Code of Ethics

Question 1

Describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards

Answer 1

• CFA Institute Professional Conduct Program is covered by the CFA Institute Bylaws and Rules of Procedure for Proceedings Related to Professional Conduct
• The Disciplinary Review Committee of the CFA Institute Board of Governors is responsbile for enforcement
• The CFA Institute Designated Officer is prompted for inquiry of professional conduct when:
  
  • members or candidates are involved in a civil litigation or criminal investigation,
  • written complaints
  • evidence of misconduct recieved through public sources
  • a report by a CFA exam proctor of possible violation during exam
• May request explaination from member or candidate in writting, or conduct an interview with the subject, interview with complianant, or collect documents as evidence
• Officer may decide
  
  • no disciplinary santions appropriate
  • issue a cautionary letter
  • discipline member or candidate
    
    • member may accept or reject the sanction
      
      • if reject, matter is referred to a panel for a hearing

Question 2

State the six components of the Code of Ethics

Answer 2

1. Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prosepective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets
2. Place the integrity of the investment profession and the interest of client above their own personal interests
3. Use reasonable care and execise independent professional judgement when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities
4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession
5. Promote the integrity of, and uphold the rules governing, capital markets
6. Maintain and improve their professional competence and stive to maintain and improve the competence of other investment professionals

Question 3

State the seven Standards of Professional Conduct

Answer 3

1. Professionalism
2. Integrity of Capital Markets
3. Duties to Clients
4. Duties to Employers
5. Investment Analysis, Recommendations, and Actions
6. Conflicts of Interest
7. Responsibilities as a CFA Institute Member or CFA Candidate

Question 4

Explain the ethical responsibilities requried by the Code and Standards, including the sub-sections of each Standard.

Professionalism

Answer 4

1. Knowledge of the law - understand and comply with all laws, if there is a conflict, comply with the more strict law. Must not knowingly participate or assist in any violation of laws
2. Independence and Objectivity - must not offer, solicit or accept any gift, benefit, compensation, or condierations that would comopromoise their own or another’s objectivity
3. Misrepresentation - must not knowingly makes any relating to investment analysis, recommendations, actions or other activities
4. Misconduct - must not engage in any incolving dishonesty, fraud, or deceit

Question 5

Explain the ethical responsibilities requried by the Code and Standards, including the sub-sections of each Standard.

Integrity of Capital Markets

Answer 5

1. Material nonpublic information - if possess material, must not act on it
2. Market manipulation - must not engage in practices that distort prices or trading volume with the intent to mislead market participants

Question 6

Explain the ethical responsibilities requried by the Code and Standards, including the sub-sections of each Standard.

Duties to Clients

Answer 6

1. Loyalty, prudence, and care - must act for the benefits of their client and place interestes before their employer’s or their own
2. Fair dealing - must deal fairly and objectively with all clients
3. Suitability
   
   1. when in an advisory relationship with a client, they must
      
      • make reasonable inquiry into a client’s investment experience, risk and reutrn objectives, and financial constaints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly
      • determine that an investment is suitable to the client’s financial situation and consistent with client’s written objectives before action
      • judge the suitability of investments in the context of the clients total portfolio
   2. Whenresponsbile for managing a portfolio to a specific mandate, stragety, or style, must be consistent with it
4. Performance presentation - must be fair accurate, and complete
5. Preservation of confidentiality - of current, former, and prospective clients, unless
   
   • information concerns illegal activites
   • disclosure is required by law
   • client permits disclosure

Question 7

Explain the ethical responsibilities requried by the Code and Standards, including the sub-sections of each Standard.

Duties to Employers

Answer 7

1. Loyalty - must not cause harm to their employer
2. Additional compensation arrangement - must not accept gifts, benefits, compensation, or consideration that creates conflict of interest with employer’s interest unless they obtain written consent from all parties
3. Responsibitlities of supervisors - must detect and prevent violations of applicable laws by anyone under their supervision

Question 8

Explain the ethical responsibilities requried by the Code and Standards, including the sub-sections of each Standard.

Investment analysis and recommendations

Answer 8

1. Diligence and reasonable bias, members must
   
   • excerise diligence, independence and thoroughness
   • have adequate bias supported by research
2. Communication with clients, members must
   
   • disclose to clients the basic format and general principles of the investment process used to analyze, select securities etc.
   • Use judgement to identify important factos to analysis and communicate this
   • Distinguish between fact and opinion in presentation
3. Record retention - to be developed and maintained

Question 9

Explain the ethical responsibilities requried by the Code and Standards, including the sub-sections of each Standard.

