain written consent from all parties involved before accept-
ing monetary compensation or other benefits that they receive for their services that are in addition to
compensation or benefits conferred by a member's employer. In this situation, Saul Jully also be obligated
to disclose his participation on Fairway's Board to clients, prospective clients, and employer under Stan-
dard VI(A), Disclosure of Conflicts.
43. Answer : C
Standard IV(B) requires that members disclose to their employer in writing all benefits that they re-
ceive in addition to their regular compensation for services they perform on beMyersf of their employer. It
is not unreasonable for an individual's godfather to give them a birthday gift. Moreover, since the tax ser-
vices were a regular birthday present before her godfather became a client, this implies that they are un-
related to any investment management services.
44. Answer : A
Members are required to disclose to their employer in writing all monetary compensation or other
benefit they receive in addition to the employer's compensation. The discounting of West's commissions is
a benefit that must be disclosed.
45. Answer : C
Fritz violated Standard IV(B), Additional Compensation Arrangements, because she must disclose in
writing other benefits to be received for services that are in addition to compensation conferred by her
employer. Charley did not violate Standard IV(B) because he received consent from his employer in writ-
ing, which includes e-mail.
46. Answer : B
Procedures for compliance for Standard IV(B) indicate that the written report should state the terms of
any oral or written agreement under which Stephen will receive additional compensation including the na-
ture of the compensation, the amount of compensation and the duration of the agreement.
47. Answer : C
Denz is in violation of Standard IV(B) "Additional Compensation Arrangements." Nonmonetary com-
pensation Jully still create a conflict of interest.
48. Answer : B
According to Standard IV(C), supervisors must make reasonable efforts to detect and prevent viola-
tions of laws, rules, regulations, and the Code and Standards by anyone under their authority. Incorporat-
ing a professional conduct evaluation as part of an employee's performance review is a recommended
compliance procedure.
49. Answer : C
Standard IV(C) Responsibilities of Supervisors requires members to make a reasonable effort to de-
tect violations by their subordinates. Violations by subordinates do not necessarily mean the supervisor
has violated this Standard.

Page 130 of 204

50. Answer : B
Compliance officers must be able to guide employee behavior and respond to employee misconduct,
otherwise there will be no effective compliance procedures in place. Unless the compliance officer can ef-
fectuate compliance procedures, the compliance program has no chance of responding to or preventing
violations of the Standards.
51. Answer : B
Although members who supervise large numbers of employees Jully delegate supervisory duties,
such delegation does not relieve them of their supervisory responsibility.
52. Answer : A
to detect violations of law, rules, regulations, and Code and Standards. This responsibility is not elimi-
nated because the Taylor's subordinates are CFA Charterholders. Taylor should review the compliance
system and report any inadequacies to senior management.
53. Answer : A
The only requirement for a supervisor is an in-depth knowledge of the Code and Standards. Neither of
the other choices are required.
54. Answer : A
Long violated the procedures for compliance involving her supervisory responsibility by not tailoring
the compliance manual to Hawthorne's operations and by not distributing the contents of the program to
appropriate personnel. Luck also violated the procedures for compliance by not responding promptly to
the allegation that Trout violated the CFA Institute standard involving priority of transactions and by not in-
creasing supervision on Trout pending the outcome of the investigation.
55. Answer : C
If Gilbert clearly cannot discharge supervisory responsibilities because of an inadequate compliance
system, she should decline in writing to accept supervisory responsibility until Allegheny adopts reason-
able procedures to allow her to adequately exercise such responsibility.
56. Answer : B
As a CEO, Belly is responsible for implementing and maintaining appropriate compliance procedures.
He must also ensure the procedures are monitored and enforced.
57. Answer : A
Standard IV(C) permits members to delegate supervisory duties but such delegation does not relieve
members of their supervisory responsibility.
58. Answer : C
Belly has not violated any of the Standards. He has the right to delegate supervisory duties. This dele-
gation does not relieve him of the responsibility of making sure that procedures are in place to prevent vio-
lations of the Code and Standards.
59. Answer : B
If Jean believes the current procedures are not adequate, Jean must refuse the supervisory responsi-
bilities in writing until an adequate system is adopted. There is nothing in the Standards about circulating
a petition.
60. Answer : A
As a CEO, Belly is responsible for reasonable procedures being in place for the entire firm. Since
Belly is not the supervisor of Chennings, however, Belly assumes no extra responsibility upon his hiring.
61. Answer : B
According to Standard IV(C), Responsibilities of Supervisors, if the member cannot discharge super-
visory responsibilities because of a poor or nonexistent compliance system, the member should decline in
writing to accept supervisory responsibility until the firm adopts an adequate system. The standard does
not require Fruitz to resign.
62. Answer : B
Standard IV(C), Responsibilities of Supervisors, permits Truzz to delegate supervisory duties to Grey,
Fritz, or both, but such delegation does not relieve Truzz of his supervisory responsibility.
63. Answer : A
While a supervisor should respond promptly and investigate violations, there is no obligation to hold
hearings when violations have occurred.

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64. Answer : A
Grey should incorporate a professional conduct evaluation as part of his review of all eight analysts
under his supervision, not just the three CFA charterholders.
65. Answer : B
By reviewing the employee's conduct, restricting the employee's activities while investigating a poten-
tial violation, and referring the matter to his manager and compliance officer, Raymond acted properly ac-
cording to Standard IV(C) “ Responsibilities of Supervisors. Wrongdoing by a subordinate does not mean
the manager has violated Standard IV(C) as long as adequate procedures to detect and prevent violations
are in place and the manager enforces them.
66. Answer : B
Even though members Jully delegate supervisory duties, such delegation does not relieve members
of the supervisory responsibility.
67. Answer : C
Standard IV(C) is violated when a supervisor does not take reasonable steps to implement an effec-
tive compliance system. Even though the system employed by Dalton Jully be adequate, Jhim is respon-
sible to see that her regional compliance officers follow it.
68. Answer : A
Lone has a responsibility to equally enforce all firm policies to demonstrate that all rules are equally
important.
69. Answer : B
Show should review important changes to the portfolio for compliance with firm policies and proce-
dures. The decision to work with Garnet seems arbitrary, and Jully not be necessary or prudent

Page 132 of 204

 INVESTMENT ANALYSIS, RECOM-
MENDATIONS, AND ACTIONS

 LOS a Diligence and Reasonable Basis.

 LOS b Communication with Clients and Prospective Clients.
 LOS c Record Retention.

PRACTICE PROBLEM
1. Adams William and Audrey Charley, both CFA charterholders, are investment advisors at Uptown Se-
curities. William recommends that one of his clients buy Alpha Company based on research con-
ducted by Uptown. Charley recommends that one of her clients sell Alpha Company based on re-
search conducted by another brokerage firm for general distribution. Both recommendations are con-
sistent with each client's investment objectives and within the context of their entire portfolios. Neither
William nor Charley has reason to suspect that any information contained in the research reports from
these two sources is inaccurate or inadequately supported. According to Standard V(A) Diligence and
Reasonable Basis, do William and Charley have a reasonable basis for making their investment rec-
ommendations?
A) Only one of these advisors has a reasonable basis for his or her recommendation.

B) Both of these advisors have a reasonable basis for their recommendations.

C) Neither of these advisors has a reasonable basis for their recommendations.

2. A financial analyst and CFA Institute member sends a preliminary research report on a company to
his supervisor. The supervisor approves the report, but then the analyst receives news that causes
him to revise downward the earnings estimate of the company. The analyst resubmits the report to
the supervisor with the new earnings estimate. The analyst soon finds out that the supervisor plans to
release the first version of the report with the first earnings estimate without a reasonable and ade-
quate basis. In response to this the analyst must:
both insist that a follow up report be issued and take up the issue with regula-
A)
tory authorities.

B) only insist that the first report be followed up by a revision.

insist that the supervisor change the earnings forecast or remove his (the ana-
C)
lyst's) name from the report.
3. The following scenarios refer to recommendations made by two analysts.
 Jonny López, CFA, is a quantitative analyst at Quantlogic, Inc. López uses computer-generated
screens to differentiate value and growth stocks based on accounting numbers such as sales,
cash flow, earnings, and book value. Based on her analysis of all domestically traded stocks in
the U.S. over the past year, López concludes that value stocks as a class have underperformed
growth stocks over that period. Using only this analysis, she recommends that account executives

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 at Quantlogic sell all value stocks from the portfolios for which they have discretionary authority to
trade and replace these stocks with growth stocks.
 James Capelli, CFA, is a fundamental analyst at Wheaton Capital Management, which focuses on
regional stocks. His analysis of Branson Wireless includes the investment's basic characteristics
such as information about historical earnings, ownership of assets, outstanding contracts, and
other business factors. In addition to conducting both a general industry analysis and a company
financial analysis, Capelli interviews key executives at Branson. Based on his analysis, he con-
cludes that the company's future prospects are strong and issues a "buy" recommendation.
According to CFA Institute Standards of Professional Conduct, did López and Capelli have a reason-
able and adequate basis for making their recommendations?
A) Both López and Capelli have a reasonable basis for their recommendations.

B) López has a reasonable basis for his recommendation, but Capelli does not.

C) Capelli has a reasonable basis for his recommendation, but López does not.
4. A client calls his money manager and asks the manager to liquidate a large portion of his assets un-
der management for an emergency. The manager warns the client of the risk of selling many assets
quickly but says that he will try to get the client the best possible price. This is a violation of:
A) Standard V(A), Diligence and Reasonable Basis.

B) none of the Standards listed here.

C) Standard III(C), Suitability.

5. An analyst has found an investment with what appears to be a great return-to-risk ratio. The analyst
double-checks the data for accuracy, keeps careful records, and is careful to not make any misrepre-
sentations as he simultaneously sends an e-mail to all his clients with a buy recommendation. Ac-
cording to Standard V(A), Diligence and Reasonable Basis, the analyst has:
violated the Standard if he does not verify whether the investment is appropri-
A)
ate for all the clients.

B) violated the Standard by communicating the recommendation via e-mail.

C) fulfilled all obligations.

6. Penguin Blue, CFA, is a research analyst following Brown Co. All the information she has gathered
suggests the stock should be rated a weak "hold." During a recent lunch, Blue overheard another ana-
lyst say that the stock should be rated a "buy." Blue returns to her office and issues a "buy" recom-
mendation. Blue:
violated CFA Institute Standards of Professional Conduct because she did not
A)
seek approval of the change from her firm's compliance director.

has violated CFA Institute Standards of Professional Conduct because she did
B)
not have a reasonable and adequate basis for making this recommendation.

has violated CFA Institute Standards of Professional Conduct because she

C)
failed to distinguish between fact and opinion.
7. Hill Rowny, CFA, has been preparing a research report on New London Wire and Cable, one of his
major investment clients. He had completed much of his analysis and had planned on having his re-
port typed and bound today. Unfortunately, his briefcase was stolen while he ate breakfast, and he
lost all his notes and working papers. The lost materials included his notes from management inter-
views, conversations with suppliers and competitors, dates of company visits, and his computer disk-

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 ette containing much of his quantitative analysis. Rowny's client needs this report tomorrow. In a
panic, Rowny called New London's vice president of finance and was faxed a copy of the company's
most recent financial projections. Rowny remembered that his own analysis showed that manage-
ment's estimates were too high. He did not remember the exact amount, so he revised New London's
figures downward 10%. Rowny also incorporated some charts and graphs on New London from a re-
search report he had received last week from a small regional research firm and used some informa-
tion from a Standard & Poor's reference work. With the help of his secretary, a Xerox machine, and
some creative word processing, Rowny got the report done in time for the evening Fedex pick up. On
the way home from the office that night, Rowny wondered if he had violated any CFA Institute Stan-
dards of Professional Conduct. Rowny has:
A) violated none of the Standards.

violated the requirement to have a reasonable basis for a recommendation and

B)
the prohibition against plagiarism.

violated the requirement to have a reasonable basis for a recommendation, the

C) prohibition against plagiarism, and the requirement to maintain appropriate
records.
8. Bob Gage, CFA, was attending a noon luncheon when he overheard two software executives talking
about a common vendor, Datagen, about how wonderful they thought the company was, and about a
rumor that a major brokerage firm was preparing to issue a strong buy recommendation on the stock.
Gage returned to the office, checked a couple of online sources, and then placed an order to pur-
chase Datagen in all of his discretionary portfolios. The orders were filled within an hour. Three days
later, a brokerage house issued a strong buy recommendation and Datagen's share price went up
20%. Gage then proceeded to gather data on the stock and prepared a report that he dated the day
before the stock purchase.
Gage has:
violated the Standards by using the recommendation of another brokerage firm
A)
in his report.

B) violated the Standards by improper use of inside information.

violated the Standards by not having a reasonable basis for making the pur-
C)
chase of Datagen.
9. In the process of recommending an investment, in order to comply with Standard V(A), Diligence and
Reasonable Basis, a CFA Institute member must:
A) do both of these.

B) have a reasonable and adequate basis for the recommendation.

C) support a recommendation with appropriate research and investigation.

10. Susi Pal is the supervisor of her firm's research department. Her firm has been seeking the mandate
to underwrite Wings Industries' proposed secondary stock offering. Without mentioning that the firm is
seeking the mandate, she asks Jack Dawson to analyze Wings common stock and prepare a re-
search report. After reasonable effort, Dawson produces a favorable report on Wings stock. After re-
viewing the report, Pal then adds a footnote describing the underwriting relationship with Wings and
disseminates the report to the firm's clients. According to CFA Institute Standards of Professional
Conduct, these actions are:
A) a violation of Standard V(A), Diligence and Reasonable Basis.

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 B) not a violation of any Standard.

C) a violation of Standard VI(A), Disclosure of Conflicts.

11. An analyst receives a research report from a colleague. The colleague's report has an elaborate table
with performance data on publicly traded stocks. The colleague says the data in the table consists of
measures provided by Standard & Poor's. The analyst finds the table a useful reference for a report
she is writing. She uses several pieces of data from the table. The analyst is potentially in violation of:
A) Standard I(C), Misrepresentation, concerning the use of the work of others.

Standard V(A), Diligence and Reasonable Basis, if she does not first verify the
B)
data in the table is accurate.

C) no particular standard because this is appropriate activity.

12. An analyst writes a report and includes the forecasts of an econometric model developed by the firm's
research department. The analyst identifies the source of the forecast and includes all the relevant
statistics concerning the model and his opinion of the model's accuracy. With respect to Standard
V(A), Diligence and Reasonable Basis, the analyst has:
A) violated the Standard by including quantitative details in a report.

B) violated the Standard by not testing the model himself.

C) complied with the Standard.

13. An analyst notices that for most years that a given class of assets has an abnormally high rate of re-
turn, the asset class often has an abnormally low rate of return the next year. Based upon this infor-
mation, according to Standard V(A), Diligence and Reasonable Basis, the analyst can recommend:
A) neither of these choices.

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

an increased allocation of Treasury bills (T-bills) for all portfolios of assets that
C)
have increased dramatically in the previous year.
14. Several years ago, Milton and Lili, a full service investment firm, managed the initial public offering of
eCom, Inc. Now, eCom wants Milton and Lili to underwrite its secondary public offering. A senior
manager at Milton and Lili asks Brent Whitman, CFA, one of its equity analysts, to write a favorable
research report on eCom to help make the underwriting a success. Whitman conducts a thorough
analysis of eCom and concludes that the company has serious problems that do not suggest a favor-
able financial outlook. Nevertheless, Whitman writes a favorable report because he is fearful of losing
his job. Milton and Lili publicly distribute a report that only contains a buy recommendation and a brief
description of the basic characteristics of eCom. Whitman has violated:
Both Standard I(B) Independence and Objectivity and Standard V(A) Diligence
A)
and Reasonable Basis.

B) Standard V(A) Diligence and Reasonable Basis only.

C) Standard I(B) Independence and Objectivity, only.

15. Hill Sánchez, CFA, works for H-E-B, Inc. In order to remain in compliance with Standard V(A), Dili-
gence and Reasonable Basis, Sánchez may recommend a security in which of the following situa-
tions?

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 A) Sánchez reads a favorable review of the security in a widely read periodical.

B) H-E-B' research department recommends a stock.

C) For either of the reasons listed here.

16. Susi Brown, CFA, is a portfolio co-manager for the Sandia Energy pension fund. Sandra Bulow, a re-
search analyst under Brown's supervision, creates a new trading model and immediately begins to
trade. Susi stops Bulow from trading, but notes that the firm has no guidelines for testing new models.
Brown should most likely:
encourage her firm to develop detailed, written guidance that establishes
A) minimum levels of testing for all computer-based models as recommended by
Standard V(A) "Diligence and Reasonable Basis."

encourage her firm to develop detailed, written guidance that establishes

B) minimum levels of testing for all computer-based models as required by Stan-
dard III(C) "Suitability."

report Bulow to the firm's compliance department for violation of Standard V(A)
C)
"Diligence and Reasonable Basis."
17. Standard V(B), Communication with Clients and Prospective Clients, least likely requires members to:
use reasonable judgment regarding the inclusion or exclusion of relevant fac-
A)
tors in research reports.

disclose the general principles of investment processes used to analyze and

B)
select securities, and construct portfolios.

make clear buy or sell recommendations on the securities covered in research

C)
reports.
18. Bailey Willy, CFA, is preparing a report on Blanding, Inc. Blanding's earnings have increased in each
of the last six years by an average of 11.8%. Based on his analysis, Willy projects that Blanding's
earnings will increase by 12.5% in each of the next two years. Willy will violate the Code and Stan-
dards if he states:
"Blanding's earnings will grow at 12.5% annually in each of the next two
A)
years."

"Blanding's earnings have been compounding at approximately 11.8% annu-

B)
ally."

"I expect Blanding's earnings growth to increase to 12.5% annually in the next
C)
two years."
19. An analyst belongs to a nationally recognized charitable organization, which requires dues for mem-
bership. 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) both his supervisor in the organization and his regular place of work.

C) his supervisor in his regular place of work only.

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20. An analyst finds 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 fixed-income instruments and em-
phasizes the observed lack of correlation. He feels the stock would be of little value to investors
whose portfolios are comprised primarily of equities. The clients with allocations of fixed income in-
struments are the only clients to see the report. According to Standard V(B), Communication with Cli-
ents and Prospective Clients, the analyst has:
A) violated the Standard concerning fair dealings with all clients.

B) not violated the Standard.

C) violated the article in the Standard concerning facts and opinions.