Conflicts of interest

Answer 9

1. Disclosure of conflicts - anything that might impair their independence and objectivity to clients or employers, must be communicated effectively
2. Priority of transactions - client and employer over members
3. Referral fees - compensation for recommendation must be disclosed to employer, and clients

Question 10

Explain the ethical responsibilities requried by the Code and Standards, including the sub-sections of each Standard.

Responsbilities as a CFA institute member or CFA candidate

Answer 10

1. Conduct as memebers and candidates in the CFA program - must not compromise the reputation or integrity of the CFA Institute or designation, or the exam
2. Refernce to CFA Institute, the CFA designation, and the CFA program - must not misrepresent or exaggerate the meaning of it

Question 11

Professionalism ex.

Michael Allen works for a brokerage firm and is reponsbile for an underwriting of securities. A company official gives Allen information indicating the financial statements Allen filed with the regulator overstate the issuer’s earnings. Allen seeks the advice of the brokerage firm’s general counsel, who states that it would be difficult for the regulator to prove that Allen has been involved in any wrong doing.

Answer 11

• reliance on advice from legal counsel does not absolve a member from the requirement to comply with the law
• allen should report this situation to his supervisor, seek independent legal opinion, and determine whether the regulator should be notified of the error

Question 12

Professionalism ex.

Kamisha Washington’s firm advertises it past performance record by showing the 10-year return of a composite of its client accounts. However, Washington discovers that the composite omits the performance of accounts that hae left the firm during the 10-year period and that this omission has led to an inflated performance figure. Washinton is asked to use the promotional material that includes the erroneous performance number when soliciting business for the firm.

Answer 12

• misrepresenting performance is a violation of the Code and Standards
• if she uses it, she will be assisting in the violation
• she should dissociate herself from the activity
• she can bring the misleading number to the attention of the person who calculated it, supervisor, or compliance department
• if they are unwilling to recalculate performance she should refrain from using it, possibly find new employment
  *

Question 13

Professionalism ex.

An employee of an investment bank is working on an underwriting and finds out the issuer has altered their financial statements to hide operating losses in one division. These misstated data are included in a preliminary prospectus that has already been released.

Answer 13

• employee should report the problem to his supervisors
• if the firm doesn’t get it fixed, employee should dissociate from the underwriting and seek legal advice about whether he should undertake additional reporting or other actions

Question 14

Professionalism ex.

Laura Jameson, a US citizen works for an investment advisor based in the US and works in a country where investment managers are prohibited from participating in IPOs for their own accounts

Answer 14

• Jameson must comply with the strictest requirement amoung US law (where her firm is based), the CFAI Code and Standards, and the laws of the coutnry where she is doing business
• she must not participate in any IPOs for her personal account

Question 15

Professionalism ex.

A junior portfolio manager suspects that a broker responsible for new business from a foreign country is being allocated a portion of the firm’s payments for third-party research and suspects that no research is being provided. He believes that the research payments may be inapropriate and unethical.

Answer 15

• he should follow the firm’s procedures for reporting possible unethical behaviour and try to get better disclosure of the nature of these payments and any research

Question 16

Independence and objectivity (Standard I(B)) ex.

Steven Taylor, a mining anlyst with Bronson Brokers, is invited by Precision Metals to join a group of his peers in a tour of mining facilities in several western US states. The company arranges for chartered group flights from sit to site and for accommodations in Spartan Motels, the only chain with accommodations near the mines, for three nights. Taylor allos Precision Metals to pick up his tab, as do the other analysts, with one exception - John Adams, an employee of a large trust company who insits on following company’s policy and paying or his hotel room himself.

Answer 16

• trip is strictly for business and Taylor was not accepting irrelevant or lavish hospitality
• accommodations were modest
• arrangements did not violate Standard I(B) so long as Taylor’s independence and objectivity were not compromised

Question 17

Independence and objectivity (Standard I(B)) ex.

Walter Fitz is an equity analyst with Hilton Brokerage who covers the mining industry. He has concluded that the sotkc of Metals and Mining is overpriced at its current level, but he is concerned that a negative research report will hurt the good relationship between Metals and Mining and the investment-banking division of the firm. In fact a senior manager of Hilton Brokerage has just sent him a copy of a proposal his firm has made to Metals and Mining to underwrite a debt offering. Fitz needs to produce a report right away and is concerned about issuing a less-than-favorable rating.

Answer 17

• Fitz’s analysis must be objective and based soley on consideration of company fundmentals
• any pressure from other divisions is inappropriate
• this could have been avoided if Hilton Brokerage had placed Metals and Mining on a restricted list for its sales force

Question 18

Independence and objectivity (Standard I(B)) ex.

An analyst in the corpoarte finance department promises a client that her firm will provide full research coverage of the issuing company after the offering

Answer 18

• this is not a violation, but she cannot promise favorable research coverage.
• research must be objective and independent

Question 19

Independence and objectivity (Standard I(B)) ex.

An employee’s boss tells him to assume coverage of a stock and maintain a buy rating

Answer 19

• research opinions an recommendations must be objective and arrived at independently
• following the boss’s instructions would be a violation if the buy rating is inappropriate

Question 20

Independence and objectivity (Standard I(B)) ex.

A money manager receives a gift of significant value from a client as a reward for good performance over the prior period and informs her employer of the gift

Answer 20

• no violation because the gift is not based on performance going forward
• gift must be disclosed with employer
• if based on future performance, would need permission from her employer

Question 21

Independence and objectivity (Standard I(B)) ex.

An analyst enters into a contract to write a research report on a company, paid for by that company, for a flat fee plus a bonus based on attracting new investors to the security

Answer 21

• this is a violation
• compensation depends on the conclusion of the report
• accepting the job for a flat fee with proper disclousure is not a violation

Question 22

Independence and objectivity (Standard I(B)) ex.

A trust manager at a bank selects mutual funds for client accounts based on the profits from “service fees” paid to the bank by the mutual fund sponsor

Answer 22

• this is a violation
• trust manager has allowed the fees to affect his objectivity

Question 23

Independence and objectivity (Standard I(B)) ex.

An analyst performing sensitivity analysis for a security does not use only scenarios consistent with recent trends and historical norms

Answer 23

• this is a good thing, not a violation

Question 24

Misrepresentation I(C) ex.

Allison Rogers is a partner in the firm of Rogers and Black, a small firm offering investment advisory services. She assures a prospective client who has just inheritied $1 million that “we can perform all the financial and investment services you need”. Rogers and Black is well equipped to provide investment advice but, in fact, cannot provide asset allocation assisstance or a full array of financial investment services.

Answer 24

• Rogers has violated Standard I(C) by orally mispresenting the services her firm can perform
• must limit herself to the range of investment advisory services they can actually perform
• can help the client obtain elsewhere the additional services

Question 25

Misrepresentation I(C) ex.

Anthony McGuire is an issuer-paid analyst hired by publicly traded companies to electronically promote their sotkcs. McGuire creates a website that promotes his research effecrts as a seeminly independent analyst. McGuire posts a profile and a strong buy recommendation for each compnay on the website, including that the stock is expected to increase in value. He does not disclose the contractual relationships with the companies he covers on his website, in the research reports he issues, or in the statements he makes about the companies on Internet chat rooms.

Answer 25

• McGuire has violated Standard I(C)
• internetsite and e-mails are misleading to potential investors
• omissions regarding the true relationship between himself and companies is the misrepresentation
• also a violation of Standard VI(C), by not disclosing the compensation arrangement in exchange for his services

Question 26

Misrepresentation I(C) ex.

Paul Ostrowski runs a 2-person investment management firm. Ostrowski’s firm subscribes to a service from a large investment research firm the provides research reports that can be repackaged by smaller firms for those firms’ clients. Ostrowski’s firm distributes these reports to client as its own work

Answer 26

• cannot imply that he is the author of the report

Question 27

Misrepresentation I(C) ex.

A member makes an error in preparing marketing materials and misstates the amount of assets his firm has under management

Answer 27

• member must attempt to stop distribution of the erroneous material
• simply making th eerror unintentionally is not a violation but continuing to distribute erroneous material is

Question 28

Misrepresentation I(C) ex.

The marketing departmentstates in sales literature that an analyst has received an MBA degree but he has not. The analyst and other members of the firm have distributed this document for years.

Answer 28

• the analyst has violated the standards, he should have known of this misrepresentation after having distributed and used the materials for years

Question 29

Misrepresentation I(C) ex.

A member describes a bank CD as “guaranteed”

Answer 29

• not a violation as long as the limits of the guarantee are not exceeded and the nature of the guarantee is clearly explained to clients

Question 30

Misrepresentation I(C) ex.

A candidate reads about a research paper in a financial publication and includes the inforamtion in a research report, citing the original research report but not the financial publication

Answer 30

• violation of standard, used information from the financial publication and did not cite it
• should obtain the report and reference it directly, or cite both sources

Question 31

Misconduct I(D) ex.