21. Campbell Gagnon, a CFA candidate, is preparing a research report on Pets-R-Us for public distribu-
tion. Gagnon's preliminary report contains unfavorable earnings forecasts for the next four quarters.
As part of his analysis, Gagnon met with Linda Brisson, the president of Pets-R-Us, and asked her to
review the preliminary report for factual inaccuracies. Brisson revised Gagnon's earnings forecasts so
that the quarterly earnings showed an upward trend and resulted in positive earnings by the fourth
quarter. Gagnon included the revised earnings figures in his report without further review. Although
the final report included the basic characteristics of Pets-R-Us, it emphasized certain areas such as
projected quarterly earnings but only briefly touched on others. According to CFA Institute Standards
of Professional Conduct on research reports, Gagnon:
violated the Standard because the report did not give similar attention to all
A) areas but instead emphasized quarterly earnings at the expense of other ar-
eas.

violated the Standard because he did not thoroughly review and analyze any
B)
information provided by Brisson.

C) did not violate the Standard.

22. Cook Lavoie, a CFA Institute member, is an analyst at a regional brokerage firm. She is preparing a
research report on Standard Power and Light. Due to deregulation, utility companies face increased
competition. During the past year, three of the five utility companies in her region have cut their divi-
dends by 50%, on average, to provide more internal funds for investment purposes. In a discussion
with Standard's chief executive officer, Lavoie learned that Standard expects to have a record amount
of capital expenditures during the next year. Although Standard subsequently issued a press release
about its capital expenditure plans, it did not make any public statements about a change in dividend
policy. Lavoie reasons that the management of Standard will be under pressure to cut its dividends
within the next year to remain competitive. Lavoie issues a research report in which she states:
"We expect Standard Power and Light will experience an initial decrease of $3 a share in its stock
price when it cuts its dividend from $2 to $1 a share by the second quarter. We expect that Standard
will strengthen its competitive position by using more internally generated funds to finance its invest-
ment opportunities. If investors buy the stock now at around $50 a share, their total return should be
at least 20% on the stock."
Based on CFA Institute Standards of Professional Conduct, which of the following statements about
Lavoie's actions is CORRECT?
A) Lavoie violated the Standards because she used material inside information.

B) Lavoie did not violate the Standards.

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

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23. An analyst who routinely purges the files that support his research and recommendations:
A) is acting in accordance to Standard III(E), Preservation of Confidentiality.

B) is acting in accordance to Standard IV(A), Loyalty to Employer.

C) may be violating Standard V(C), Record Retention.

24. Davis Leblanc, CFA, is preparing a research report on Open Interface, Inc. In the course of her re-
search she learns the following:
 Open Interface had its credit rating downgraded by a prominent rating agency 3 years ago due to
sales pressure in the industry. The rating was restored 3 months later when the pressure re-
solved.
 Open Interface's insider trading has been substantial over the last 3 months. Holdings of Open
Interface shares by officers, directors, and key employees were reduced by 50% during that pe-
riod.
In Leblanc's detailed report making a buy recommendation for Open Interface, both the credit rating
downgrade and the insider trading were omitted from the report.
Leblanc has:
violated the Code and Standards by not including the insider trading informa-
A)
tion in her report.

violated the Code and Standards by not including the insider trading informa-
B)
tion and by not including the credit rating downgrade in her report.

C) not violated the Code and Standards in her report.

25. In preparing research reports, which of the following is least likely required or recommended by the
Code and Standards?
A) Send all reports to the firm's legal counsel to ensure compliance with securities laws.

B) Maintain copies of materials that were relied on in preparing the research report.

C) Attribute paraphrases and summaries of material prepared by others.

26. Fisher White, CFA, works for a portfolio management firm. White is a partner of the firm and is primar-
ily responsible for managing several large pension plans. White has just finished a research report in
which she recommends Zeta Corporation as a Strong Buy. Her rating is based on solid manage-
ment in a growing and expanding industry. She just handed the report to the marketing department of
the firm for immediate dissemination. Upon returning to her desk she notices a news flash by CNN
reporting that management for Zeta Corporation is retiring. White 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 White is best? White:
may send out the report as written as long as a follow up is disseminated
A)
within a reasonable amount of time reflecting the changes in management.

should report the new information to her immediate supervisor so that they can
B) determine whether or not the marketing department should send out the report
as written.

C) should revise the recommendation based on this new information.

27. In the preparation of a research report, a CFA Institute member may emphasize certain matters,
touch briefly on others, and omit some altogether:

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 provided that the analyst both has a reasonable basis and is unconstrained by
A)
the Mosaic theory.

B) provided that the analyst has a reasonable basis for his or her actions.

C) under no circumstances.
28. An analyst has several groups of clients who are categorized according to their specific needs. Com-
pared to research reports distributed to all of the clients, reports for a specific group:
A) will not be allowed because it violates the Standard III(B), Fair Dealing.

B) may generally exclude more basic facts.

C) will definitely include more basic facts.

29. Tonny Henrry, CFA, has his own money management firm with two clients. The accounts of the two
clients are equal in value. It is Henrry's opinion that interest rates will fall in the near future. Based
upon this, Henrry begins increasing the bond allocation of each portfolio. In order to comply with
Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to:
A) make sure that the change is identical for both clients.

B) perform both of these functions.

inform the clients of the change and tell them it is based upon an opinion and
C)
not a fact.
30. An analyst finds a stock that has had a low beta given its historical return, but its total risk has been
commensurate with its return. When writing a research report about the stock for clients with well-
diversified portfolios, according to Standard V(B), Communication with Clients and Prospective Cli-
ents, the analyst needs to mention:
A) both the historical beta and total risk and return.

B) the relationship of the historical beta and return only.

C) the relationship of the historical total risk to return only.

31. Froze Fortin, CFA, prepares a company research report in which he recommends a strong "buy." He
has been careful to ensure that his report complies with the CFA Institute Standard on research re-
ports. According to CFA Institute Standards of Professional Conduct, which of the following state-
ments about how Fortin can communicate the report is most correct?
A) Fortin can make his report in person, by telephone, or by computer on the Internet.

B) Fortin can transmit his report by computer on the Internet.

C) Fortin can make his report in person.

32. Gomez Belanger, 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. Belanger is excited about these prospects
and issues a research report that states that the company is about to achieve significant success with
the new acquisition. Belanger has:
violated CFA Institute Standards of Professional Conduct because she did not
A)
check the accuracy of the statements that management made.

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 violated CFA Institute Standards of Professional Conduct because she misrep-
B)
resented the optimism by turning it to certainty.

not violated CFA Institute Standards of Professional Conduct because she had
C)
reasonable reason to believe that the statements in her report were true.
33. Hall Bergeron recently joined Bloomington Investments as a research analyst. After spending an af-
ternoon looking through the research team's archives, Bergeron is not sure Bloomington maintains
the records that support the team's analysis and recommendations for the minimum 7-year period
called for by Standard V(C), Record Retention. What is Bergeron's most appropriate course of action?
Decline to participate in any new research until she can verify that the firm is in
A)
compliance with the Standard.

Review the firm's record retention procedures with her supervisor or compli-
B) ance officer to ensure that they comply with the Standard, or suggest ways to
bring them into compliance.

Keep her own copies of the relevant records and maintain them at home for a
C)
minimum 7-year holding period.
34. According to CFA Institute Standards of Professional Conduct, members should do all of the following
to meet the compliance procedures for having a reasonable basis for recommendations, EXCEPT:
A) analyze the client's investment needs.

analyze the investment's basic characteristics before recommending a specific

B)
investment to a broad client group.

distribute a detailed, written research report to clients with each recommenda-

C)
tion.
35. Harris Caron, CFA, is an equity research analyst who has recently left a large firm to start independ-
ent practice. He is able to re-create several of his previous recommendation reports from memory,
based on sources obtained at his previous employer. He publishes the reports and obtains several
new clients. Caron is most likely:
A) in violation of Standard V(C) Record Retention.

B) not in violation of any Standard.

C) in violation of Standard V(A) "Diligent and Reasonable Basis."

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 SOLUTION
1. Answer : B
William and Charley have a reasonable and adequate basis if they recommend an investment transaction
based on sound research prepared by their firm or an independent third party.
2. Answer : C
According to Standard V(A), Diligence and Reasonable Basis, the analyst must exercise diligence, inde-
pendence, and thoroughness when performing investment analysis, making a recommendation, or taking
investment action. The analyst should document the difference in opinion including any request to remove
his or her name from the report.
3. Answer : C
Capelli appears to have exercised diligence and thoroughness in making his recommendation. López's
recommendation is not based on thorough quantitative work because the period used in her study is only
one year. Also, her recommendation does not consider the client's specific needs and circumstances.
4. Answer : B
The money manager has done his duty. He has warned the client of the risk and made no explicit prom-
ises concerning what he can and cannot do.
5. Answer : C
If the analyst had been an investment manager, it would have been inappropriate for him to make a blan-
ket recommendation for all of his clients without considering the unique needs of each. However, the ana-
lyst is merely stating that given the qualities of the investment, it is an attractive buy. He has kept ade-
quate records, and made fair disclosure of his rating decision.
6. Answer : B
Analysts are required to have a reasonable and adequate basis, supported by appropriate research and
investigation, for their recommendations.
7. Answer : C
New London's report is potentially self serving, so Rowny did not exercise diligence or have an adequate
basis for his recommendation. In addition, Rowny did not acknowledge his source of the charts and
graphs. Finally, he did not maintain adequate records.
8. Answer : C
Standard V(A) requires members to have a reasonable and adequate basis for taking investment actions.
Overhearing a conversation does not provide adequate basis. It is not improper to use overheard conver-
sations that do not include inside information, nor is it improper to reference another firm's report to sub-
stantiate adequate basis, if the other report is justified.
9. Answer : A
Both of these are explicitly required by Standard V(A).
10. Answer : B
The fact that the firm is seeking the mandate does not preclude the research department from performing
analytical work on the security. As long as the final recommendation is based upon reasonable facts, not
the desire to obtain the mandate, there is no violation.
11. Answer : B
Since the data in the table supposedly comes from Standard & Poor's, a recognized data source, the ana-
lyst does not have to cite the source of the data. However, the analyst needs to use reasonable care and
verify that the data is accurate by going back to the source. Had the analyst printed the table prepared by
her colleague without acknowledgement, the analyst would have violated Standard I(C), Misrepresenta-
tion.
12. Answer : C
Including quantitative details in a report is not a violation of the Standard. The analyst has more of an ob-
ligation to give an opinion on the accuracy of the model than withhold such an opinion. Although the ana-
lyst should use reasonable care to verify information included in a report, retesting models developed by
the research department of a firm is not explicitly required.
13. Answer : A

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 An analyst should not make a recommendation based only upon a statistical anomaly. Furthermore, none
of the other choices would be appropriate. Clients with low risk tolerance should not short sell assets. The
analyst cannot make a recommendation to all clients because each client has different 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 port-
folio. But the decision to rebalance must be made on a case-by-case basis and not for all portfolios.
14. Answer : A
Whitman violated Standard V(A) Diligence and Reasonable Basis because he did not have a reasonable
and adequate basis for issuing a favorable recommendation. Whitman violated Standard I(B) Independ-
ence and Objectivity because he did not act independently in issuing his recommendation but instead was
influenced by senior management at Milton and Lili.
15. Answer : B
Sánchez will be in violation if he acts solely on the basis of what he read in the periodical. Use of informa-
tion within the firm can be relied upon unless the Sánchez has reason to believe the source lacks a sound
basis.
16. Answer : A
Brown should encourage her firm 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 firm does not have rules discouraging this behavior.
17. Answer : C
There is no obligation to make buy or sell recommendations on securities that are covered by research
reports.
18. Answer : A
Standard V(B) Communication with Clients and Prospective Clients requires members to distinguish be-
tween fact and opinion. "Blanding's earnings will grow at 12.5% annually in each of the next two years"
states an uncertain future outcome as a fact and thus violates this Standard. Preceding the statement with
"I expect..." identifies the forecast properly as an opinion.
19. Answer : B
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.
20. Answer : B
Recommending a stock whose return is uncorrelated with interest rate changes is appropriate for the cli-
ents 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 pres-
entation of fact, and is not in violation. The analyst is free to show the report only to investors for whom
the investment is appropriate.
21. Answer : B
Standard V(B) permits Gagnon to ask company management to review his report for factual inaccuracies,
but Gagnon should have taken care to thoroughly review and analyze any information provided by the
company. Gagnon is not required to give equal emphasis to all areas but can emphasize certain areas,
touch briefly on others, and omit certain aspects deemed unimportant.
22. Answer : C
Lavoie's statement that Standard will cut its dividend from $2 to $1 a share is an opinion, not a fact. She
should distinguish between facts and opinions in research reports.
23. Answer : C
According to Standard V(C), a member shall maintain appropriate records to support recommendations.
Neither of the other choices would apply to this action.
24. Answer : A

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 Standard V(B), Communication with Clients and Prospective Clients, requires analysts to use reasonable
judgment regarding the inclusion or exclusion of relevant factors in their research reports. It would not be
unreasonable to exclude the temporary credit downgrade from 3 years earlier.
25. Answer : A
Members do not need to send all reports to the firm's legal counsel to ensure compliance with securities
laws.
26. Answer : C
This question is related to Standard V(B) which states that CFA Institute members should use reasonable
judgment regarding the inclusion or exclusion of relevant factors in research reports. The change in man-
agement was a relevant factor and must be disclosed before dissemination.
27. Answer : B
According to Standard V(B), the analyst must use reasonable judgment in identifying relevant factors
when communicating with clients and prospects . The Mosaic theory does not apply here.

28. Answer : B
According to Standard V(B), an analyst can use reasonable judgment regarding the exclusion of some
facts and should include more basic facts for reports to wider audiences. The key issue is that analysts
should tailor their reports to the intended audience.
29. Answer : C
According to Standard V(B), the analyst must inform the clients of the change and tell them it is based
upon an opinion and not a fact. Making an identical change in two portfolios may be a violation of this
standard if the needs of the clients are not identical.
30. Answer : B
Using reasonable judgment, an analyst may exclude certain factors from research reports. Since the re-
port will be delivered to clients with well-diversified portfolios, total risk is not as important as beta. Given
that the total risk has been only commensurate with historical return, furthermore, then the analyst is not
negligent by not mentioning it.
31. Answer : A
A report can be made via any means of communication, including in-person recommendation, telephone
conversation, media broadcast, and transmission by computer such as on the Internet.
32. Answer : B
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. Belanger violated
the standard because she misrepresented management's enthusiasm by turning it into certainty.
33. Answer : B
Standard V(C), Record Retention requires that members maintain all records supporting analysis, rec-
ommendations, actions, and all other investment related communications with clients and prospects. The
recommended procedures for compliance with Standard V(C) state that the record-keeping requirement is
generally the firm's responsibility. These records are the property of the firm, so Bergeron keeping her
own copies at home could potentially violate Standard IV(A), Loyalty. Bergeron's best course of action is
to review the firm's procedures with her supervisor and recommend any improvements that are necessary
to bring them into compliance with Standard V(C).
34. Answer : C
Standard V(C), Record Retention, requires that members maintain appropriate records to support the rea-
sonableness of such recommendations or actions, but they are not required to distribute a research report
with each recommendation.
35. Answer : A
Caron is most likely in violation of Standard V(C) "Record Retention" because the supporting documenta-
tion is unavailable. He needs to recreate the supporting records based on information gathered through
public sources or the covered company.

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 CONFLICTS OF INTEREST
LOS A.: Disclosure of Conflicts.
LOS B.: Priority of Transactions.
LOS C.: Referral Fees.

1. Howard Poirier, CFA, is writing a research report on Paulsen Group, an investment advisory firm.
Poirier's brother-in-law holds shares of Paulsen stock. Poirier has recently interviewed for a position
with Paulsen and expects a second interview. According to the Standards, Poirier's most appropriate
action is to disclose in the research report:
his brother-in-law's holding of Paulsen stock and that he is being considered
A)
for a job at Paulsen.

B) his brother-in-law's holding of Paulsen stock.

C) that he is being considered for a job at Paulsen.

2. Jenkins Lefebvre, CFA, is an analyst with a large insurance company. His personal portfolio includes
a significant investment in QRS common stock that his firm does not currently follow. The director of
the research department asked Lefebvre to analyze QRS and write a report about its investment po-
tential. Based on CFA Institute Standards of Professional Conduct, Lefebvre is required to:
A) disclose the ownership of the stock to his employer and in the report.

B) sell his shares of QRS before completing the report.

C) decline to write the report without specific approval of his supervisor.

3. An analyst has been covering a particular firm for years. Recently, the analyst's uncle died and left the
analyst a sizable position in the firm's stock. The analyst needs to:
A) refuse to receive the stock in the first place.

B) do nothing since the analyst did not purchase the stock.

C) disclose the ownership of the stock to his supervisor.

4. The following scenarios involve two analysts at Dupree Asset Management, a small New York-based
company with about $150 million in assets under management. Dupree restricts personal trading of
stocks analyzed, corporate directorships, trustee positions, and other special relationships that could
reasonably be considered a conflict of interest with their responsibilities to their employer.
 Max Demers, CFA, is a senior investment analyst. Demers was recently elected to the board of
trustees of his alma mater, Midwest University, and was appointed as the chairman of the Univer-
sity's endowment committee. Midwest has more than $2 billion in its endowment. Demers must
travel from New York to Chicago eight times a year to attend meetings of the board of trustees
and endowment committee. Demers did not inform Dupree of his involvement with Midwest Uni-
versity.
 Ham Zinn, a candidate in the CFA Program, is a junior investment analyst. She recently wrote a
research report on Ranger Communications and recommended the stock for Dupree's "buy" list.
Zinn bought 200 shares of Ranger stock for her personal account 12 months before she wrote her

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 research report. Over the past 12 months, the stock's price has been in the $20-42 price range.
Zinn has not informed Dupree of her ownership of Ranger stock.
According to CFA Institute Standards of Professional Conduct, which the following statements about
Demers and Zinn's actions is CORRECT?
A) Zinn violated the Standards, but Demers did not.

B) Neither Demers nor Zinn violated the Standards.

C) Both Demers and Zinn violated the Standards.

5. Philipins Richard, CFA, is preparing a purchase recommendation on Aneas Lumber for his research
firm. All of the following are potential conflicts of interest EXCEPT:
A) Richard's research firm has a large stake of ownership in Aneas Lumber.

B) Richard's cousin repairs machines for Aneas.

C) Aneas hires Richard as a consultant to analyze Aneas' financial statements.

6. Suney Robert, CFA, is a financial analyst for Quantum Investments. He is preparing a purchase rec-
ommendation on Burch Corporation. According to CFA Institute Standards of Professional Conduct,
which of the following statements about disclosure of conflicts is most correct? Robert would have to
disclose that:
A) he has a material beneficial ownership of Burch Corporation through a family trust.

B) both of these choices require disclosure.

C) his wife owns 2,000 shares of Burch Corporation.

7. According to Standard VI(A), Disclosures of Conflicts, members must disclose to their clients the
member's (or their firm's) material ownership of all of the following EXCEPT:
A) real estate holdings.

B) corporate finance relationships.

C) beneficial ownership of securities.

8. When an analyst makes an investment recommendation, which of the following statements must be
disclosed to clients?
A) An employee of the firm holds a directorship with the recommended company.

B) The firm is a market maker in the stock of the recommended company.

C) Both of these statements must be disclosed to clients.

9. Hall Couture has been working for Advisors, Inc., for several years, and he just joined CFA Institute.
Couture routinely writes research reports on Pharmaceutical firms. Couture has recently been asked
to serve on the board of directors of an organization that promotes the search for a cure of a certain
cancer. Serving on the board is an unpaid position without any direct benefits other than meeting new
people and potential clients. To comply with Standard VI, Disclosure of Conflicts, Couture needs to:
both disclose the position on the board to his supervisor and describe his re-
A)
sponsibilities on the board.

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 B) do nothing.

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

10. Feb Parent, CFA, is employed as manager of a college endowment fund. The college's board of di-
rectors has recently voted to consider divesting from companies located in a country that has a poor
civil rights record. Parent has personal investments in several firms in the country. Parent needs to:
A) do nothing since the board has not made a decision yet.

B) disclose her ownership in the stocks to both her supervisor and the board.

C) disclose her ownership in the stocks to her supervisor only.

11. Lewis Granson, a CFA charterholder and portfolio manager at DSD Investments, was recently ap-
pointed to the investments committee at Brightwood College. He will receive no compensation from
Brightwood for serving on this committee. Another person at DSD manages part of Brightwood's en-
dowment. Granson does not inform DSD's compliance office of his involvement with Brightwood, be-
cause he does not believe doing so is necessary.
Bob Gosselin, a CFA candidate, also works for DSD as an investment analyst. Procedures estab-
lished at DSD prohibit personal trading in securities analyzed or recommended by DSD. One of these
securities is Horizon, a telecommunications firm. Gosselin buys 10 shares of Horizon for her infant
son's trust account. She believes that reporting this purchase to DSD's compliance officer is unneces-
sary because the amount of the transaction is small and is not for her own personal account.
Did Granson or Gosselin's actions violate CFA Institute Standards of Professional Conduct?
A) Granson: No, Gosselin: No.

B) Granson: No, Gosselin: Yes.

C) Granson: Yes, Gosselin: Yes.

12. Lopez Narrow, CFA, is a pharmaceuticals analyst at Dominion Asset Management. His supervisor di-
rects him to prepare separate research reports on Miracle Drug Company and Wonder Drug Com-
pany. Narrow's former college roommate and close friend is the president of Miracle. Narrow owns
2000 shares of Wonder, which currently sells for $25 a share. Narrow's supervisor is unaware of
these facts. According to CFA Institute Standards of Professional Conduct, which of the following ac-
tion, if any, is Narrow required to take if he writes the research reports?
Narrow must disclose to Dominion his ownership of shares in Wonder but not
A)
his relationship with the president of Miracle.

Narrow must disclose to Dominion his relationship with the president of Miracle
B)
but not his ownership of shares in Wonder.

Narrow must disclose to Dominion both his relationship with the president of
C)
Miracle and his ownership of shares in Wonder.
13. John Wood, CFA, follows the Amity Paving Company for his employer. Which of the following scenar-
ios is Wood least likely to have to disclose to his employer.
A) Wood's ownership of Amity securities.

B) Wood's personal relationship with the CEO of Amity.

The fact that Wood's son worked at Amity as a laborer during the summer
C)
while in school.

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14. Martinez Baldwin, CFA, as a representative for Axe Investment Management, is compensated by a
base salary plus a percentage of fees generated. In addition, she receives a quarterly performance
bonus on a particular client's fee if the client's account increases in value by more than 2 points over a
benchmark index. Baldwin had a meeting with a prospect in which she described the firm's investment
approach but did not disclose her base salary, percentage fee, or bonus.
Baldwin has:
A) violated the Standards by not disclosing her performance bonus.

violated the Standards by not disclosing her salary, fee percentage, and per-
B)
formance bonus.

not violated the Standards because there is no conflict of interest with a poten-
C)
tial prospect in the employment arrangements.
15. An analyst is serving on the Board of Directors of a local publicly traded company. To avoid violating
the CFA Institute Code and Standards, the analyst must disclose this to:
A) only his employer.

B) no one since it should not cause a conflict of interest for the analyst.

C) both his employer and his clients and prospective clients.

16. Suney Robert, CFA, is a financial analyst for Quantum Investments. He is preparing a purchase rec-
ommendation on Burch Corporation for internal use. According to the CFA Institute Standards of Pro-
fessional Conduct, which of the following statements about disclosure of conflicts is not required?
Robert would NOT need to disclose to his employer that:
A) his wife owns 2,000 shares of Burch Corporation.

he is a beneficiary of a pension plan of his former employer that owns a large

B)
number of shares of Burch's stock.

C) Quantum is an OTC market maker for Burch Corporation's stock.

17. The following scenarios refer to two analysts who are employed at Global Securities, a large broker-
age firm.
 Mitchell Morris, CFA, is instructed by her supervisor to write a research report on Delta Enter-
prises. Delta's stock is widely held by institutional and individual investors. Although Morris does
not own any of Delta's stocks, she believes that one of her friends may own 10 shares of Delta.
The stock currently sells for $25 per share. Morris does not believe that informing her employer
about her friend's possible ownership of Delta shares is necessary.
 Murphy Phillips, a member of CFA Institute, is asked by his supervisor to write a research report
on Gamma Company. Phillips's wife inherited 500 shares of Gamma Company from her father
when he died five years ago. Gamma stock currently sells for $35 per share. Phillips does not be-
lieve that informing his employer about his wife's ownership of Gamma shares is necessary.
According to CFA Institute Standards of Professional Conduct, which the following statements about
Morris and Phillips's conduct is most accurate?
A) Only one of these analysts must disclose a potential conflict of interest.

B) Neither of these analysts must disclose a potential conflict of interest.

C) Both of these analysts must disclose a potential conflict of interest.

18. To comply with the CFA Institute Standards, employees have a duty to disclose possible conflicts of
interest to:

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 A) both their employer and their clients.

B) neither employers nor clients, but the member must use "prudent judgment."

C) only their employer.

19. Reyes Hut, CFA, is an equity research analyst for a long-term investment fund. His annual bonus is
linked to quarterly trading profits. Under a new policy, the quarterly assessment period is switched to
a monthly assessment period. According to the Code and Standards, best practices dictate:
A) updating disclosures when the policy change is implemented.

Requiring Hut to obtain permission from each client prior to implementation of

B)
the new policy.

C) keeping the policy change private as a trade secret.

20. An analyst likes to trade options in her own account. She does not deem any of her client accounts
suitable for option trading. When she finds a favorable options position, in accordance to Standard
VI(B), Priority of Transactions, she should:
A) act on it on her own behalf as she sees fit.

B) first tell her clients about it before acting herself.

C) refrain from acting until she notifies her supervisor.

21. Goldy Macruz, CFA, works in the trust department of a bank. The bank's trust account holds a large
block of a particular company. Macruz learns that this company is going to buy back one million
shares at a 15% premium to the market price on a first-come-first-served basis. Macruz immediately
tells his mother-in-law to tender her shares but waits until the end of the day to tender the trust's
shares. Macruz has most likely violated:
A) Standard IV(A), Loyalty to Employer.

B) Standard VI(B), Priority of Transactions.

C) Standard II(A), Material Nonpublic Information.

22. A firm produces regular proprietary research reports on various companies. According to Standard
VI(B), Priority of Transactions, which of the following would be an access person?
An independent auditor with access to material, non-public information on a
A)
company being analyzed.

B) A person working in the mail room.

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

23. Standard VI(B), Priority of Transactions, applies to transactions an analyst takes on behalf of:
A) both of these.

B) his clients.

C) his employer.
24. Samuel Goldstein, CFA, is an analyst for Tamarack Securities. Goldstein's father, Reuben, has a cli-
ent account at Tamarack. In ordering trades, Goldstein should place orders in:

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 A) his clients' accounts first, his father's account second, and his account last.

his clients' and his father's accounts in the first group and his personal ac-
B)
counts in the second group.

C) all accounts simultaneously.

25. Andy Rock, CFA, is an analyst at Best Trade Co. The company is going to announce a sell recom-
mendation on Biomed stock in one hour. Rock was a member of the team who reached the decision
on Biomed. Rock's wife has an account at Best Trade Co. that contains Biomed stock. According to
the Code and Standards, trading on Rock's wife's account can begin:
A) only after the recommendation is announced to the general public.

only after Rock, as a beneficial owner, has given an appropriate amount of

B)
time for clients and his employer to act.

C) as soon as the information is disseminated to all clients.

26. An analyst has the opportunity to offer his clients shares in a hot new issue. One of the analyst's cli-
ents is his brother. When the new issue comes out, for those clients he deems it would be appropri-
ate, he offers them an equal share. He includes his brother in that group. With respect to Standard
VI(B), Priority of Transactions, this is:
congruent with the Standard as long as he does not have a direct personal
A)
interest in his brother's account.

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

congruent with the Standard even if he has a direct personal interest in his
C)
brother's account.
27. An analyst has a large personal holding of a security, and he has just determined that market condi-
tions warrant selling this security. The analyst contacts clients who have a position in the security and
advises them to sell some or all of the security. After waiting 24 hours, he sells the security from his
personal accounts. This is:
A) a violation of Standard VI(B), Priority of Transactions.

B) congruent with Standard VI(B), Priority of Transactions.

C) a violation of Standard III(B), Fair Dealing.

28. An analyst routinely has the opportunity to offer his clients the opportunity to purchase hot new is-
sues. He tells his clients that he will distribute each issue equally among those interested, with him-
self included in the distribution. The clients do not object to this. With respect to Standard VI(B), Prior-
ity of Transactions, this:
A) cannot be a violation because the clients know of the practice and agree.

B) may be a violation despite the clients' approval.

C) may be a violation because it is impossible to distribute hot new issues equally.

29. An analyst, who is a CFA Institute member, manages a high-grade bond mutual fund. This is his only
professional responsibility. When the analyst comes across a speculative stock investment that he
feels is a good investment for his personal portfolio, the analyst:

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 is in violation of Standard IV(A), Loyalty to Employer, by spending time analyz-
A)
ing stocks when he should only analyze bonds.

must notify his supervisor about the stock according to Standard VI(B), Priority
B)
of Transactions, to see if it is appropriate for the portfolio that he manages.

may invest in the stock because the analyst would not purchase the stock for
C)
the bond portfolio he manages.
30. Rivera Hall, CFA, is a portfolio manager for an investment advisory firm. He plans to sell 10,000
shares of Park Rockport, Inc. to finance his daughter's new restaurant venture, but his firm recently
upgraded the stock to "strong buy." In order to remain in compliance with Standard VI(B) "Priority of
Transactions," Hall must:
A) not sell the shares of Park Rockport.

delay selling the shares until a firm client makes an offsetting purchase to
B)
avoid having a market impact.

C) notify his firm of his intention to sell the shares before selling the shares.
31. Robinson Arsenault, CFA, refers many of his clients to Hall Towers, CPA, for accounting services. In
return, Towers performs routine services for Arsenault, such as his tax returns, for no charge. With re-
spect to this relationship, Arsenault:
A) is in violation of both Standard V(B) and III(B).

B) is only in violation of Standard III(B), Fair Dealing, by not putting the client first.

C) must disclose to his clients that Towers provides services for Arsenault's personal benefit.
32. Robinson Arsenault, CFA, refers many of his clients to Hall Towers, CPA, for accounting services. In
return, Towers performs routine services for Arsenault, such as his tax returns, for no charge. Towers
has just become a member of CFA Institute. With this development, Towers must:
only reveal to the prospects referred by Arsenault that he performs services for
A)
Arsenault.

reveal to the prospects referred by Arsenault that he performs services for

B)
Arsenault, along with the estimated value of those services.

C) discontinue his services for Arsenault.

33. An analyst who is a member of CFA Institute has composed an introductory information packet for her
new clients, which includes information on fees she receives for referring clients to other professionals
and those she pays for having clients referred to her. With respect to Standard VI(C), Referral Fees,
this action:
A) is not addressed in the Standard.

may not satisfy the Standard if such information is only provided after the re-
B)
ceivers of the information have become clients.

exceeds the requirement of the Standard because she does not need to reveal
C)
the fees she pays to those that refer clients to her.
34. Vikash Hill, CFA, leases office space from Land Bank in exchange for an agreement that Hill will pay
Land 20% of any fees paid by Land customers to Hill for investment management services. Hill also

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 has an arrangement with Bloom Insurance Advisors whereby Hill receives a fee for each client re-
ferred. Hill only refers clients that request insurance products. Hill meets with Randolph Song, a Land
Bank customer, who is interested in Hill's asset management services as well as insurance products.
Hill is required to disclose to Song:
A) the terms of the arrangements with both Land Bank and Bloom.

the terms of the arrangement with Bloom, but not the terms of the arrangement
B)
with Land Bank.

neither the Land Bank nor Bloom arrangements, but may disclose them if he
C)
chooses to do so.
35. If a CFA charterholder receives a referral fee, he must:
consult with the firm's compliance officer, and follow his or her instructions
A)
concerning disclosure.

disclose the nature of the fee arrangement to the client before entering into a
B)
formal agreement.

C) disclose the fee to the supervisor, in written form, as an additional benefit.

36. Which of the following statements about Standard VI(C), Referral Fees, is CORRECT?
Referral fees must be disclosed before proceeding with an agreement for ser-
A)
vice.

Referral fees may be disclosed before or after proceeding with an agreement

B)
for service.

Referral fees must be disclosed after proceeding with an agreement for ser-
C)
vice.
37. Standard VI(C), Referral Fees, requires the member to do all of the following EXCEPT:
make required disclosures to the referred client before an agreement is made
A)
to provide services to the referred client.

disclose to the referred client how much the referral source was paid to refer
B)
the client.

disclose to the referred client the percentage of the member's business that
C)
comes from referrals.
38. A member or candidate that receives consideration from others for the recommendation of products
or services, must disclose the estimated dollar value of the consideration paid in:
A) cash or soft dollars only.

B) cash only.

C) cash, soft dollars, or in kind.

39. Standard VI(C), Referral Fees, is applicable to:
A) only cash consideration received for the recommendation of products or services.

B) all consideration received or paid for the recommendation of products or services.

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 C) only consideration paid in soft dollars for the recommendation of products or services.
40. Jim Hamel, CAIA, CPA, is a CFA Level II candidate living in Boston. In the course of his accounting
practice, Hamel often refers clients to a local law firm specializing in estate planning. Hamel does not
violate client confidentiality and does not receive compensation for the referral. However, the law firm
often gives Hamel tickets to the theater and major sporting events.
Which of the following statements regarding disclosure is CORRECT? Hamel:
need not disclose the benefits received for referring clients because no com-
A)
pensation is received.

need not disclose the benefits received for referring clients because the clients
B)
were developed in the course of his accounting practice.

C) must disclose the benefits received for referring clients to the law firm.

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 SOLUTION

1. Answers : C
The possibility of employment with Paulsen creates a potential conflict of interest which Poirier must dis-
close. Standard VI(A) Disclosure of Conflicts does not require disclosure of his brother-in-law's ownership
of Paulsen stock.
2. Answers : A
Standard VI(A) (Disclosure of Conflicts) requires that Lefebvre make full disclosure of all matters that
could impair his objectivity. Lefebvre needs to disclose his personal holding in QRS stock not only to his
employer, but also in any subsequent reports that he authors. Getting the approval of his supervisor does
not solve this conflict problem for Lefebvre. Selling his shares of QRS would be one solution to Lefebvre's
situation, however this action is not required by the Standards.
3. Answers : C
The only thing the analyst needs to do is to disclose the ownership of the stock to his supervisor in accor-
dance to Standard VI(A), Disclosure of Conflicts. Refusing to receive the stock could be acceptable op-
tion, but is not required.
4. Answers : C
Standard VI(A), Disclosure of Conflicts, requires that Demers inform Dupree of his involvement with Mid-
west University given that Demers's new role can be expected to be time consuming and possibly affect
his responsibilities at Dupree. Zinn is required to disclose her ownership of Ranger stock before conduct-
ing the research report because such ownership could bias her objectivity in making a recommendation.
She should have discussed owning the stock with her supervisor before beginning to write the research
report on Ranger.
5. Answers : B
Standard VI(A) defines what constitutes a conflict of interest with regard to clients, prospective clients, and
employers. All of these represent potential conflicts of interest with the exception of the cousin working for
Aneas Lumber in a job that is unrelated to the Aneas' financing.
6. Answers : B
Standard VI(A) requires that Members and Candidates fully disclose all matters which may impair their in-
dependence or objectivity or interfere with their duties to their employer, clients and prospects.
7. Answers : A
Unless the firm's real estate holdings would impair their independence and objectivity, they need not be
disclosed.
8. Answers : C
Both of these items are explicitly listed in the discussion of Standard VI(A), Disclosure of Conflicts.
9. Answers : A
Couture could be affected by his position on the board because he may tend to favor investments in firms
that do cancer research. To comply with Standard VI(A), Disclosure of Conflicts, Couture must inform his
supervisor of this relationship and describe his responsibilities on the board. Even if his supervisor does
not find the relationship troublesome, any subsequent action that could lead to a conflict of interest should
be discussed with the firm's compliance officer.
10. Answers : A
From the given information, there is no conflict of interest and no violation of Standard VI(A), Disclosure of
Conflicts. A conflict could arise if the board were to ask Parent what the effect on the college's endowment
would be if they were to divest. At that time she would have to reveal her ownership in the stocks to make
known the possible conflict of interest.
11. Answers : C
Granson violated Standard VI(A), Disclosure of Conflicts, by failing to inform DSD of her involvement with
Brightwood College. Granson could reasonably be expected to be involved with investment policy deci-
sions at Brightwood that could affect DSD because DSD manages a portion of Brightwood's endowment.
Gosselin also violated Standard VI(A), because she ignored a directive of her employer. Her purchase of