Simon Sasserman is a trust investment officer at a bank in a small affluent town. He enjoys lunching every day with friends at the country club, where his clients have observed him having numerous drinks. Back at work after lunch, he clearly is intoxicated while making investment decisions. His colleagues make a point of handling any business with Sasserman in the morning because they distrust his judgement after lunch.

Answer 31

• a violation of Standard I(D) because this conduct raised questions about his professionalism and competence

Question 32

Misconduct I(D) ex.

Carmen Garcia manages a mutual fund dedicated to socially responsible investing. She is also an environmental activist. As the result of her participation at nonviolent protests, Garcia has been arrested on numerous occasions for trespassing on the property of large pertrochemical plant that is accused of damaging the environment

Answer 32

• generally Standard I(D) is not meant to cover legal transgressions resulting from acts of civil disobedience in support of personal beliefs
• Such conduct does not reflect poorly on the member’s reputation, competence, or integrity

Question 33

Misconduct I(D) ex.

A member intentionally includes a receipt that is not in his expenses for a company trip

Answer 33

• violation because it involves deceit and fraud

Question 34

Misconduct I(D) ex.

A member tells a client that he can get her a good deal on a car through his father in-law, but instead get her a poor deal and accepts part of the commissionon the car purchase

Answer 34

• violation because member has been dishonest and misrepresented the facts of the situation

Question 35

Integrity of capital markets - material non-public information II(A) ex.

Josephone Wlash is riding an elevator up to her office when she overhears the CFO for Swan Furniture Company tell the president of Swan that he just calculated the company’s earning for the past quarter, and they have unexpectedly and signifiacntly dropped. The CFO adds that this drop will not be resleased to the public until next week. Walsh immediately calls her broker and tells him to sell her Swan stock.

Answer 35

• violation of Standard II(A)
• has sufficient information to determine that the information is both material and nonpublic

Question 36

Integrity of capital markets - material non-public information II(A) ex.

Elizabeth Levenson is based in Taipei and covers the Taiwanese market for her firm, which is based in Singapore. She is invited to meet the finance director of a manufacturing company, along with the other ten largest shareholders of the company. During the meeting, the finance director states that the company expects it sworkforce to strike next Friday, which will cripple productivity and distribution. Can Levenson use this information as a basis to chage her rating on the company from a “buy” to “sell”?

Answer 36

• if company has not made the information public, she cannot sue the information according to Standard II(A)

Question 37

Integrity of capital markets - material non-public information II(A) ex.

A member’s dentist, who is an active investor, tells the member that based on his research he believe that Acme Inc. will be bought out in the near future by a larger firm in the industry. The member investigates and purchases shares of Acme.

Answer 37

• No violation
• dentist had no inside information and reached the conclusion on his own
• infomation is nonmaterial

Question 38

Integrity of capital markets - material non-public information II(A) ex.

A member recieved an advance copy of a stock recommendation that will appear in a widely read national newspaper column the next day and purchases the stock

Answer 38

• violatoin
• a recommendation in a widely read newspaper column will likely cause the stock price to rise, so this is material and nonpublic

Question 39

Integrity of capital markets - market manipulation II(B) ex.

Sergei Gonchar is the chairman of ACME Futures Exchange, which seeks to launch a new bond futures contract. In order to convince investors, traders, arbitrages, hedgers, and so on, to use its contract, the exchange attempts to demonstrate that it has the best liquidity. To do so, it enters into agreements with members so that they commit to a substantial minimum trading volume on the new contract over a specific period in exhcange for substantial reductions on their regualr commissions.

Answer 39

• violation of Standard II(B)
• attempts to mislead participants on the acutal liquidity of the market constitute the violation
• investors have been intentionally misled to believe they chose the most liquid market
• if ACME discloses its agreement with members to boost transactions over some initial launch period, it does not violate the standard
• this would give them a better service, but it must be disclosed

Question 40

Integrity of capital markets - market manipulation II(B) ex.

A member is seeking to sell a large position in a fairly illiquid stock from a fund he manages. He buys and sells shares of th estock between that fund and another he also manages to create an appearance of activity and stock price appreciatioin, so that the sale of the whole position will have less market impact and he will realize a better return for the fund’s shareholders

Answer 40

• violation
• trading acitivty is meant to mislead market participants
• fund shareholders gain by this action but this does not change the fact of the violation

Question 41

Integrity of capital markets - Duties to Clients III(A) ex.