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 Horizon stock has an appearance of impropriety. Gosselin could discuss the purchase of Horizon stock
with her firm's compliance officer and request an exception to the prohibition against personal trading in
securities analyzed or recommended by DSD.
12. Answers : C
Standard VI(A) requires that Narrow disclose to Dominion conflicts that reasonably could be expected to
interfere with his independence and objectivity. Both Narrow's relationship with the president of Miracle
and his ownership of a substantial dollar amount of Wonder's shares represent a potential conflict requir-
ing prompt disclosure to Dominion.
13. Answers : C
Members are required to disclose to their employer all matters that reasonably could interfere with their
objectivity. Personal friendships with corporate executives and personal ownership of securities could rea-
sonably interfere with objectivity, but it is unlikely that a child's employment in a labor function would rea-
sonably interfere with a parent's objectivity.
14. Answers : A
Standard VI(A) requires members to disclose all matters that could reasonably be expected to impair the
member's ability to make unbiased and objective recommendations. Compensation based on a percent-
age of fees generated does not create an inherent bias. If, however, a performance bonus is paid for in-
vestment results, it may unduly encourage the manager to take more risk than is proper and prudent, and
so the existence of the bonus opportunity must be disclosed to the client.
15. Answers : C
Serving on a Board of Directors should be disclosed to both the employer and clients and prospective cli-
ents.
16. Answers : C
Standard VI(A), Disclosure of Conflicts, requires members to disclose to their employer all matters, includ-
ing beneficial ownership of securities, that reasonably could be expected to interfere with their duty to their
employer or ability to make unbiased and objective recommendations. Disclosure of an employer's own
involvement with the security is not necessary in this instance. If the report had been for external use, it
would have been necessary to make all of the disclosures given as choices.
17. Answers : A
The possibility that Morris's friend may own a few shares of Delta's stock, worth a low dollar amount, does
not create a conflict of interest such potential ownership could not reasonably be expected to interfere
with her duty to employer or ability to make unbiased and objective recommendations. On the other hand,
Phillips has a beneficial interest in his wife's ownership of Gamma shares. Standard VI(A) Disclosure of
Conflicts requires that Phillips disclose this information so that his employer can make the proper determi-
nation.
18. Answers : A
According to Standard VI(A), Disclosure of Conflicts, employees have a duty to disclose to both their em-
ployer and their clients all matters which may impair their independence and objectivity or interfere with
their duties to employer, clients, and prospects.
19. Answers : A
Standard VI(A) "Disclosures of Conflicts" recognizes this policy as a potential conflict of interest as mem-
bers and candidates could be incentivized to favor short-term trading gains over long-term value creation.
Best practices dictate updating disclosures when the policy change is implemented. The long-term inves-
tors should know how members and candidates are compensated, especially when there is the potential
for conflicts of interest.
20. Answers : A
This is not a violation of Standard VI(B), Priority of Transactions, because the investment is not suitable
for her clients. If the analyst believes that none of her clients should trade options, she is not obligated to
advise them in this instance.
21. Answers : B
Standard VI(B), Priority of Transactions, applies. If an analyst decides to make a recommendation about
the purchase or sale of a security, he must give his customers or employer adequate opportunity to act on
this recommendation before acting on his own behalf. Personal transactions include those made for the

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 member's own account and family accounts. Here, Macruz violated Standard VI(B) by acting on his
mother-in-law's behalf and then waiting until the end of the day to act on his employer's behalf.Â
Explanations for other responses:
 Standard IV(A), Loyalty to Employer, does not apply. This standard concerns a member competing
with his/her employer (independent practice), for example a member who engages in outside consult-
ing.
 Standard II(A), Material Nonpublic Information, does not apply. The question does not indicate that
the information is not public.
22. Answers : C
Persons with access to information during the normal preparation of research recommendations are sub-
ject to Standard VI(B). An independent auditor is not involved in the normal preparation of research rec-
ommendations.
23. Answers : A
Standard VI(B) addresses the treatment of both these accounts. The accounts of clients and employers
have priority over personal accounts.
24. Answers : B
Standard VI(B), Priority of Transactions, provides that transactions for clients have priority over personal
trades. Family accounts that are considered client accounts receive the same treatment as client ac-
counts.

25. Answers : C
Family accounts that are client accounts should be treated like any other firm account and should neither
be given special treatment nor be disadvantaged because of an existing family relationship with the mem-
ber or candidate. Members or candidates may undertake transactions in accounts for which they are a
beneficial owner only after their clients and employers have had adequate opportunity to act on the rec-
ommendation. Personal transactions include those made for the member or candidate's own account, for
family (including spouse, children, and other immediate family members) accounts, and for accounts in
which the member or candidate has a direct or indirect pecuniary interest, such as a trust or retirement
account. It could be argued that Rock is a beneficial owner of his wife's account and the reason why his
wife's account should be treated like any other client account is because it does not state that Rock
makes the trades in his wife's account. From that we are to infer that another person other than Rock is
managing his wife's account thus she should be treated like any other client.
26. Answers : A
Client accounts that belong to family members should be treated like any other account so long as there is
no direct interest on the part of the analyst. In other words, these types of accounts should not be at a dis-
advantage relative to other client accounts when there is no direct interest on the part of the analyst over-
seeing the account.
27. Answers : B
According to Standard VI(B), an analyst must give clients the first opportunity to buy or sell a security be-
fore the analyst acts on his own behalf. A 24-hour waiting period seems reasonable under the circum-
stances presented. The analyst seems to have a reasonable basis, and there is no reason to believe that
he is violating Standard III(B) since he contacted all of the clients who have a position in the security.
28. Answers : B
Just because the clients know of a practice does not make it right. The analyst must put the clients first. It
is a violation for the analyst to participate in a hot new issue which can lower the allocation to any given
client below what that client would prefer. This is tantamount to putting the analyst's interests ahead of the
clients' interests.
29. Answers : C
The problem says the analyst came across the speculative stock investment. We do not know if the ana-
lyst neglected his duties. Since such an investment is clearly not appropriate for a high-grade bond fund,
the analyst may invest in the stock without any restrictions relating to the fund.
30. Answers : C

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 Standard VI(B) "Priority of Transactions" does not prohibit Hall from trading opposite the firm's recom-
mendation, but he should notify his firm first. Note that if Hall were a research analyst covering Park
Rockport, he may be prevented from selling the security if his firm claims compliance with the CFA Insti-
tute's Research Objectivity Standards.
31. Answers : C
According to VI(C), Referral Fees, Arsenault must disclose to his clients that Towers provides services for
Arsenault's personal benefit. Neither of the Standards listed in the other answers apply.
32. Answers : B
According to VI(C), Referral Fees, as a member of CFA Institute, Towers must tell his clients about the
payment in kind to Arsenault along with an estimate of the value of those services.
33. Answers : B
Standard VI(C) says that a member must reveal information both on fees she receives for referring clients
to other professionals and those she pays for having clients referred to her before a prospect becomes a
client. This allows the prospect to evaluate any partiality of a recommendation and the full cost of the ser-
vices.
34. Answers : A
Standard VI(C) Referral Fees requires members to disclose to clients and prospects any consideration or
benefit received by the member or delivered to others for the recommendation of any services to the client
or prospect. Hill is delivering a benefit to Land Bank and receiving a benefit from Bloom, both of which
must be disclosed to Song.
35. Answers : B
According to Standard VI(C), the nature as well as the value of the fee must be disclosed to the client be-
fore entering into a formal agreement. The compliance officer and/or the employee's supervisor should be
contacted for consultation.

36. Answers : A
According to Standard VI(C), referral fees must be disclosed before proceeding with an agreement for
service in order for the client or employer to compute the full cost of the service and to evaluate any po-
tential partiality of the recommendation.
37. Answers : C
The applicable Standard, VI(C), does not require a member to disclose the percentage of their business
that comes from referrals.
Standard VI(C) states, "Members shall disclose to clients and prospects any consideration or benefit re-
ceived by the member or delivered to others for the recommendation of any services to the client or pros-
pect." Appropriate disclosure means telling the client or prospect, before agreeing to perform services, of
any benefit given or received for recommending the member's services.
38. Answers : C
According to Standard VI(C), Referral Fees, consideration includes all fees that are paid in cash, soft dol-
lars, and in kind. Referral fees must be disclosed to the client or employer before engaging in an agree-
ment to provide services.
39. Answers : B
According to Standard VI(C), Referral Fees, consideration includes all fees that are paid in cash, soft dol-
lars, and in kind. Referral fees must be disclosed to the client or employer whether the consideration is re-
ceived by or paid to others for the recommendation.
40. Answers : C
Standard VI(C), Referral Fees, requires members to disclose to clients and prospects any consideration
or benefit received by the member or delivered to others for the recommendation of any services to a cli-
ent or prospect. Hamel has received a benefit (free tickets), which must be disclosed to the clients re-
ferred by Hamel. Disclosure will allow the clients to determine any partiality of the recommendation.

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 RESPONSIBILITIES AS A CFA INSTITUTE
MEMBER OR CFA CANDIDATE

LOS A.: Conduct as Members and Candidates in the CFA Program.

LOS B.: Reference to CFA Institute, the CFA Designation, and the CFA Program.

1. Sydney Flores, Level II CFA candidate, posts blogs for her exam study group three days after the
exam to vent her frustrations over the exam. However, to avoid disclosing what was actually on the
exam, she only discusses topic areas she thought would be on the exam that were not. She writes
"...the topics selected were unnecessarily obscure. Important items like FCF, DDM, and Residual In-
come were ignored completely..." Flores is most likely:
A) not in violation as the information was only about what was NOT on the exam.

not in violation as the information about the actual exam contents was posted
B)
after the conclusion of the exam.

in violation of Standard VII(A) "Conduct as Members and Candidates in the

C)
CFA Program" for providing confidential information about the exam.
2. Butler Morin is a CFA Level II candidate living in San Francisco. Morin 's best friend, Steve Haney,
also a Level II candidate, is living in Munich. Because of the time difference between Munich and San
Francisco, Morin suggests that Haney call Morin during the Munich exam lunch break to discuss the
morning exam. Haney makes the call on exam day.
Which of the following statements regarding Morin and Haney is CORRECT?
A) Morin is in violation of Standard VII(A), but Haney is not in violation.

B) Both Morin and Haney are in violation of Standard VII(A).

C) Neither Morin nor Haney is in violation of Standard VII(A).

3. All of the following are violations of Standard VII(A), Conduct as Members and Candidates in the CFA
Program, EXCEPT:
A) disregarding the rules related to the administration of the CFA examination.

B) expressing opinions in disagreement with CFA Institute advocacy positions.

C) improperly using the CFA Designation to further professional goals.

4. For the past 5 years, Mia Pelletier, CFA, has served as a proctor for the CFA exam. Pelletier tells her
assistant, a CFA Level III candidate, that she normally receives the examinations on the Thursday be-
fore the exam. Given the low pass rate at Level III, Pelletier asks her assistant if he would like an ad-
vance copy of the next exam. Pelletier 's assistant declines the offer.

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 Pelletier 's assistant has been very vocal about expressing his opinions about the low pass rate. The
assistant claims, there are too many charterholders and CFA Institute is deliberately failing candi-
dates because the prestige of the CFA charter is becoming diluted.
With regard to Standard VII(A) Conduct as Members and Candidates in the CFA Program, which of
the following statements concerning Pelletier 's and her assistant 's behavior is most accurate?
A) Both Pelletier and her assistant are in violation of Standard VII(A).

B) Pelletier is in violation of Standard VII(A), but her assistant is not in violation.

C) Neither Pelletier nor her assistant is in violation of Standard VII(A).

5. Cooper Boucher is registered to sit for the CFA Level II exam. Unfortunately, Boucher has failed the
exam the past two years. In his frustration, Boucher posted the following comment on a popular inter-
net bulletin board: I believe that CFA Institute is intentionally Menarditing the number of charterhold-
ers in order to increase its cash flow by continuing to fail candidates. Just look at the pass rates.
Which of the following statements regarding Boucher 's conduct is CORRECT? Boucher is:
not in violation of Standard I(D), Misconduct or Standard VII(A), Conduct as
A)
Members and Candidates in the CFA Program.

in violation of Standard VII(A), Conduct as Members and Candidates in the

B)
CFA Program, but not in violation of Standard I(D), Misconduct.

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

C)
Members and Candidates in the CFA Program.
6. Which of the following actions would be a violation of the Standard VII(A), Conduct as Members and
Candidates in the CFA Program?
A) Exaggerating the implications of holding the CFA designation.

B) Failure to submit a Professional Conduct Statement and pay annual dues.

C) Misrepresenting information on the Professional Conduct Statement.

7. While on a business trip, Lee Fournier, CFA, found a notebook that had apparently been left in the
waiting area of an airport. Fournier opened the notebook and read the title: Confidential: Level II CFA
Examination. Before returning the notebook to CFA Institute, he made a copy and gave it to Linda
Sacket, one of his firm's analysts, who was a candidate for Level II of the CFA examination. Fournier
reasoned that CFA Institute would not use these questions and that Sacket would benefit from review-
ing these questions. Sacket read the questions and guideline answers before taking the Level II ex-
amination. According to the CFA Institute Standards of Professional Conduct:
A) Fournier violated the Standards, but Sacket did not.

B) Sacket violated the Standards, but Fournier did not.

C) both Fournier and Sacket violated the Standards.

8. Sydney Landry, Level II CFA candidate, regularly posts in Internet chat rooms dedicated to candi-
dates studying for the Level II exam. Throughout the season, she and other candidates discuss cur-
riculum content in great detail. Three days after the exam, she returns to the site and vents her frus-
trations over complicated exam questions by posting questions she remembers on the site, and ask-
ing others for their responses and reasoning. Other candidates follow suit and post the questions they
remember. Within a week, Landry and her fellow candidates are able to reconstruct about 85% of the
exam from their collective memory. Finding the exercise cathartic, she is then able to return to her job
and personal life and wait for her results. Landry and her fellow candidates are most likely:

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 in violation of Standard VII(A) "Conduct as Members and Candidates in the
A) CFA Program" for discussing curriculum content in a public forum prior to the
exam.

in violation of Standard VII(A) "Conduct as Members and Candidates in the

B)
CFA Program" for providing confidential information about the exam.

not in violation as the information about the actual exam contents was posted
C)
after the conclusion of the exam.
9. Which of the following is least likely an appropriate use of the CFA designation?
Cox Michaud, as a CFA charterholder, expects to outperform the market be-
A)
cause CFA charterholders have on average outperformed their peers.

B) Cox Michaud, CFA.

Cox Michaud has earned the CFA designation by passing three exams, all
C)
three on his first attempts.
10. Edwards Perron, a stock broker who has completed Level I of the CFA program and is registered for
the next Level II CFA exam, may:
A) use the Level I CFA designation since he has passed the Level I exam.

B) not mention that he is involved in the CFA Program until he has passed all three levels.

C) state that he is a Level II candidate in the CFA Program.

11. Foster Menard and Gray Dubois have both passed Level I of the CFA Program. Both are currently en-
rolled to sit for Level II. Menard's business card reads, "Foster Menard, CFA Level I." Dubois's re-
sume states, "Level II Candidate in the CFA Program." According to CFA Institute Standards of Pro-
fessional Conduct involving use of the professional designation:
A) Both Menard and Dubois violated the Standard.

B) Dubois violated the Standard, but Menard did not.

C) Menard violated the Standard, but Dubois did not.

12. When using the CFA designation, which of the following is appropriate?
A) Perron CFA's, Inc.

B) "I am a CFA charterholder."

C) "I am a CFA."
13. Which of the following is an appropriate statement for a Level II CFA candidate to make?
A) I am a Level II CFA.

B) I passed the Level I CFA exam last year.

C) I am a Level I CFA charterholder.

14. Jennifer Gabrielle, CFA, is an analyst at Techno Associates. Gabrielle attended a conference at which
Harris Hamel presented several proprietary computerized spreadsheets that he had developed to
value high-tech stocks. While at the conference, Gabrielle copied the spreadsheets without Hamel 's

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 knowledge. Later, Gabrielle made several minor Leduces to Hamel 's initial model. After testing the
revised model, Gabrielle was impressed with the results. As inputs for the model, she used factual
materials supplied by Moody 's Investors Service, a recognized financial and statistical reporting ser-
vice. Gabrielle wrote a research report describing the revised model and its results and distributed the
report to Techno 's clients. According to CFA Institute Standards of Professional Conduct, which of
the following actions is Gabrielle required to take? Gabrielle is:
required to seek the authorization from Hamel to copy the spreadsheets, ac-
A) knowledge Hamel for developing the initial model but is not required to ac-
knowledge Moody's Investors Service as the source of the data.

required to seek authorization from Hamel to copy the spreadsheets and ac-
B) knowledge Hamel for developing the initial model and Moody's Investors Ser-
vice as the source of the data.

required to acknowledge Moody's Investors Service as the source of the data

C) but is not required to seek authorization from Hamel to copy the spreadsheets
or to acknowledge Hamel for developing the initial model.
15. Gravel, Allard and Leduc all received their CFA charters and ordered new business cards. Their
business cards are as follows:
K. L. Gravel, CFA
D. K. Allard, Chartered Financial Analyst
M. S. Leduc, C.F.A
Which of the business cards use the CFA marks improperly?
A) Leduc.

B) Gravel and Leduc.

C) Allard and Leduc.

16. All of the following situations violate Standard VII(B), Reference to CFA Institute, the CFA Designa-
tion, and the CFA Program, EXCEPT:
Mia Hamel received her CFA charter in 1980. In 2001, she stopped paying her
annual CFA Institute dues. During her retirement speech in 2002, Hamel said,
A) "Although I am no longer an active CFA charterholder, I was awarded the right
to use the CFA designation in 1980 and maintained active membership in CFA
Institute for 20 years."

Barney Latrell, when introducing himself to a prospective client, says, "I com-
B) pleted my CFA in 1995, which required passing three six-hour examinations
over a three year period."

Lee Cabell has satisfied all the requirements imposed by CFA Institute for the
C) right to use the Chartered Financial Analyst designation. His business cards
say: Lee Cabell, C.F.A.
17. statement annually. Which of the following statements is CORRECT regarding his status with CFA In-
stitute? The analyst:
A) cannot refer to ever having been a member.

B) is no longer an active member.

C) is still an active member.

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18. Hill Lambert and Booby Jean, who recently started their own investment advisory business, plan to
take the Level III CFA examination next year. Lambert's business card reads, "Hill Lambert, CFA
Candidate." Jean has not put anything about the CFA on his business card. However, the firm's pro-
motional materials describe the CFA requirements and indicate that Jean participates in the CFA pro-
gram and has completed Levels I and II. According to CFA Institute Standards of Professional Con-
duct:
A) Lambert has violated the Standards but Jean has not.

B) Both Lambert and Jean have violated the Standards.

C) Neither Lambert nor Jean has violated the Standards.

19. Lee Gilbert, portfolio manager at Moonlight Investments, has passed all three levels of the CFA®
Program and has completed his work experience requirements. He expects to receive his charter in
the near future. He includes the following statement in his firm 's brochure: Gilbert has passed all
three levels of the exam and has completed the required work experience for the CFA Charter. He is
eligible for the CFA Charter and expects to receive the charter in the near future. Over the years, he
has demonstrated a superior performance and his CFA Charter will be rightfully awarded. Gilbert
has:
violated CFA Institute Standards of Professional Conduct because he implied
A)
superior performance that would be linked to the CFA Charter.

violated CFA Institute Standards of Professional Conduct because he adver-

B)
tised the CFA Charter before actually obtaining it.

not violated CFA Institute Standards of Professional Conduct because he met

C)
all disclosure requirements.
20. A CFA Institute member puts the following statement on her resume: I passed each level of the CFA
exam on the first try. Is this a violation of Standard VII(B)?
A) Yes, because she incorrectly refers to the CFA exam.