Emilie Rome is a trust officer for Paget Trust Company. Rom’es supervisor is responsible for reviewing Rome’s trust account transactions and her monthly reports of personal stock transactions. Rome has been using Nathan Gray, a broker, almost exclusiely for trust account brokerage transactions. Where Gray makes a market in sotkcs, he has been giving Rome a lower price for personal purchases and a higher price for sales than he gives to Rom’s trust accounts and other investors.

Answer 41

• violation of duty and loyalty to the bank’s trust accounts for brokerage transactions simply because Gray trades Rome’s personal account on favourable terms

Question 42

Integrity of capital markets - Duties to Clients III(A) ex.

A member uses a broker for client-account trades that has relatively high prices and average research and execution. In return, the broker pays for the rent and other overhead expenses for the member’s firm

Answer 42

• violation
• because the member used client brokerage for services that do not benefit clients and failed to get the best price and execution for his clients

Question 43

Integrity of capital markets - Duties to Clients III(A) ex.

In return for receiving account management business from Borker X, a member directs trades to Broker X on the accounts referred to her by Broker X, as well as on other accounts as an incentive to Broker X to send her more account business.

Answer 43

• a violation if Broker X does not offer the best price and execution or if the practice of directing trades to Broker X is not disclosed to clients
• Best price and execution is always required unless clients provide a written statement not to and aware of the impact

Question 44

Integrity of capital markets - **Fair Dealing III(B) **ex.

Bradley Ames, a well-known and respected analyst, follows the computer industry. In the course of his research, he finds that a samall, relatively unknown compnay whose shares are traded over the coutner has just signed significant contracts with some of the companies her follows. After considerable amont of investigation, Ames decides to write a research report on the company and recommend purchase. While the report is being reviewed by the compnay for factual accuracy, Ames schedules a luncheon with several of his best clients to discuss the company. At the luncheon, he mentions the purchase recommendation scheduled to be sent early the following week to all the firm’s clients.

Answer 44

• violation III(B)
• By disseminating th epurchase recommendation to the clients with whom he had lunch with a week before the recommendation was sent to all clients

Question 45

Integrity of capital markets - Fair Dealing III(B) ex.

A member gets optioins for his part in an IPO from the subject firm. The IPO is oversubscribed and the member fills his own and other individuals’ orders but has to reduce allocation to his institutional clients.

Answer 45

• violation of the standard
• he must disclose to his employer and his clients that he has accepted options for putting toegther the IPO
• he shouldn’t take any shares of a hot IPO for himself instead of client to meet orders

Question 46

Integrity of capital markets - Fair Dealing III(B) ex.

A member is delayed in allocating some trades to client accounts. When she allocates the trades, she puts some positions that have appreciated in a preferred client’s account and puts trades that have not done as well as in others

Answer 46

• violation of the standard
• members should have allocated the trades to specific accounts prior to the trades
• or should have allocated the trades proportionally to suitable accounts in a timely fashion

Question 47

Integrity of capital markets -** Fair Dealing III(B) **ex.

Because of minimum lot size restrictions, a portfolio manager allocates the bonds she recieves from an oversubscribed bond offering to her clients in a way that is not strictly proportional to their purchase requests

Answer 47

• no violation
• since she has a reason (minimum lot size) to deviate from a strict pro rata allocation to her clients

Question 48

Integrity of capital markets - Suitability III(C) ex.

Jessica Walters, an investment advisor, suggest to Brian Crosby a risk-averse client, that covered call options be used in his equity portfolio. The pupose would be to enhance Crosby’s income and partially offset any untimely depreciation in value should the stock market or other circumstances affect his holdings unfabourably. Walter educates Crosby about all possible outcomes, including the risk of incurring an added tax liability if a stock rises in price and is called away and, conversely, the risk of his holdings losing protection on the downside if prices drop sharply.

Answer 48

• no violation
• when determining sutiability, primary focus should be the characterisitcs of the client’s entire portfolio, not on an issue-by-issue analysis.
• in thise case, Walters properly considered the investment in the conext of the entire portfolio and explained the investment to the client

Question 49

Integrity of capital markets - Suitability III(C) ex.

A member gives a client account a significant allocation to non-dividend paying high-risk recurities even though the client has low risk tolerance and modest return objectives.

Answer 49

• violation

Question 50

Integrity of capital markets - **Suitability III(C) **ex.

A member puts a security into a fund she manages that does not fit the mandate of the fund and is not permitted investment according to the fund’s disclosures

Answer 50

• violation

Question 51

Integrity of capital markets - Suitability III(C) ex.