B) Yes, because saying she passed exams on the first try is not appropriate.

C) No, because it is a statement of fact.

21. Tom William received his CFA designation in 1998 and was employed as an investment counselor
until 2003. During the past several years, William has been out of work because of a serious illness.
He also failed to pay his annual CFA Institute dues during the current year. William has now recov-
ered and accepted a position with an investment advisory firm. His new business card says, Tom
William, CFA. As part of his job with his new firm, William uses PowerPoint® to make presentations to
groups of prospective clients. He obtained some of these PowerPoint® slides from web sites, but re-
moved the copyright notice before showing the slides to prospective clients.
Which of the following statements about Standard VII(B), Reference to CFA Institute, the CFA Desig-
nation, and the CFA Program, and Standard I(C), Misrepresentation, is most accurate? William:
A) violated Standard VII(B) but he did not violate Standard I(C).

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

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

22. When Lewis Giroux first joined Advisors, Inc., he was excited that all the analysts at the firm had the
CFA designation. In letters to prospective clients, he states that this ensures that Advisors can pro-

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 vide better service than their competitors. With respect to Standard VII(B), Reference to CFA Institute,
the CFA Designation, and the CFA Program, this is:
A) a violation because he cannot guarantee better service.

B) a violation because he mentions the CFA designation in the letter.

a violation for both mentioning the CFA designation and saying the firm can
C)
guarantee better service.
23. All of the following statements in promotion of your services are in violation of CFA Institute Standards
of Practice handbook EXCEPT:
I guarantee under my management that you will receive returns in excess of
A)
the market index average.

B) I passed Level II of the CFA Program in 2003.

based upon my research, you will achieve a 20% compound annual rate of
C)
return on small cap stocks over the next 5 years.
24. Rio Rousseau has earned the right to use the CFA designation and wants to indicate this on his busi-
ness card. According to CFA Institute Standards of Professional Conduct, which of the following is the
proper use of the professional designation on his business card?
A) Rio Rousseau, cfa.

B) Rio Rousseau, Chartered Financial Analyst.

C) Rio Rousseau, C.F.A.

25. Lopez Miller and Rango Fortier have both passed Level II of the CFA Exam Program and have regis-
tered for Level III. Miller circulates a resume stating that she is a candidate for the CFA designation
and has passed Level II of the CFA program. Fortier circulates a resume stating that he is a CFA II.
Which of the following statements is CORRECT?
A) Only Fortier has violated the Code of Standards.

B) Only Miller has violated the Code of Standards.

C) Both Miller and Fortier have violated the Code of Standards.

26. Joney Dupuis, CFA, includes the following phrase on his business card: Joney Dupuis is your trusted
local CFA. Is this a violation of Standard VII(B)?
A) Yes, because he uses CFA as a noun.

B) Yes, because he cannot put the initials "CFA" on his business card.

C) No, because his CFA Institute membership indicates that he is indeed trustworthy.
27. Martin Champagne and Lopez Fortier prepared the following information to be included in the promo-
tional materials of their employer, Jobing Securities.
 Martin Champagne is one of five CFAs at Jobing Securities. She satisfied all requirements for the
CFA designation in 1998.
 Lopez Fortier holds a CFA Level I designation, which he passed in 2001. He is registered to take
the next scheduled Level II examination.
Are the promotional materials prepared by Champagne and Fortier fully consistent with the Standards
of Professional Conduct?

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 A) Champagne: No. Fortier: No.

B) Champagne: Yes. Fortier: No.

C) Champagne: No. Fortier: Yes.

28. Avery Arsenault retired several years ago and relinquished her membership in CFA Institute. She had
the CFA designation up until then. She has decided to go back to work and puts the following state-
ment on her resume: I earned the CFA designation 10 years ago. Is this a violation of Standard
VII(B)?
A) No, as long as she does not indicate she currently has the designation.

B) Yes, she has used the letters "CFA" in an undignified manner.

C) Yes, because she uses "CFA" as a noun.

29. All of the following are required for a CFA Institute member to maintain his or her active status EX-
CEPT:
A) remit a completed Professional Conduct Statement on an annual basis.

B) paying membership dues to CFA Institute on an annual basis.

C) Passing each exam in no more than two tries.

30. During 2004 Sara Gravel received an undergraduate business degree with a management major and
completed all requirements for the CFA designation imposed by CFA Institute. She is applying for
employment at several brokerage firms. Her resume states, I was awarded the CFA degree in 2004
by CFA Institute. Her resume also states that she graduated with honors and majored in finance. Her
grade point average was 3.48 but with honors requires a 3.50 grade point average.
Which of the following statements about Standard VII(B), Reference to CFA Institute, the CFA Desig-
nation, and the CFA Program, and Standard I(C), Misrepresentation, is CORRECT? Gravel:
A) violated Standard I(C) but she did not violate Standard VII(B).

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

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

31. Which of the following statements is a violation of Standard VII(B) if it is included on a CFA charter-
holder 's resume?
A) Both of these are violations of Standard VII(B).

B) My earning the CFA designation indicates my superior ability.

C) My earning the CFA designation indicates my desire to maintain high standards.

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 SOLUTION
1. Answer : C
Standard VII(A) "Conduct as Members and Candidates in the CFA Program" prohibits members and can-
didates from providing confidential information about the exam “ even after the conclusion of the exam.
Examples include broad topical areas tested or not tested.
2. Answer : B
Both Morin and Haney violated Standard VII(A) by compromising the integrity of the exam. Morin now has
an unfair advantage.
3. Answer : B
Members and Candidates are allowed to express their opinions about the CFA Institute and CFA Program
without violation of any Standards. Both of the other choices are in direct violation of Standard VII(A).
4. Answer : B
Pelletier is in violation of Standard VII(A), Conduct as Members and Candidates in the CFA Program.
Pelletier compromised the integrity of the exam by offering her assistant an advance copy. Pelletier 's as-
sistant is allowed to express his opinion without violation of any Standards.
5. Answer : A
Standard VII(A), Conduct as Members and Candidates in the CFA Program does not prohibit expressing
opinions about the program or the CFA Institute. Thus, Boucher is not in violation. Nothing in the facts in-
dicates a violation of Standard I(D), Misconduct. Standard I(D) deals with professional conduct involving
dishonesty, fraud, or deceit.
6. Answer : C
Misrepresenting information on the Professional Conduct Statement is a direct violation of Standard
VII(A), Conduct as Members and Candidates in the CFA Program. The other choices are violations of
Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program.
7. Answer : C
Both violated Standard VII(A) because they committed an act that compromised the validity of the exami-
nations leading to the award of the right to use the CFA designation.
8. Answer : B
Standard VII(A) "Conduct as Members and Candidates in the CFA Program" prohibits members and can-
didates from providing confidential information about the exam “ even after the conclusion of the exam.
9. Answer : A
Members may not over-promise their performance as CFA charterholders. They may follow their name
with the designation and describe, factually, the requirements for becoming a charterholder.
10. Answer : C
Edwards may refer to his participation in the program but must state that he is a candidate and specify the
level of the exam for which he is registered. There is no partial designation.
11. Answer : C
There is no designation for someone who has passed Level I, Level II, or Level III of the CFA examina-
tion. Candidates may state, however, that they have completed Level I, II, or III, as the case may be, in
the CFA Program. Thus, Menard violated the Standard, but Dubois did not.
12. Answer : B
The only appropriate use of the designation is I am a CFA charterholder. You cannot use the designa-
tion as a noun (as in I am a CFA ) and you cannot use the designation in the company name.
13. Answer : B
The only appropriate statement is I passed the Level I CFA exam last year. It is a factual statement
and does not imply a partial designation, which does not exist.
14. Answer : A
To comply with Standard I(C) Misrepresentation, Gabrielle should have gotten the authorization from
Hamel to copy the spreadsheets. The prohibition against plagiarism requires that Gabrielle identify Hamel
as the source of the initial model. However, the Standard permits publishing factual information from

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 Moody's Investors Service without acknowledgment because Moody's is recognized as a source of factual
materials.
15. Answer : A
Consistent with Standard VII(B), members must use the CFA marks in a proper manner. Members may
indicate CFA or Chartered Financial Analyst after their names, but the designation should not be
given more prominence than that used in printing the name itself. Also, periods should not be used to
separate the letters.
16. Answer : A
Hamel 's statement did not violate Standard VII(B). Her right to use the CFA designation was suspended
when she stopped paying dues but her statement is a matter of fact. Cabell 's violated Standard VII(B)
because he improperly used the CFA designation on his business card. Proper usage of the CFA desig-
nation on his business card would be: Lee Cabell, CFA or Lee Cabell, Chartered Financial Analyst. Latrell
violated Standard VII(B) by using the CFA designation as a noun. The CFA mark must be used as an ad-
jective. Latrell could have stated, I was awarded the CFA charter in 1995.
17. Answer : B
Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program, applies. In or-
der to use the CFA designation, the member must pay annual dues and submit a yearly Professional Con-
duct Statement.
18. Answer : A
On letterheads and business cards and in directory listings, only the mark CFA or the words Chartered Fi-
nancial Analyst should appear after the charterholder's name.
19. Answer : A
According to Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program,
Gilbert may indicate that he has completed the requirements and is eligible for the CFA charter along with
an accurate explanation of the requirements. However, he may not imply that the designation would mean
superior performance capabilities.
20. Answer : C
The statement is not a violation because it is a fact. However, the member must not go on to claim supe-
rior performance.
21. Answer : C
William violated Standard VII(B) because his right to use the CFA designation was suspended when he
stopped paying CFA Institute dues. Thus, he can no longer use the CFA designation on his business
card. William also violated Standard I(C) because he was guilty of plagiarism. He inappropriately used
copyrighted material, which provided the impression that such material was his own.
22. Answer : A
According to Standard VII(B), the analyst cannot guarantee better service. Giroux can mention the fact
that all analysts have the designation, but he is Menardited in what he can say with respect to this fact. He
could say, for example, that this means the analysts all had to take and pass three rigorous exams.
23. Answer : B
Candidates may refer to the CFA level(s) passed and the associated dates as long as a partial designa-
tion is not implied. They may not guarantee or promise a given level of return.
24. Answer : B
The CFA designation should always be capitalized and shown without periods. The CFA designation
should not be referred to as a degree. Placing the designation "CFA" or "Chartered Financial Analyst" af-
ter one's name on a resume, business card, brochure, or other published material is appropriate.
25. Answer : A
The Code and Standards permit an individual to state that he or she is a candidate for the CFA designa-
tion as long as the person is registered for the next CFA exam. The same individual may state the fact
that he or she has passed Level I or II of the CFA program. There is no partial designation, such as CFA
II.
26. Answer : A
The initials CFA cannot be used as a noun. The initials can appear on a business card but cannot be used
to exaggerate the meaning or implications of membership.

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27. Answer : A
Neither statement is fully consistent with Standard VII(B), Reference to CFA Institute, the CFA Designa-
tion, and the CFA Program. The CFA designation must always be used as an adjective and never as a
noun as Champagne used in her promotional description. Correct use of the CFA designation would be:
Martin Champagne is one of five CFA charterholders at Jobing Securities. No designation exists for
someone who has passed Level I of the CFA examination. Thus, Fortier 's statement saying that he holds
a CFA Level I designation represents incorrect use. A correct statement would be: Lopez Fortier
passed Level I of the CFA examination in 2001.
28. Answer : A
Arsenault is allowed to state that she earned the designation as long as she does not infer that she cur-
rently has the designation. The letters CFA are only to be used as an adjective, and she does that.
29. Answer : C
Passing each exam in two or fewer tries is not required to maintain active status as a member of the CFA
Institute. CFA Institute imposes both of the other choices.
30. Answer : B
Gravel violated Standard VII(B). The CFA designation should not be referred to as a degree. Gravel also
violated Standard I(C) because her claim that she graduated with honors is not true.
31. Answer : B
A CFA charterholder may not make claims about how earning the designation proves superior capabili-
ties. Saying "my earning the CFA designation indicates my desire to maintain high standards" is allowed
because it is a factual statement

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ETHICAL AND PROFESSIONAL STANDARDS

INTRODUCTION TO THE GLOBAL

INVESTMENT PERFORMANCE
STANDARDS (GIPS)

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 ETHICAL AND PROFESSIONAL STANDARDS

INTRODUCTION TO THE GLOBAL

INVESTMENT PERFORMANCE
STANDARDS (GIPS)

Learning Outcomes —
The candidate should be able to:
a. explain why the GIPS standards were created, what parties the GIPS standards apply to, and who
is served by the standards;
b. explain the construction and purpose of composites in performance reporting;
c. explain the requirements for verification.
The objective of this reading is to orient the Level I candidate approaching the assigned sections of
the GIPS standards. It explains why the GIPS standards were created, who can claim compliance,
and who benefits from compliance. It also introduces the key notion of composites, states the pur-
pose of verification, and previews the structure of the Standards.

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I. Why Were the GIPS Standards Created?
Institutions and individuals are constantly scrutinizing past investment performance returns in search of
the best manager to achieve their investment objectives.
In the past, the investment community had great difficulty making meaningful comparisons on the basis
of accurate investment performance data. Several performance measurement practices hindered the
comparability of performance returns from one firm to another, while others called into question the ac-
curacy and credibility of performance reporting overall. Misleading practices included:
 Representative Accounts: Selecting a top-performing portfolio to represent the firm’s overall in-
vestment results for a specific mandate.
 Survivorship Bias: Presenting an “average” performance history that excludes portfolios whose
poor performance was weak enough to result in termination of the firm.
 Varying Time Periods: Presenting performance for a selected time period during which the man-
date produced excellent returns or out-performed its benchmark—making comparison with other
firms’ results difficult or impossible.
Making a valid comparison of investment performance among even the most ethical investment man-
agement firms was problematic. For example, a pension fund seeking to hire an investment manage-
ment firm might receive proposals from several firms, all using different methodologies for calculating
their results.
The GIPS standards are a practitioner-driven set of ethical principles that establish a standardized, in-
dustry-wide approach for investment firms to follow in calculating and presenting their historical invest-
ment results to prospective clients. The GIPS standards ensure fair representation and full disclosure of
investment performance. In other words, the GIPS standards lead investment management firms to
avoid misrepresentations of performance and to communicate all relevant information that prospective
clients should know in order to evaluate past results.

II. Who Can Claim Compliance?

First, any investment management firm may choose to comply with the GIPS standards. Complying with the
GIPS standards is voluntary. Compliance with the GIPS standards is not typically required by legal or regula-
tory authorities.
Second, only investment management firms that actually manage assets can claim compliance with the
Standards. Plan sponsors and consultants cannot make a claim of compliance unless they actually man-
age assets for which they are making a claim of compliance. They can claim to endorse the Standards
and/or require that their investment managers comply with the Standards. Similarly, software (and the
vendors who supply software) cannot be “compliant.” Software can assist firms in achieving compliance
with the GIPS standards (e.g., by calculating performance in a manner consistent with the calculation re-
quirements of the Standards) but only an investment management firm can claim compliance once the firm
has satisfied all requirements of the Standards.
Third, compliance is a firm-wide process that cannot be achieved on a single product or composite. A firm
has only two options with regard to compliance with the GIPS standards: fully comply with all requirements
of the GIPS standards and claim compliance through the use of the GIPS Compliance Statement; or not
comply with all requirements of the GIPS standards and not claim compliance with, or make any reference
to, the GIPS standards.

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III. Who Benefits from Compliance?
The GIPS standards benefit two main groups: investment management firms and prospective clients.
 By choosing to comply with the GIPS standards, investment management firms assure prospective
clients that the historical “track record” they report is both complete and fairly presented. Compliance
enables the GIPS-compliant firm to participate in competitive bids against other compliant firms
throughout the world. Achieving and maintaining compliance may also strengthen the firm’s internal
controls over performance-related processes and procedures.
 Investors have a greater level of confidence in the integrity of performance presentations of a GIPS-
compliant firm and can more easily compare performance presentations from different investment
management firms. While the GIPS standards certainly do not eliminate the need for in-depth due
diligence on the part of the investor, compliance with the Standards enhances the credibility of in-
vestment management firms that have chosen to undertake this responsibility.

IV. Composites
One of the key concepts of the Standards is the required use of composites. A composite is an aggregation
of one or more portfolios managed according to a similar investment mandate, objective, or strategy. A com-
posite must include all actual, fee-paying, discretionary portfolios managed in accordance with the same in-
vestment mandate, objective, or strategy. For example, if a GIPS-compliant firm presents its track record for
a Global Equity Composite (the Composite), the Composite must include all portfolios that are managed, or
have historically been managed, in the firm’s Global Equity strategy. The firm may not subjectively select
which Global Equity portfolios will be included in or excluded from the calculation and presentation of the
Global Equity Composite. The determination of which portfolios to include in the Composite should be done
according to pre-established criteria (i.e., on an ex-ante basis), not after the fact. This prevents a firm from in-
cluding only their best-performing portfolios in the Composite.

V. Verification
Firms that claim compliance with the GIPS standards are responsible for their claim of compliance and
for maintaining that compliance. That is, firms self-regulate their claim of compliance. Once a firm claims
compliance with the Standards, they may voluntarily hire an independent third party to perform a verifi-
cation in order to increase confidence in the firm’s claim of compliance. Verification may also increase
the knowledge of the firm’s performance measurement team and improve the consistency and quality of
the firm’s compliant presentations.
Verification is performed with respect to an entire firm, not on specific composites. Verification does not
ensure the accuracy of any specific composite presentation. Verification tests:
 whether the investment firm has complied with all the composite construction requirements of the
GIPS standards on a firm-wide basis, and
 whether the firm’s policies and procedures are designed to calculate and present performance in
compliance with the GIPS standards.
Verification must be performed by an independent third party. A firm cannot perform its own verification.
Third-party verification brings additional credibility to a firm’s claim of compliance. A verified firm may
provide existing and prospective clients with greater assurance about its claim of compliance with the
GIPS standards. Verification may also provide improved internal processes and procedures as well as
marketing advantages to the firm.

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VI. The Structure of the GIPS Standards
The provisions within the 2010 edition of the GIPS standards are divided into nine sections: Fundamen-
tals of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosure, Presen-
tation and Reporting, Real Estate, Private Equity, and Wrap Fee/Separately Managed Account (SMA)
Portfolios. The provisions are further categorized into requirements and recommendations.

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1. All of the following are misleading practices which justify the existence of the GIPS standards, except:
(a) Survivorship bias
(b) Representative accounts
(c) Use of Composites
2. Which of the following statements regarding the GIPS standards is most likely to be correct?
(a) Any investment manager may choose to comply with the GIPS standards
(b) GIPS compliance can be achieved on a single product or composite, or on a firm wide basis
(c) Plan sponsors, consultants and software providers can choose to comply with GIPS
3. Two investment analysts are discussing the rationale behind the existence of the GIPS Standards. The
first analyst states that prospective clients and investors will benefit from the Standards. Analyst 2 insists
that investment management will benefit from the Standards. Which of the following statements is most
accurate?
(a) Both analysts are correct
(b) The first analyst is correct, the second analyst is incorrect
(c) The first analyst is incorrect, the second analyst is correct
4. According to the GIPS Standards, a composite is:
(a) An aggregation of one or more portfolios managed by the same fund manager
(b) An aggregation of one or more portfolios managed according to a similar investment mandate, objec-
tive or strategy
(c) An aggregation of one or more portfolios managed by the same investment unit or division
5. A fund manager is considering adding the following three portfolios with similar strategy to their relevant
composite:
Portfolio A: Actual, fee-paying and discretionary
Portfolio B: Simulated, non-fee paying and discretionary
Portfolio C: Actual, fee-paying and non-discretionary
Which of these portfolios must the manager include in the composite according to the GIPS Standards?
(a) Portfolio A
(b) Portfolio B
(c) Portfolio C
6. Which of the following statements regarding verification under the GIPS Standards is correct?
(a) Verification is voluntary
(b) Verification must be conducted on specific composites
(c) A firm may perform its own verification

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 Solutions
1. Answer: C
Survivorship bias is related to presenting a performance history that excludes portfolios with poor per-
formance. ‘Representative accounts’ involves selecting a top performing portfolio to represent the firm’s
overall investment results. Use of composites, aggregations of portfolios managed to a similar mandate, is
required by GIPS and aims to remove these issues from performance presentation.
2. Answer: A
Only investment management firms that actually manage assets can claim compliance with the Stan-
dards. Plan sponsors and consultants cannot claim compliance unless they actually manage assets for
which they are making a claim of compliance. Similarly, software vendors cannot be compliant.
3. Answer: A
The GIPS Standards benefit two main groups: investment management firms gain from fairer competition
for client funds, whilst prospective clients and investors will have a higher level of confidence in the integ-
rity of performance presentations
4. Answer: B
A composite is an aggregation of one or more portfolios managed according to a similar investment man-
date, objective or strategy
5. Answer: A
A composite must include all actual, fee paying, discretionary portfolios managed in accordance with the
same investment mandate, objective or strategy.
6. Answer: A
Verification is a voluntary process carried out by a third party to test whether a firm claiming compliance
has followed the GIPS Standards. Verification is performed with respect to an entire firm, not on specific
composites. A firm cannot perform its own verification.

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ETHICAL AND PROFESSIONAL STANDARDS

THE GIPS STANDARDS

Page 175 of 204

 ETHICAL AND PROFESSIONAL STANDARDS

THE GIPS STANDARDS

Learning Outcomes —
The candidate should be able to:
a. describe the key features of the GIPS standards and the fundamentals of compliance;
b. describe the scope of the GIPS standards with respect to an investment firm’s definition and his-
torical performance record;
c. explain how the GIPS standards are implemented in countries with existing standards for per-
formance reporting and describe the appropriate response when the GIPS standards and local
regulations conflict;
d. describe the nine major sections of the GIPS standards.

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Introduction
Preamble—Why Is a Global Investment Performance Standard Needed?
Standardized Investment Performance
Financial markets and the investment management industry have become increasingly global in nature. The
growth in the types and number of financial entities, the globalization of the investment process, and the in-
creased competition among investment management firms demonstrate the need to standardize the calcula-
tion and presentation of investment performance.

Global Passport
Asset managers and both existing and prospective clients benefit from an established global standard for cal-
culating and presenting investment performance. Investment practices, regulation, performance measure-
ment, and reporting of performance vary considerably from country to country. By adhering to a global stan-
dard, firms in countries with minimal or no investment performance standards will be able to compete for busi-
ness on an equal footing with firms from countries with more developed standards. Firms from countries with
established practices will have more confidence in being fairly compared with local firms when competing for
business in countries that have not previously adopted performance standards. Performance standards that
are accepted globally enable investment firms to measure and present their investment performance so that
investors can readily compare investment performance among firms.

Investor Confidence
Investment managers that adhere to investment performance standards help assure investors that the firm’s
investment performance is complete and fairly presented. Both prospective and existing clients of investment
firms benefit from a global investment performance standard by having a greater degree of confidence in the
performance information presented to them.

Objectives
The establishment of a voluntary global investment performance standard leads to an accepted set of best
practices for calculating and presenting investment performance that is readily comparable among investment
firms, regardless of geographic location. These standards also facilitate a dialogue between investment firms
and their existing and prospective clients regarding investment performance.
The goals of the GIPS Executive Committee are:
 To establish investment industry best practices for calculating and presenting investment performance
that promote investor interests and instill investor confidence;
 To obtain worldwide acceptance of a single standard for the calculation and presentation of investment
performance based on the principles of fair representation and full disclosure;
 To promote the use of accurate and consistent investment performance data;
 To encourage fair, global competition among investment firms without creating barriers to entry; and
 To foster the notion of industry “self-regulation” on a global basis.

Overview
Key features of the GIPS standards include the following:

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 The GIPS standards are ethical standards for investment performance presentation to ensure fair repre-
sentation and full disclosure of investment performance. In order to claim compliance, firms must adhere
to the requirements included in the GIPS standards.
 Meeting the objectives of fair representation and full disclosure is likely to require more than simply adher-
ing to the minimum requirements of the GIPS standards. Firms should also adhere to the recommenda-
tions to achieve best practice in the calculation and presentation of performance.
 The GIPS standards require firms to include all actual, discretionary, fee-paying portfolios in at least one compos-
ite defined by investment mandate, objective, or strategy in order to prevent firms from cherry-picking their best
performance.
 The GIPS standards rely on the integrity of input data. The accuracy of input data is critical to the accu-
racy of the performance presentation. The underlying valuations of portfolio holdings drive the portfolio’s
performance. It is essential for these and other inputs to be accurate. The GIPS standards require firms to
adhere to certain calculation methodologies and to make specific disclosures along with the firm’s per-
formance.
 Firms must comply with all requirements of the GIPS standards, including any updates, Guidance Statements,
interpretations, Questions & Answers (Q&As), and clarifications published by CFA Institute and the GIPS Ex-
ecutive Committee, which are available on the GIPS website (www.gipsstandards.org) as well as in the GIPS
Handbook.
The GIPS standards do not address every aspect of performance measurement or cover unique characteris-
tics of each asset class. The GIPS standards will continue to evolve over time to address additional areas of
investment performance. Understanding and interpreting investment performance requires consideration of
both risk and return. Historically, the GIPS standards focused primarily on returns. In the spirit of fair represen-
tation and full disclosure, and in order to provide investors with a more comprehensive view of a firm’s per-
formance, the 2010 edition of the GIPS standards includes new provisions related to risk.

Historical Performance Record

 A firm is required to initially present, at a minimum, five years of annual investment performance that is
compliant with the GIPS standards. If the firm or the composite has been in existence less than five years,
the firm must present performance since the firm’s inception or the composite inception date.
 After a firm presents a minimum of five years of GIPS-compliant performance (or for the period since the
firm’s inception or the composite inception date if the firm or the composite has been in existence less
than five years), the firm must present an additional year of performance each year, building up to a mini-
mum of 10 years of GIPS-compliant performance.
 Firms may link non-GIPS-compliant performance to their GIPS-compliant performance provided that only
GIPS-compliant performance is presented for periods after 1 January 2000 and the firm discloses the pe-
riods of non-compliance. Firms must not link non-GIPS-compliant performance for periods beginning on or
after 1 January 2000 to their GIPS-compliant performance. Firms that manage private equity, real estate,
and/or wrap fee/separately managed account (SMA) portfolios must also comply with Sections 6, 7, and
8, respectively, of the Provisions of the GIPS standards that became effective as of 1 January 2006.

Compliance
Firms must take all steps necessary to ensure that they have satisfied all the requirements of the GIPS stan-
dards before claiming compliance. Firms are strongly encouraged to perform periodic internal compliance

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checks. Implementing adequate internal controls during all stages of the investment performance process—
from data input to preparing performance presentations—will instill confidence in the validity of performance
presented as well as in the claim of compliance.
Firms may choose to have an independent third-party verification that tests the construction of the firm’s com-
posites as well as the firm’s policies and procedures as they relate to compliance with the GIPS standards.
The value of verification is widely recognized, and being verified is considered to be best practice. The GIPS
Executive Committee strongly recommends that firms be verified. In addition to verification, firms may also
choose to have specifically focused composite testing (performance examination) performed by an independ-
ent third-party verifier to provide additional assurance regarding a particular composite.

Effective Date
The effective date for the 2010 edition of the GIPS standards is 1 January 2011. Compliant presentations that
include performance for periods that begin on or after 1 January 2011 must be prepared in accordance with
the 2010 edition of the GIPS standards. Prior editions of the GIPS standards may be found on the GIPS web-
site (www.gipsstandards.org).

Implementing a Global Standard

The presence of a local sponsoring organization for investment performance standards is essential for effec-
tive implementation and ongoing support of the GIPS standards within a country. Such country sponsors also
provide an important link between the GIPS Executive Committee, the governing body for the GIPS stan-
dards, and the local markets in which investment managers operate.
The country sponsor, by actively supporting the GIPS standards and the work of the GIPS Executive Committee,
ensures that the country’s interests are taken into account as the GIPS standards are developed. Compliance with
the GIPS standards is voluntary, and support from the local country sponsor helps to drive the adoption of the GIPS
standards.
The GIPS Executive Committee strongly encourages countries without an investment performance standard
to promote the GIPS standards as the local standard and translate them into the local language when neces-
sary. Although the GIPS standards may be translated into many languages, if a discrepancy arises, the Eng-
lish version of the GIPS standards is the official governing version.
The GIPS Executive Committee will continue to promote the principles of fair representation and full disclosure
and develop the GIPS standards so that they maintain their relevance within the changing investment manage-
ment industry.
The self-regulatory nature of the GIPS standards necessitates a strong commitment to ethical integrity. Self-
regulation also assists regulators in exercising their responsibility for ensuring the fair disclosure of information
within financial markets. The GIPS Executive Committee encourages regulators to:
 Recognize the benefit of voluntary compliance with standards that represent global best practices;
 Give consideration to taking enforcement actions against firms that falsely claim compliance with the
GIPS standards; and
 Recognize and encourage independent third-party verification.
Where existing laws, regulations, or industry standards already impose requirements related to the calculation
and presentation of investment performance, firms are strongly encouraged to comply with the GIPS standards
in addition to applicable regulatory requirements. Compliance with applicable law and/or regulation does not
necessarily lead to compliance with the GIPS standards. In cases in which laws and/or regulations conflict with

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the GIPS standards, firms are required to comply with the laws and regulations and make full disclosure of the
conflict in the compliant presentation.

I. Provisions of the Global Investment Performance Standards

The provisions within the GIPS standards are divided into the following nine sections: Fundamentals of Com-
pliance, Input Data, Calculation Methodology, Composite Construction, Disclosure, Presentation and Report-
ing, Real Estate, Private Equity, and Wrap Fee/Separately Managed Account (SMA) Portfolios.
The provisions for each section are categorized into requirements and recommendations. Firms must meet all
the requirements to claim compliance with the GIPS standards. Firms are encouraged to implement as many
of the recommendations as possible. These recommended provisions are considered to be industry best prac-
tice and assist firms in fully adhering to the spirit and intent of the GIPS standards.
1. Fundamentals of Compliance: Several core principles create the foundation for the GIPS standards,
including properly defining the firm, providing compliant presentations to all prospective clients, adhering
to applicable laws and regulations, and ensuring that information presented is not false or misleading.
Two important issues that a firm must consider when becoming compliant with the GIPS standards are
the definition of the firm and the firm’s definition of discretion. The definition of the firm is the foundation
for firm-wide compliance and creates defined boundaries whereby total firm assets can be determined.
The firm’s definition of discretion establishes criteria to judge which portfolios must be included in a com-
posite and is based on the firm’s ability to implement its investment strategy.
2. Input Data: Consistency of input data used to calculate performance is critical to effective compliance
with the GIPS standards and establishes the foundation for full, fair, and comparable investment perform-
ance presentations. For periods beginning on or after 1 January 2011, all portfolios must be valued in ac-
cordance with the definition of fair value and the GIPS Valuation Principles.
3. Calculation Methodology: Achieving comparability among investment management firms’ performance
presentations requires uniformity in methods used to calculate returns. The GIPS standards mandate the
use of certain calculation methodologies to facilitate comparability.
4. Composite Construction: A composite is an aggregation of one or more portfolios managed according
to a similar investment mandate, objective, or strategy. The composite return is the asset-weighted aver-
age of the performance of all portfolios in the composite. Creating meaningful composites is essential to
the fair presentation, consistency, and comparability of performance over time and among firms.
5. Disclosure: Disclosures allow firms to elaborate on the data provided in the presentation and give the
reader the proper context in which to understand the performance. To comply with the GIPS standards,
firms must disclose certain information in all compliant presentations regarding their performance and the
policies adopted by the firm. Although some disclosures are required for all firms, others are specific to
certain circumstances and may not be applicable in all situations. Firms are not required to make negative
assurance disclosures (e.g., if the firm does not use leverage in a particular composite strategy, no disclo-
sure of the use of leverage is required). One of the essential disclosures for every firm is the claim of
compliance. Once a firm meets all the requirements of the GIPS standards, it must appropriately use the
claim of compliance to indicate compliance with the GIPS standards. The 2010 edition of the GIPS stan-
dards includes a revised compliance statement that indicates if the firm has or has not been verified.
6. Presentation and Reporting: After constructing the composites, gathering the input data, calculating
returns, and determining the necessary disclosures, the firm must incorporate this information in presenta-
tions based on the requirements in the GIPS standards for presenting investment performance. No finite

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 set of requirements can cover all potential situations or anticipate future developments in investment in-
dustry structure, technology, products, or practices. When appropriate, firms have the responsibility to in-
clude in GIPS-compliant presentations information not addressed by the GIPS standards.
7. Real Estate: Unless otherwise noted, this section supplements all of the required and recommended pro-
visions in Sections 0–5. Real estate provisions were first included in the 2005 edition of the GIPS stan-
dards and became effective 1 January 2006. The 2010 edition of the GIPS standards includes new provi-
sions for closed-end real estate funds. Firms should note that certain provisions of Sections 0–5 do not
apply to real estate investments or are superseded by provisions within Section 6. The provisions that do
not apply have been noted within Section 6.
8. Private Equity: Unless otherwise noted, this section supplements all of the required and recommended
provisions in Sections 0–5. Private equity provisions were first included in the 2005 edition of the GIPS
standards and became effective 1 January 2006. Firms should note that certain provisions in Sections 0–
5 do not apply to private equity investments or are superseded by provisions within Section 7. The provi-
sions that do not apply have been noted within Section 7.
9. Wrap Fee/Separately Managed Account (SMA) Portfolios: Unless otherwise noted, this section sup-
plements all of the required and recommended provisions in Sections 0–5. Firms should note that certain
provisions in Sections 0–5 of the GIPS standards do not apply to wrap fee/SMA portfolios or are super-
seded by provisions within Section 8. The provisions that do not apply have been noted within Section 8.
Defined Terms: Words appearing in small capital letters in the GIPS standards are defined in the
GIPS Glossary, which is located at the end of this reading.

Fundamentals of Compliance
Fundamentals of Compliance—Requirements
0.A.1
FIRMS MUST comply with all the REQUIREMENTS of the GIPS standards, including any updates, Guidance
Statements, interpretations, Questions & Answers (Q&As), and clarifications published by CFA Institute and
the GIPS Executive Committee, which are available on the GIPS standards website (www.gipsstandards.org)
as well as in the GIPS Handbook.
0.A.2
FIRMS MUST comply with all applicable laws and regulations regarding the calculation and presentation of per-
formance.
0.A.3
FIRMS MUST NOT present performance or performance-related information that is false or misleading.
0.A.4
The GIPS standards MUST be applied on a FIRM-wide basis.
0.A.5
FIRMS MUST document their policies and procedures used in establishing and maintaining compliance with the
GIPS standards, including ensuring the existence and ownership of client assets, and MUST apply them con-
sistently.

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0.A.6
If the FIRM does not meet all the REQUIREMENTS of the GIPS standards, the FIRM MUST NOT represent or state
that it is “in compliance with the Global Investment Performance Standards except for . . .” or make any other
statements that may indicate partial compliance with the GIPS standards.
0.A.7
Statements referring to the calculation methodology as being “in accordance,” “in compliance,” or “consistent”
with the Global Investment Performance Standards, or similar statements, are prohibited.
0.A.8
Statements referring to the performance of a single, existing client PORTFOLIO as being “calculated in accor-
dance with the Global Investment Performance Standards” are prohibited, except when a GIPS-
compliant FIRM reports the performance of an individual client’s PORTFOLIO to that client.
0.A.9
FIRMS MUST make every reasonable effort to provide a COMPLIANT PRESENTATION to all PROSPECTIVE CLI-
ENTS. FIRMS MUST NOT choose to whom they present a COMPLIANT PRESENTATION. As long as a PROSPECTIVE
CLIENT has received a COMPLIANT PRESENTATION within the previous 12 months, theFIRM has met
this REQUIREMENT.
0.A.10
FIRMS MUST provide a complete list of COMPOSITE DESCRIPTIONS to any PROSPECTIVE CLIENT that makes such a
request. FIRMS MUST include terminatedCOMPOSITES on the FIRM’S list of COMPOSITE DESCRIPTIONS for at least
five years after the COMPOSITE TERMINATION DATE.
0.A.11
FIRMS MUST provide a COMPLIANT PRESENTATION for any COMPOSITE listed on the FIRM’S list of COMPOSITE DE-
SCRIPTIONS to any PROSPECTIVE CLIENT that makes such a request.

0.A.12
FIRMS MUST be defined as an investment firm, subsidiary, or division held out to clients or PROSPECTIVE CLI-
ENTS as a DISTINCT BUSINESS ENTITY.

0.A.13
For periods beginning on or after 1 January 2011, TOTAL FIRM ASSETS MUST be the aggregate FAIR VALUE of all
discretionary and non-discretionary assets managed by the FIRM. This includes both fee-paying and non-fee-
1
paying PORTFOLIOS.
0.A.14
TOTAL FIRM ASSETS MUST include assets assigned to a SUB-ADVISOR provided the FIRM has discretion over the
selection of the SUB-ADVISOR.
0.A.15
Changes in a FIRM’S organization MUST NOT lead to alteration of historical COMPOSITE performance.
0.A.16
When the FIRM jointly markets with other firms, the FIRM claiming compliance with the GIPS standards MUST be
sure that it is clearly defined and separate relative to other firms being marketed, and that it is clear
which FIRM is claiming compliance.