A member strats his own money management business but puts all clients in his friend’s hedge funds

Answer 51

• violation with respect to suitability
• must match clients needs and circumstances to the investments he recommends and cannot act like a sales agent for his friend’s funds

Question 52

Integrity of capital markets - Performance Presentation III(D) ex.

Kyle Taylor of Taylor Trust Company, noting the performance of Taylor’s common trust fund for the past two years, states in the brochure sent to his potential clients that “you can expect steady 25% annual compound growth of the vluae of your investments over the year”. Taylor Trust’s common trust fund did increase at the rate of 25% per annum for the past year which mirrored the increase of the entire market. The fund, however, never average that growth for more than a year, and the average rate of growth of all of its trust accounts for five years was 5% per annum.

Answer 52

• violation of III(D)
• Taylor should have disclosed that the 25% growth occured in only one year
• also he did not include client accounts other than those in the firm’s common trust fund
• should take into account the performance of all categories of accounts
• also violated I(C), which prohibits statements of assurance or guarantees regarding an investment

Question 53

Integrity of capital markets - Performance Presentation III(D) ex.

A member puts simulated results of an investment strategy in a sales brochure without disclosing that the results are not acutal performance numbers

Answer 53

• violation

Question 54

Integrity of capital markets - Performance Presentation III(D) ex.

In materials for prospective clients, a member uses performance figures for a large-cap growth composite he has created by choosing accounts that have done relatively well and including some accounts with significant mid-cap exposure.

Answer 54

• violation
• member has attempted to mislead clients and has misrepresented her performance

Question 55

Integrity of capital markets - **Preservation of Confidentiality III(E) **ex.

David Bradford manages money for a family-owned real estate development corporation. He also manages the individual portfolios of several of the family members an officers of the corporation, including the CFO. Based on the financial records from the corporation, as well as some questionable practices of the CFO that he has observed, Bradford believes that the CFO is embessling money from the corporation and putting it into his personal investment account

Answer 55

• should check with his firm’s compliance department as well as outside counsel to determine whether applicable securities regulations require reporting the CFO’s finacial records

Question 56

Integrity of capital markets - Preservation of Confidentiality III(E) ex.

A member has learned from his client that one of his goals is to give more of his portfolio income to charity. The member tells this to a friend who is on the board of a worthy charity and suggests that he should contact the client about a donation.

Answer 56

• violation
• disclosing information he has learned from the client in the course of their business relationship

Question 57

Integrity of capital markets - Preservation of Confidentiality III(E) ex.

A member learns that a pension account client is violating the law with respect to charges to the pension fund

Answer 57

• member must bring this to the attention of her supervisor and try to end the illegal activity
• failing this, the member should seek legal advice about any disclosure she should make to legal or regualtory authorities and disassociate herself from any continuing association with the pension account

Question 58

Duties to employers - Loyalty IV(A) ex.

Dennis Elliot has hired Sam Chisolm who previously worked for a compeiting firm. Chisolm left his former firm after 18 years of employement. When Chisolm begins working for Elliot, he wants to contact his former clients because he knows them well and is cetain that many will follow him to his new employer. Is Chisolm in violation of the Standard IV(A) if he contacts his former clients?

Answer 58

• no violation with absence of non-compete
• client records are property of the firm, contacting former clients for any reason through the use of client lists or other information taken from a former employer without permission would be a violation
• extent of contact may be governed by a non-compete agreement signed by the employer and employee
• simple knowledge of the name and existence of former clients is not confidential information
• skills or experience employee gained while employed is not confidential or priviledge information
• if non-compete is absent, not prohibited to contact clients from former firm

Question 59

Duties to employers - Loyalty IV(A) ex.

Several employees are planning to depart their current comployer within a few weeks and have been careful to not engage in any activities that would confloct wit their duty to their current comployer. THey have just learned that one of their employer’s clients has undertaken a request for proposal (RFP) to review the possibly hire a new investment consultant. The RFP has been sent to the employeer and all of its competitors. The group believes that the new entity to be formed would be qualified to respond to the RFP and eligible for the business. The RFP submission period is likely to conclude before the employee’ resignations are effective. Is it permissible for the group of departing employees ot respond to the RFP under their anticated new firm?

Answer 59

• violation of Standard IV(A)
• a group of employees responding to an RFP that their employer is also responding to would lead to diret competition between the employees and the employer
• violation unless the group of employees received permission from their employer as well as the entity sending out the RFP

Question 60

Duties to employers - Loyalty IV(A) ex.

A member solicits clients prospects of his current employer to open accounts at the new firm he will be joining shortly

Answer 60

• violation
• can’t solicit the firm’s clients and prospects while he is still employed

Question 61

Duties to employers - Loyalty IV(A) ex.

Two employees discuss joining with others in an employee-led buyout of their employer’s emerging markets investment management business

Answer 61

• no violation
• their employer can decide how to respond to any buyout offer
• if buyout takes place, clients should be informed of the nature of the changes in a timely manner

Question 62

Duties to employers - Loyalty IV(A) ex.

A member is writing a research report on a company as a contract worker for Employer A (using Employer A’s premises and meterials) with the understanding that Employer A does not claim exclusive rights to the outcome of her research. As she is finishing the report, she is offered a full-time job by Employer B and sends Employer B a copy of a draft of her report for publication.

Answer 62

• violation
• by not giving Employer A the first rights to act on her research
• she must also becareful not to take any materials used in preparing the report from Employer A’s premises

Question 63

Duties to employers - **Loyalty IV(A) **ex.

A member prepares to leave his employer and open his own firm by registering with the SEC, renting an office, and buying office equipment

A member is a full-time employee of an investment management firm and wants to accept a paid position as twon mayor without asking his employer’s permission

Answer 63

• no violation
• as long as these preparations have not interfered with the performance of his current job
• the solicitation of firm clients and prospects prior to leaving his employer would however be a violation
• no violation
• because the member serving as mayor does not conflict with his employer’s business interest
• as long as the time commitment does not preclude performing his expected job function well

Question 64

Duties to employers - Additional Compensation Arrangements IV(B) ex.

Geoff Whitman, a portfolio analyst for Adams Trust Company, manages the account of Carol Cochran, a client. Whitman is paid a salary by his employer, and Cochran pays the trust company a standard fee based on the market vluae of assets in her portfolio. Cochran proposes to Whitman that “any year that my portfolio that my portfolio achieves at least a 15% return before taxes, you and your wife can fly to Monaco at my expense and use my condominium during the third week of January”. Whitman does not inform his employer of the arrangement and vacations in Monaco the following January as Cochran’s guest

Answer 64

• violation of IV(B)
• by failing to inform his employer in writing of this supplemental, contingent compensation arrangement
• arrangement could have detracted Whitmen’s performance with respect to other acounts he handles for Adams Trust
• must obtain consent of his employer to accept

Question 65

Duties to employers -** Additional Compensation Arrangements IV(B)** ex.

A member is on the board of directors of a company whose shares he purchases for client accounts. As a member of the board, he receives the company’s product at no charge

Answer 65

• violation
• because receiving the company’s product constitutes compensation for his service if he does not disclose this additional compensation to his employer

Question 66

Duties to employers - Responsibilities of Supervisors IV(C) ex.

Jane Mantock, senior vice president and head of the research department of H & V, Inc. a rgional brokerage firm, has decided to change her recommendation for Timber Products from buy to sell. In line with H & V’s procedures, she oraly advises certain other H & V executives of her proposed actions before the report is prepared for publication. As a result of his conversation with Mattock, Dieter Frampton, one of the executives of H&V accountable to Mattock, immediately sells Timber’s stock from his own account and from certain discretionary client accounts. In addition, other personnel inform certain institutional customers of the changes recommendation before it is printed and disseminated to all H&V customers who have received previous Timber reports.

Answer 66

• failed to supervise reasonably and adequately the action of those accountable to her
• did not prevent or establish reasonable procedures designed to prevent dissemination of the informaiton by those who knew of the changed recommendation
• adequate procedures would have informed the subordinates of their dutires and detected sales by Frampton and selected customers

Question 67

Duties to employers - Responsibilities of Supervisors IV(C) ex.

A member responsible for compliance by the firm’s trading desk notices a high level of trading acitivity in a stock that is not on the firm’s recommended list. Most of this trading is being done by a trainee, and the member does not investigate this tading.

Answer 67

• violation of member’s responsbilities as a supervisor
• must takes steps to monitor the activites of trading in training, as well as investigate the reason for the heavy trading of the security by her firm’s trading desk

Question 68

Investment Analysis, Recommendations, and Actions -

Diligence and reasonable bias V(A)

Helen Hawke manages the corporate finance department of Sarkozi Securities, Litd. The firm is anticipating that the government will soon close a tax loophole that currently allows oil and gas exploration companies to passs on drilling expenses to holders of a certain class of shares. Because market demand for this tax-advantaged class of stock is currently high, Sarkozi convinces several companies to undertake new equity financings at once before the loophole closes. Time is of the essence, but Sarkozi lacks sufficient resources to conduct adequate research on all prospective issuing companies. Hawke decides to estimate the IPO prices based on the relative size of each company and to justify the pricing laster when her staff has time.