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Fundamentals of Compliance—Recommendations
0.B.1
FIRMS SHOULD comply with the RECOMMENDATIONS of the GIPS standards, including RECOMMENDATIONS in any
updates, Guidance Statements, interpretations, Questions & Answers (Q&As), and clarifications published by
CFA Institute and the GIPS Executive Committee, which will be made available on the GIPS website
(www.gipsstandards.org) as well as in the GIPS Handbook.
0.B.2
FIRMS SHOULD be verified.
0.B.3
FIRMS SHOULD adopt the broadest, most meaningful definition of the FIRM. The scope of this defini-
tion SHOULD include all geographical (country, regional, etc.) offices operating under the same brand name re-
gardless of the actual name of the individual investment management company.
0.B.4
FIRMS SHOULD provide to each existing client, on an annual basis, a COMPLIANT PRESENTATION of
the COMPOSITE in which the client’s PORTFOLIO is included.

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1. With respect to the Global Investment Performance Standards, which of the following is one of the nine
sections containing investment performance provisions?
A. Real Estate.
B. Derivatives.
C. Legal and Ethical Considerations.
2. According to the Fundamentals of Compliance section of the Global Investment Performance Standards,
issues that a firm must consider when claiming compliance include all of the following except:
A. replicating performance.
B. properly defining the firm.
C. documenting firm policies and procedures used in establishing and maintaining compliance with the
Standards.
3. G&F Advisors claims compliance with the Global Investment Performance Standards (GIPS) in its market-
ing materials. The compliant presentation includes a footnote which indicates that the firm has been veri-
fied by an independent third party. An additional note states that G&F is in compliance with the GIPS
standards except for its private equity investments. It is likely that G&F violated the GIPS standards?
A. No, because the footnotes meet the requirements of the Standards.
B. No, because the provisions do not apply to the private equity investments.
C. Yes, because they cannot claim compliance unless all requirements of the Standard are met.
4. Which of the following is a correct description of a key feature of the GIPS standards?
A. Firms must include all portfolios in at least one composite
B. In order to claim compliance, firms must adhere to the requirements and recommendations included
in the GIPS Standards
C. Firms should go beyond the minimum requirements of the GIPS Standards
5. An investment firm was founded ten years ago and adopted the GIPS Standards two years ago. Which of
the following is the minimum number of years the firm must show in order to adhere to GIPS?
A. Five
B. Seven
C. Ten
6. Where existing laws, regulations, or industry standards already impose requirements that conflict with the
GIPS Standards, firms should:
A. Adhere to the GIPS Standards
B. Adhere to the laws and regulations and disclose the conflict
C. Refrain from producing performance presentations
7. All of the following areas of performance presentations are provisions of the GIPS Standards, except:
A. Fundamentals of Compliance
B. Wrap Fee/SMA Portfolios
C. Firm Definition
8. The compliance statement of a firm claiming to comply with the GIPS Standards is contained in with pro-
vision of the GIPS Standards?
A. Provision 0 – Fundamentals of Compliance
B. Provision 4 - Disclosure

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 Solutions
1. Answer: A
Real Estate is one of the nine sections in the 2010 edition of the GIPS standards. Derivatives and Legal
and Ethical Considerations are not sections of the Standards.
2. Answer: A
Replication of performance is not included in the Fundaments of Compliance section within the GIPS
standards.
3. Answer: C
Firms must meet all the requirements set forth in the GIPS standards and cannot claim partial compliance.
4. Answer: C
The correct key features of GIPS are; Firms must include all actual, fee-paying discretionary portfolios in
at least one composite, firms must adhere to the requirements included in the GIPS Standards, and firms
should go beyond the minimum requirements of the GIPS Standards and adhere to the recommendations
to achieve best practice. Answer A is not correct since firms must only comply with requirements in order
to claim compliance with GIPS. Answer A is not correct since it is only actual, fee-paying, discretionary
portfolios must be included composites.
5. Answer: B
According to the GIPS Standards the firm should initially show five years of performance data when it be-
gins using the Standards. After that time, the firm must add a year every year until the performance record
is at least 10 years.
6. Answer: B
In cases in which laws and/or regulations conflict with the GIPS Standards, firms are required to comply
with the laws and regulations and make full disclosure of the conflict in the compliant presentation.
7. Answer: C
Fundamentals of Compliance is provision number 0, Wrap Fee/SMA Portfolios is provision number 8.
Firm definition is an issue addressed in provision 0.
8. Answer: B
Provision 4 - Disclosures deals with the claim of compliance that a firm claiming compliance with the GIPS
Standards must make

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ETHICAL AND PROFESSIONAL STANDARDS

ADDITIONAL QUESTIONS

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Code of Ethics and Standards of Professional Conduct
Unless otherwise stated in the question, all individuals in the following questions are CFA Institute
members or candidates in the CFA Program and, therefore, are subject to the CFA Institute Code
of Ethics and Standards of Professional Conduct.

1. Oversight and responsibility for the CFA Institute Professional Conduct Program is main-
tained by the:
1. Board of Governors
2. CEO
3. Disciplinary Review Committee
2. If a member or candidate does not accept the charges and proposed sanction levied by CFA In-
stitute under the Professional Conduct Program, the matter is referred to a panel composed of
1. Board of Governors
2. Senior CFA Institute executives
3. Disciplinary Review Committee
3. Sanctions that can be imposed by CFA institute under the Professional Conduct Program in-
clude all of the following except:
1. Public Censure
2. Fine
3. Suspension of membership
4. Bob Hadrell, CFA, has recently joined a new firm that currently reviewing its internal code of eth-
ics. As part of this review, the firm has asked Hadrell for a summary of the CFA Institute Code of
Ethics and Standards of Professional Conduct. Hadrell makes the following two statements:
Statement 1: "Members of CFA Institute and candidates for the CFA designation must pro-
mote the integrity of and uphold the rules governing capital markets”
Statement 2: "Integrity of Capital Markets: Market Manipulation.”
Hadrell should describe:
1. Both Statement 1 and Statement 2 as Standards of Professional Conduct
2. Statement 1 as a component of the Code of Ethics and Statement 2 as a Standard of Pro-
fessional Conduct
3. Statement 1 as a Standard of Professional Conduct and Statement 2 as a component of
the Code of Ethics
5. “Priority of Transactions” is included as a sub-section to which CFA Institute Standard of Pro-
fessional Conduct?
1. Duties to clients
2. Investment analysis, recommendations and actions
3. Conflicts of interest

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CODE OF ETHICS AND STANDARDS OF PROFESSIONAL
CONDUCT

1. The CFA Institute Board of Governors maintains oversight and responsibility for the Professional
Conduct Program (PCP), which, in conjunction with the Disciplinary Review Committee (DRC),
is responsible for enforcement of the Code and Standards.

2. LEAVE IT

3. Sanctions imposed by CFA Institute may have significant consequences; they include public
censure, suspension of membership and use of the CFA designation, and revocation of the CFA
charter. Candidates enrolled in the CFA Program who have violated the Code and Standards or
testing policies may be suspended or prohibited from further participation in the CFA Program.

4. The Code of Ethics contains six components that address general areas of ethical behavior. The
Standards of Professional Conduct are seven areas of Professional Conduct that deal with
specific types of behavior in certain situations, e.g., Market Manipulation.

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Guidance for Standards I-VII
1. Tom Gerten is a research analyst that has reasons to believe that ongoing employer activities
are in violation of CFA Institute Standards of Professional Conduct. Gerten’s initial response
should be to:
1. Report his suspicions to the relevant regulatory body
2. Report his suspicions to his supervisor or compliance department
3. Resign his position at the firm in order to dissociate from the activity
2. Charles Baker uses internet social media platforms to communicate with clients. He resides in
a country with no securities laws or regulations that address social media, and his clients are
located in a country with less strict securities laws and regulations regarding use of social
media than the Code and Standards. Baker should adhere to:
1. the Code and Standards
2. the securities laws and regulations of the location of his client
3. the securities laws and regulations of his residence
3. Frank Clotti is an investment analyst working for a credit rating agency. Clotti has been told
by his immediate supervisor that ratings for structured products issued by a certain client
should not receive a rating that is below investment grade, as it might affect the advisory rela-
tionship that the credit rating agency has with the client. Clotti has already conducted his
analysis and concluded that several of the structured products issued by the client should be
rated as below investment grade. According to the Standards, Clotti should:
1. Adhere to the instructions of his supervisor
2. Assign the structured products the lowest possible investment grade
3. Refuse to associate with research that assigns a rating of investment grade to the struc-
tured products he has concluded should be rated below investment grade
4. Which of the following policies most closely adheres to the recommended procedures for
compliance under Standard I(B):Independence and Objectivity regarding gifts?
1. Analysts should reject all gifts from clients and related parties
2. Analysts should disclose gifts from clients to their employer and receive only modest gifts
from related parties
3. Analysts should disclose gifts from clients to their employer and reject all gifts from re-
lated parties
5. Jim Wonder reads a study in a financial Journal regarding the valuation of global equity mar-
kets, and wishes to use information in the study in his own research. In order to avoid violat-
ing Standard I(C): Misrepresentation Wonder should attribute the information used in his re-
port to
1. The financial journal

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 2. The original author of the study
3. Both the financial journal and the original author of the study
6. All of the following are considered acts of plagiarism under Standard I(C): Misrepresentation
except:
1. Verbally repeating a quote of a leading industry expert in an online webcast without attri-
bution
2. A firm using work completed by analysts that subsequently left the firm without attributing
the analysts
3. An analyst reissuing work solely under their name that was initially completed by ana-
lysts that previously worked at the firm
7. Which of the following actions is most likely to be considered a violation of Standard I(D):
Misconduct?
1. A portfolio manager conducting an extra marital relationship with a member of his office
2. A portfolio manager not expending the necessary effort to due diligence securities that
are added to client portfolios
3. A risk manager filing for personal bankruptcy
8. Which of the following statements clearly conflicts with the recommended procedures for
compliance with Standard I(D): Misconduct?
1. Firms should develop a code of ethics that makes it clear that personal behavior that re-
flects poorly on the individual, the institution or the industry will not be tolerated
2. Firms should not attempt to list potential violations and sanctions due to difficult nature of
capturing the wide variety of misconduct possible at modern financial institutions
3. Firms should check the references of individuals to ensure they are of good character
and not ineligible to work in the industry due to past misdemeanours
9. Tom Cobo is a research analyst covering the biotechnology sector. He employs an ‘expert net-
work’ of industry contacts to stay abreast of current issues in the industry. Cobo arranges a call
with a scientist involved in the preliminary testing of an Alzheimer’s disease, during which the sci-
entist discloses that it is very likely that the tests will be successful and the drug will be fast
tracked through the government approval system. Cobo returns to his firm and discusses this in-
formation with his colleagues, before increasing his holding in the company. Cobo has
1. Violated Standard II(A): Material Non-Public Information
2. Not violated Standard II(A): Material Non-Public Information so long as procedures are in
place with the expert network to deter the exchange of material non-public information
3. Not violated Standard II(A): Material Non-Public Information because the information was
being publically disseminated by the scientist in the expert network
10. The mosaic theory states that:
1. Analysts should never use material non-public information
2. Analysts can use material non-public information as long as it is combined with material
public information to reach any conclusion
3. Analysts can use nonmaterial non-public information

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11. Which of the following is least likely to be an example of transaction-based manipulation un-
der Standard II(B): Market Manipulation?
1. Issuing misleading positive information or overly optimistic projections of a security’s
worth only to later sell it at an artificially high level.
2. Crossing a single share of a security at a price that is significantly different from the last
traded price in order to affect a related option expiration price
3. Securing a controlling, dominant position in a financial instrument to exploit and manipu-
late the price of a related derivative and/or the underlying asset
12. Oscar Moon is an employee at a credit ratings agency, and has created a computer model for
valuation of complex asset backed securitized products. The scenarios that Moon uses as the
inputs for the model ignore any negative situations of deteriorating credit conditions, increas-
ing rate and falling asset prices. Due to the higher ratings that this model achieves, his valua-
tion model becomes popular with his firm, who are keen to issue positive ratings for struc-
tured products in order to win business. Moon’s firm compensates him based on the amount
of structured products business the firm wins. Moon has
1. Violated Standard II(A) Market Manipulation
2. Not violated Standard II(A) Market Manipulation since the scenarios used in the model
accurately represent his views
3. Not violated Standard II(A) Market Manipulation since the Standard only relates to mar-
ket transactions and publically disseminated information
13. According to Standard III(A): Loyalty, Prudence and Care, soft dollar agreements:
1. Violate the duty of loyalty to the client
2. Do not violate the duty of loyalty to the client as long as the goods and services pur-
chased with soft dollar commissions are used to benefit the client
3. Never violate the duty of loyalty to the client
14. Three investment managers have the following arrangements for voting proxies:
Manager A votes on all proxy matters that arises on client portfolios
Manager B has conducted a cost-benefit analysis and only votes on proxies where the bene-
fits of doing so outweigh the costs
Manager C has a policy of always voting proxies in line with management in order to ensure
smooth running of company policy
Which of these managers is least likely to be in violation of Standard III(A): Loyalty, Prudence
and Care?
1. Manager A
2. Manager B
3. Manager C
15. Which of the following policies on communication of investment recommendations is most
likely to be in compliance with Standard III(B) Fair Dealing?
1. All clients are communicated with on a uniform basis

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 2. Information is disseminated in a way such that all clients have a fair opportunity to act on
every recommendation
3. Communications are made with clients in order of size
16. Which of the following statements clearly conflicts with the recommended procedures for compliance
with Standard III(B): Fair Dealing when a firm is changing an investment recommendation?
1. Maintain a list of clients and their holdings
2. Limit the number of people involved
3. Lengthen the timeframe between decision and dissemination
17. According to Standard III(C): Suitability, members and candidates that receive a request from
a client for a trade that does not properly align with the risk and return objectives outlined in
the client’s investment policy statement should:
1. Refuse to accept the order
2. Refrain from making the trade until concerns have been discussed with the client
3. Execute the trade, but discuss concerns with the client as soon as practically possible
18. David Haynes is a portfolio manager who manages a mixture of different funds including
growth funds and high income dividend funds. He is very confident that he has identified a
significantly undervalued opportunity in a high tech growth investment that currently does not
pay a dividend. Haynes is so convinced by the opportunity that he feels all of his funds should
benefit from it, and subsequently allocates shares across all of his portfolios. His analysis
turns out to be correct and the shares perform very strongly. According to Standard III(C):
Suitability, Haynes has:
1. violated the Standard
2. not violated the Standard since his analysis was based on a reasonable basis
3. not violated the Standard since his clients benefited from his actions
19. Which of the following statements best characterises the requirements of Standard III(D): Per-
formance Presentation?
1. Members and Candidates must comply with GIPS standards
2. Members and Candidates should encourage their firms to comply with GIPS standards
3. Members and Candidates should only seek employment at firms that adhere to GIPS
standards
20. Steven Burrell produces a performance presentation which does not adhere to GIPs stan-
dards and includes some simulated data. Which of the following statements is most accurate
in relation to the requirements of Standard III(D): Performance Presentation?
1. Burrell is in violation of the Standards since use of simulated data is not allowed
2. Burrell should produce separate reports for actual data and simulated data
3. Burrell should disclose the use of simulated data in the presentation to the recipients of
the information
21. Martin Green provides retirement planning advice to high net worth individuals. One of his cli-
ents, Sunhil Baal, is a successful entrepreneur who runs several small businesses locally.
Green notices that Baal is currently contributing to his pension plan in manner which is very

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 tax inefficient. He consults a colleague, Paul Rodgers and discusses the sources of income
that Baal has and the pension contributions that he makes. Rodgers agrees that Baal could
make significant tax savings through changing the way he contributes to his personal pension
plan, and agrees to contact Baal regarding his situation. Which of the following statements is
most accurate regarding Green’s behaviour? Green is:
1. In violation of Standard III(E): Preservation of Confidentiality
2. Not in violation of Standard III(E): Preservation of Confidentiality since his actions have
benefitted the client
3. Not in violation of Standard III(E): Preservation of Confidentiality since Rodgers is a col-
league of Green
22. Which of the following situations is most likely to lead to a violation of Standard III(E): Preser-
vation of Confidentiality? Disclosure of client information:
1. In cooperation with an investigation by the CFA Institute Professional Conduct Program
2. In attempt to introduce the client to new business contacts
3. Having gained client permission to disclose the information
23. Sonny Etheridge is making plans to leave his current employer after 13 years of service. He
plans to set up a new firm which will engage in very similar business activities as his current
firm. Etheridge resigns his post, and before he leaves the employment of his current firm,
makes arrangements in his own time to register his new company as a legal entity. He plans
to compete aggressively with his current firm and is confident that he can have success
based on the experience and knowledge he has in the industry. Whilst he will not take any
client lists from his current employer, he intends to use public information about his current
clients to contact them once he has established his new firm. Is Etheridge in violation of
Standard IV(A): Loyalty?
1. Yes, because he plans to compete with his current employer
2. Yes, because he plans to contact the clients of his current employer
3. No
24. Which of the following statements is most accurate regarding the requirements on a member
of candidate under Standard IV(A): Loyalty?
1. A member or candidate can not ever engage in independent competition to their current
employer
2. A member or candidate can only engage in independent competition to their current em-
ployer if they provide full disclosure to their employer prior to engaging in the activity
3. A member or candidate can only engage in independent competition to their current em-
ployer if they gain consent from their employer prior to engaging in the activity
25. Peter Morris is a senior portfolio manager at Robearn Investments. As part of his role he often
makes internal presentations at Robearn concerning current market conditions and his view
on the various companies in the sector that he covers. Due to his high profile and experience,
Morris is approached to make public speeches and presentations on similar matters at indus-

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 try dinners and conferences in return for financial compensation. According to Standard IV(B)
Additional Compensation Arrangements, Morris should:
1. Refuse the offer
2. Disclose to Robearn the potential additional compensation from public speaking prior to
engaging in the activity
3. Obtain written consent from all parties involved prior to engaging in any public speaking
26. A client offers their fund manager the use of their private yacht should the manager outper-
form the S&P500 index by ten percentage points or more. According to Standard IV(B) Addi-
tional Compensation Arrangements, the manager should:
1. Refuse the bonus
2. Obtain consent from their employer to receive the bonus before it is received
3. Obtain consent from their employer to enter into the arrangement regardless of whether
any bonus is eventually received
27. A violation of the Code and Standards has occurred in a department of a financial firm. Which
of the following statements is most likely to be accurate with regards to Standard IV(C): Re-
sponsibilities of Supervisors?
1. The supervisor of the department is in violation of the Standards
2. The supervisor of the department may possibly be in violation of the Standards
3. The supervisor of the department is not in violation of the Standards
28. Christiana Tesi is an execution trader at Chuck Mcateer, a small institutional investment advi-
sor that manages several mutual funds and private accounts. Her manager, Michael Bond,
has recently been tipped off that Tesi is ‘front running’ fund orders on her personal account –
an activity she has been doing for several years. Which of the following statements is most
likely to be accurate?
1. The actions of both Tesi and Bond are in violation of the Standards
2. Tesi in violation of the Standards, Bond is not in violation of the Standards
3. Tesi is not in violation of the Standards, Bond is in violation o the Standards
29. According to Standard V(A): Diligence and Reasonable Basis, provided an analyst makes
reasonable and diligent efforts to determine the that the research is sound, they are permitted
to use
1. Both secondary and third party research
2. Secondary research but not third party research
3. Third party research but not secondary research
30. Laurindo Brecker has produced a report on the equity market neutral strategy hedge fund
sector. As part of his research, he has modeled a simple quantitative contrarian strategy that
selects long and short weights of securities based on their recent price performance. Brecker
uses daily returns over the last three months for his model, and concludes that equity market
neutral hedge funds are a good long term investment prospect. Brecker is:
1. In violation of Standard V(A): Diligence and Reasonable Basis since he has used simu-
lated performance in his report and not disclosed this fact

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 2. In violation of Standard V(A): Diligence and Reasonable Basis since he has not con-
ducted a thorough enough analysis before making his recommendation
3. Not in violation of Standard V(A)
31. Which of the following statements is most likely to be consistent with Standard V(B): Commu-
nication with Clients?
1. Analysts should not use opinions in research and only report facts
2. Analysts should be clear to distinguish between fact and opinion in research
3. Analysts should always have an opinion and not just state facts in research
32. Saxit Asset Management has a proprietary model for valuing securities that is based on a
combination of fundamental and macroeconomic factors. The model has always been run
based on a statistical technique called principal component analysis. After recent personnel
changes at the firm, the head of investment management decides that the model will be no
longer be used and that managers will use more subjective techniques to value investments.
Clients are not informed of the change in the investment process unless they make a direct
enquiry about the subject. The head of investment management is:
1. In violation of Standard V(B): Communication with Clients
2. Not in violation of Standard V(B) because the personnel changes justified the change in
investment process
3. Not in violation with Standard V(B) because the change is being fully disclosed when cli-
ents enquire about the process
33. Henry Mullen is a research analyst who bases his research on a wide variety of sources, in-
cluding digital media such as text messages, blog posts and Twitter posts. There are no local
regulations that address the use of digital media sources in research reports. Which of the fol-
lowing statements best describes the duties imposed on Mullen under Standard V(C): Record
Retention?
1. Mullen is not permitted to use these digital media sources in his research
2. Mullen is permitted to use these digital sources in his research providing all relevant in-
formation is retained
3. Mullen is permitted to use these digital sources providing he adheres to local regulations
34. Jim Bell is a research analyst that has recently changed employer. His original employer did
not consent to Bell taking to his new employer any documentation relating to his previous
recommendations. He previously had a “Strong Sell” recommendation on the leading com-
pany in his sector and wishes to initiate coverage of the company with the same rating. Bell
issues a “Strong Sell” rating at his new firm and basis his recommendation on public sources
and memory of information gathered at his previous firm. Bell is:
1. In violation of Standard V(C): Record Retention
2. Not in violation of Standard V(C): Record Retention, provided he retains records of the
public sources and information gathered at his previous firm
3. Not in violation of Standard V(C): Record Retention since experience and knowledge
gained at previous employers is permitted to be used at his new employer

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35. Emily Coryell is a research analyst who has a small holding of shares in CDE Corp, a infor-
mation technology services company. Coryell is asked to initiate coverage on CDE Corp. In
order to comply with Standard VI(A): Conflicts of Interest, Coryell should:
1. Refuse to write the report
2. Disclose to her employer her personal holding in CDE Corp in writing
3. Disclose her personal holding in CDE Corp both to her employer in writing and in the report
36. Clifford Roach is a portfolio manager for Ginger Investments. Historically Roach has been
paid a constant percentage of assets under management for his service, however after a re-
cent change in the compensation structure at Ginger, Roach is being compensated based on
quarterly performance. Management at Ginger made this internal decision in order to better
incentivise their managers to outperform for their clients. Consequently, Roach increases the
risk of the portfolios that he manages. No disclosures of the change n compensation structure
have been made to clients of Ginger. Roach has most likely:
1. Violated both Standard III(C) Suitability and Standard VI(A) Conflicts of Interest
2. Standard III(C) Suitability only
3. Standard VI(A) Conflicts of Interest only
37. Which of the following statements is least likely consistent with the recommended procedures
for compliance with Standard VI(B) Priority of Transactions?
1. Investment firms should ban all employees from participation in equity IPOs
2. Strict Limits should be placed on investment personnel acquiring securities in private
placements
3. Investment personnel involved in the investment decision-making process should estab-
lish blackout periods prior to trades for clients
38. Bob Bernard discovers that a junior member of staff has frequently been profiting from ad-
vanced knowledge of the firm’s recommended “buy” list. He checks to see if the personal
dealing of the employee has been recorded but it comes to light that the employee had never
signed the personal account dealing agreement of the firm. Which of the following statements
is most likely to be correct?
1. There has been a violation of both Standard IV(C) Responsibilities of Supervisors and
Standard VI(B) Priority of Transactions
2. There has been a violation of Standard IV(C) Responsibilities of Supervisors only
3. There has been a violation of Standard VI(B) Priority of Transactions only
39. Which of the following statements is consistent with the recommended procedures for com-
pliance with Standard VI(C) Referral Fees?
1. Firms should completely restrict such fees
2. Firms may completely restrict fees or enforce procedures that require disclosure of
agreements prior to any payments taking place
3. Firms may completely restrict fees or enforce procedures that require disclosure of
agreements before entering into such arrangements

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40. Mike Brown is an investment adviser that has a referral agreement in place with a local mort-
gage broker. Brown has disclosed to his employer that a referral agreement is in place and
that he will receive compensation every time the mortgage broker gains a customer on his re-
ferral. Brown is:
1. In compliance with Standard VI(C) Referral Fees
2. In violation of Standard VI(C) Referral Fees since he should also disclose the nature and
value of the compensation
3. In violation of Standard VI(C) Referral Fees since he should have obtained consent from
his firm before entering into the referral Fee agreement
41. Stella Bubsi and Larry Futura are candidates in the CFA Program. Bubsi has asked Futura
about the specific details of questions appearing in the exam. Futura has declined to provide
specific details, but does give the broad topical areas that were tested. Which of the following
statements is most accurate?
1. Both Bubsi and Futura have violated the Standards
2. Bubsi has violated the Standards but Futura has not
3. Neither Bubsi nor Futura have violated the Standards.
42. Joe Folds has recently completed the CFA Program and has been asked his opinion of the
process by Tyler Screde who is considering embarking on the Program. According to the
Standards, how should Folds respond?
1. With his opinion
2. With fact only, not opinion
3. He should decline to comment
43. Tim Evans and Ernesto Hodges have both recently been awarded the CFA charter. They up-
date their business cards and resumes as follows:
Tim Evans describes himself as “one of only two qualified CFAs at my firm”.
Ernesto Hodges replaces his name on his business card with “Ernesto Hodges, CFA”. Which
of the following statements is most accurate?
1. Both Evans and Hodges are in compliance with the Standards
2. Evans is in compliance with the standards, but Hodges is not
3. Neither Evans nor Hodges are in compliance with the Standards
44. Louise Overhill, CFA, makes the following two statements on her professional networking pro-
file page:
Statement 1: “I passed each of the CFA examination levels in consecutive years”
Statement 2: “Passing the three CFA examination levels in consecutive years puts me among
an elite group of analysts from which employers can expect superior performance”
How many of the statements made by Overhill are in compliance with the Standards?
1. Neither
2. Statement 1 is in compliance, but statement 2 is not
3. Statement 2 is in compliance, but statement 1 is not

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 GUIDANCE FOR STANDARDS I - VII

1. Standard I(A):Knowledge of the Law recommends that members and candidates take the
following intermediate steps to dissociate from ethical violations of others when direct
discussions with the person or persons committing the violation are unsuccessful. The first step
should be to attempt to stop the behavior by bringing it to the attention of the employer through a
supervisor or the firm's compliance department. If this attempt is unsuccessful, then members and
candidates have a responsibility to step away and dissociate from the activity. Resignation of
their position should be considered as a last resort.

2. Members and candidates who practice in multiple jurisdictions may be subject to varied
securities laws and regulations. If applicable law is stricter than the requirements of the Code and
Standards, members and candidates must adhere to applicable law; otherwise, they must adhere
to the Code and Standards.

3. Clotti would be in violation of Standard I(B):Independence and Objectivity if he is associated

with research that assigns a higher credit rating to the structured products than that he has
calculated as fair in his research.

4. Standard I(B):Independence and Objectivity recommends that gifts from clients be disclosed to
employers and that gifts from related parties be limited. Standard I(B) does not preclude
customary, ordinary business-related entertainment as long as its purpose is not to influence or
reward members or candidates. Firms should consider a strict value limit for acceptable gifts that
is based on the local or regional customs and should address whether the limit is per gift or an
aggregate annual value.

5. According to Standard I(C): Misrepresentation, best practice would be either to obtain the
complete study from its original author and cite only that author or to use the information
provided by the financial journal and cite both sources.

6. Standard I(C): Misrepresentation, applies to verbal statements and those made on Internet
platforms. Work completed by employees is the property of the firm and the firm retains the right
to continue using the work completed after a member or candidate has left the organization. The
firm may issue future reports without providing attribution to the prior analysts. A member or
candidate cannot, however, reissue a previously released report solely under his or her name.

7. Standard I(D) addresses all conduct that reflects poorly on the professional integrity, good
reputation, or competence of members and candidates. Any act that involves lying, cheating,
stealing, or other dishonest conduct is a violation of this standard if the offense reflects adversely
on a member's or candidate's professional activities. Although CFA Institute discourages any sort
of unethical behavior by members and candidates, the Code and Standards are primarily aimed at
conduct and actions related to a member's or candidate's professional life, hence the extramarital
affair is not likely to be considered a violation. A portfolio manager not expending the necessary

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 effort on running a client portfolio is likely to call into question the relationship of trust, hence it
would qualify as misconduct under the standard. Personal bankruptcy does not necessarily
indicate misconduct unless the bankruptcy involved some sort of professional fraud or deceit.

8. LEAVE IT

9. Cobo has violated Standard II(A) by passing along material non-public information concerning
the ongoing product tests, which the fund used to trade in the securities and options of the related
company. Cobo cannot simply rely on the agreements signed by individuals who participate in
expert networks that state that he has not received information that would prohibit his trading
activity. He must make his own determination whether information he received through these
arrangements reaches a materiality threshold that would affect his trading abilities.

10. LEAVE IT

11. The first answer is an example of information-based market manipulation. The second and third
answers are examples of transaction-based manipulation.

12. Standard II(B): Market Manipulation applies to manipulating transactions and information,
including manipulating the inputs to a model in order to achieve short-term gain, which is the
case with Moon. The second answer is not correct since it is most likely that the positive inputs to
the model represent Moon's desire for higher compensation rather than genuinely reflecting his
view.

13. LEAVE IT

14. Part of a member's or candidate's duty of loyalty includes voting proxies in an informed and
responsible manner. Proxies have economic value to a client, and members and candidates must
ensure that they properly safeguard and maximize this value. An investment manager who fails
to vote, casts a vote without considering the impact of the question, or votes blindly with
management on nonroutine governance issues (e.g., a change in company capitalization) may
violate this standard. Voting of proxies is an integral part of the management of investments.

A cost-benefit analysis may show that voting all proxies may not benefit the client, so voting
proxies may not be necessary in all instances.

15. LEAVE IT

16. Members and candidates should maintain a list of clients and their holdings to understand which
clients are most impacted by changes in recommendations. They should also limit the number of
people privy to the knowledge that there is due to be a change in recommendations in order to
prevent inequitable disclosure. The Code and Standards recommend that members and candidates
shorten the time frame between decision and dissemination in order to reduce the chance of
unfair dissemination to select clients.

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17. LEAVE IT

18. LEAVE IT

19. LEAVE IT

20. LEAVE IT

21. LEAVE IT

22. LEAVE IT

23. Planning to compete with your current employer is not a breach of Standard IV(A): Loyalty, as
long as the competition does not occur until the employee has started his new employment, and
the employee does not attempt to solicit the business of clients of the firm until his current
employment has ended. Contacting the clients of his current employer using publicly available
information will not be in violation of the standard.

24. Although Standard IV(A) does not preclude members or candidates from entering into an
independent business while still employed, members and candidates who plan to engage in
independent practice for compensation must notify their employer and describe the types of
services they will render to prospective independent clients, the expected duration of the services,
and the compensation for the services. Members and candidates should not render services until
they receive consent from their employer to all the terms of the arrangement.

25. Morris delivers his presentations at Robearn as part of his employment, and giving similar
speeches in a public environment can be seen as earning additional compensation from services
rendered to the employer. Members and candidates must obtain permission for additional
compensation/benefits because such arrangements may affect loyalties and objectivity and create
potential conflicts of interest. Disclosure allows an employer to consider the outside
arrangements when evaluating the actions and motivations of members and candidates.
Moreover, the employer is entitled to have full knowledge of all compensation/benefit
arrangements so as to be able to assess the true cost of the services members or candidates are
providing.

26. LEAVE IT
27. LEAVE IT
28. LEAVE IT

29. If members and candidates rely on secondary or third-party research, they must make reasonable
and diligent efforts to determine whether such research is sound. Secondary research is defined
as research conducted by someone else in the member's or candidate's firm. Third-party research
is research conducted by entities outside the member's or candidate's firm, such as a brokerage
firm, bank, or research firm. If a member or candidate has reason to suspect that either secondary

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 or third-party research or information comes from a source that lacks a sound basis, the member
or candidate must not rely on that information.

30. LEAVE IT

31. LEAVE IT

32. LEAVE IT

33. Members and candidates should understand that although employers and local regulators are
developing digital media retention policies, these policies may lag behind the advent of new
communication channels. Such a lag places greater responsibility on the individual to ensure that
all relevant information is retained. Examples of nonprint media formats that should be retained
include, but are not limited to, e-mails, text messages, blog posts, and Twitter posts.

34. LEAVE IT

35. Standard VI(A) protects investors and employers by requiring members and candidates to fully
disclose to clients, potential clients, and employers all actual and potential conflicts of interest.
Although this holding may not be material, Coryell must disclose it in the report and to her
employer before writing the report because of the potential perceived conflict of interest.

36. Roach is likely in breach of Standard III(C) since he has changed the risk profile of the portfolios
he manages without any change in the circumstances of the investor that would justify this
action. Roach has violated Standard VI(A) by failing to inform his clients of the change in his
compensation arrangement with his employer, which has created a conflict of interest between
his compensation and his clients' objectives.

37. LEAVE IT

38. The junior employee violated Standard VI(B) by placing personal transactions ahead of client
transactions. In addition, Bernard violated Standard IV(C): Responsibilities of Supervisors by
permitting the employee to continue to perform his assigned tasks without having signed the
personal account dealing agreement of the firm.

39. LEAVE IT

40. LEAVE IT

41. Standard VII(A) prohibits members from disclosing and/or soliciting confidential material gained
prior to or during the exam and grading processes with those outside the CFA exam development
process. Bubsi has solicited confidential information, hence he has violated the Standard.
Confidential exam information includes the broad topics that were tested in an exam disclosed by
Futura, hence he is in violation of the Standards.

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42. LEAVE IT

43. According to Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA
Program, both Evans and Hodges have violated the Standards. The CFA and Chartered Financial
Analyst designations must always be used as adjectives, never as nouns or common names. The
CFA designation should not be given more prominence (e.g., larger or bold font) than the
charterholder's name.

44. If a candidate passes each level of the exam in consecutive years and wants to state that he or she
did so, that is not a violation of Standard VII(B) because it is a statement of fact. If the candidate
then goes on to claim or imply superior ability by obtaining the designation in only 3 years,
however, he or she is in violation of Standard VII(B).

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 INTRODUCTION TO THE GLOBAL INVESTMENT
PERFORMANCE STANDARDS (GIPS)

1. According to the GIPS Standards, a composite is:

1. An aggregation of one or more portfolios managed by the same fund manager
2. An aggregation of one or more portfolios managed according to a similar investment
mandate, objective or strategy
3. An aggregation of one or more portfolios managed by the same investment unit or division

EXPLANATION:
A composite is an aggregation of one or more portfolios managed according to a similar investment
mandate, objective, or strategy.

2. All of the following are misleading practices which justify the existence of the GIPS standards,
except:
1. Survivorship bias
2. Representative accounts
3. Use of Composites

EXPLANATION:
Survivorship bias is related to presenting a performance history that excludes portfolios with poor
performance. “Representative accounts” involves selecting a top-performing portfolio to represent
the firm's overall investment results. Use of composites, aggregations of portfolios managed to a
similar mandate, is required by GIPS and aims to remove these issues from performance
presentation.

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 ETHICS AND TRUST IN THE INVESTMENT PROFESSION

SUMMARY:
 Ethics refers to the study of making good choices. Ethics encompasses a set of moral principles
and rules of conduct that provide guidance for our behavior.

 Situational influences are external factors that may shape our behavior.

 Challenges to ethical behavior include being overconfident in our own morality,

underestimating the effect of situational influences, and focusing on the immediate rather than
long-term outcomes or consequences of a decision.

 In any given profession, the code of ethics publicly communicates the established principles and
expected behavior of its members.

 Members of a profession use specialized knowledge and skills to serve others; they share and
agree to adhere to a common code of ethics to serve others and advance the profession.

 A code of ethics helps foster public confidence that members of the profession will use their
specialized skills and knowledge to serve their clients and others.

 High ethical standards always matter and are of particular importance in the investment
industry, which is based almost entirely on trust. Clients trust investment professionals to use
their specialized skills and knowledge to serve clients and protect client assets. All stakeholders
gain long-term benefits when investment professionals adhere to high ethical standards.

 Rules and laws often codify ethical actions that lead to better outcomes for society or specific
groups of stakeholders.

 Organizations and individuals generally adhere to legal standards, but legal standards are often
created to address past ethical failings and do not provide guidance for an evolving and
increasingly complex world.

 Legal standards are often rule based. Ethical conduct goes beyond legal standards, balancing
self-interest with the direct and indirect consequences of behavior on others.

 A framework for ethical decision making can help people look at and evaluate a decision from
different perspectives, enabling them to identify important issues, make wise decisions, and
limit unintended consequences.

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