Answer 68

• Violation of Standard V(A)
• Sarkozi should have taken on only the work that it could adequately handle
• hawke has not performed sufficient due diligence
• such an omission can result in investors purchasing shares at price that have no actual basis

Question 69

Investment Analysis, Recommendations, and Actions -

Diligence and reasonable bias V(A) ex.

A member in the corporate finance department of securities firm prices IPO shares without doing adequate research becasue she wants to get them to market quickly

Answer 69

• violaton of V(A)

Question 70

Investment Analysis, Recommendations, and Actions -

Diligence and reasonable bias V(A) ex.

A member screens a database of investment mangers and send a recommendation of five of them to a client. Subsequently, but before the client receives the report, one of the recommended firms loses its head of research and several key portfolio managers. The member does not update her report.

Answer 70

• violation
• member should have notified the client of the change in key personnel at the management firm

Question 71

Investment Analysis, Recommendations, and Actions -

Diligence and reasonable bias V(A) ex.

A member writes a report in which she estimates martgage rates. After reviewing it, a majority of the investment committee vote to change the report to reflect a different interest forecast. Must the member dissociate herself from the report?

Answer 71

• no
• under no obligation

Question 72

Investment Analysis, Recommendations, and Actions -

Diligence and reasonable bias V(A) ex.

A member is principal in a small investment firm that bases its securities recommendations on third-party research that it purchases

Answer 72

• not a violation
• as long as the member’s firm periodically check the purchase research to determine still meets the criteria of the standard

Question 73

Investment Analysis, Recommendations, and Actions -

Diligence and reasonable bias V(A) ex.

A member selects an outside advisor for international equityies based soley on the fact that the selected firm has the lowest fees for managing the internationequities accounts

A member investigates the management, fees, track record, and investment strategy of a hedge fund and recommends it to a client who purchases it. The member accurately discloses the risks involved with the inestment in the hedge fund. Soon afterward, the fund reports terrible losses and suspends operations

Answer 73

• violation of Standard V(A)
• member must consider performance and service, not just fees
• not necessarily a violation
• if performed reasonable due diligence and disclosed investment risk adequately, comply with standard

Question 74

Investment Analysis, Recommendations, and Actions -

Communication with Clients and Prospective Clients V(B) ex.

Sarah Williamson, director of marketing for Country Technicians, Inc. is convinced that she has found the perfect formula for increasing Country Technician’s income and diversifying its product based. Williamson plans to build a Country Technician’s reputation as a leading money manager by marketing an exclusive and expensive investment advice letter to high-net-worth individuals. one hitch in the plan is the complexity of Country Technician’s investment system - a combination of technical trading rules (based on historical price and volume fluctuations) and portfolioo-constructionrules designed to minimize risk. To simplify the newsletter, she decides to include only each week’s top-five buy and sell recommendations and to leae out details of the vaulation models and the portfolio-strucutring scheme

Answer 74

• violation of V(B)
• because she does not intend to include all the relevant factors behind the investment advice
• does not need to describe the investment system in detail, but clients must be informed of Country Technician’s basic process and logic
• with out the basis of recommendation, clients cannot possibly understand its limitations or it inherent risk

Question 75

Investment Analysis, Recommendations, and Actions -

Communication with Clients and Prospective Clients V(B) ex.

Richard Dox is a mining analyst for East Bank Securities. He has jst finished his report on Boisy Bay Minerals. Included in his report is his own assessment of the gropogical extent of mineral reserves likely to be found on the company’s land. Dox completed this calculation based on the core samples from the company’s latest drilling. According to Dox’s calculations, the company has in excess of 500,000 ouces of gold onthe property. Dox concludes his research report as follows: “Based on the fact that the compnay has 500,000 ounces of gold to be mined, I recomend a strong BUY”

Answer 75

• violation of Standard V(B)
• if issues report as written
• his calculation of total gold reserves is an opinion, not a fact
• opionion must be distinguished from fact in research reports

Question 76

Investment Analysis, Recommendations, and Actions -

Communication with Clients and Prospective Clients V(B) ex.

A member sends a report to his investment management firm’s clients describing a strategy his firm offers in terms of the high returns it will generate in the event interst rate volatility decreases. The report does not provide details of the strategy because they are deemed proprietrary. The report does not consider the possible return if interst rate volatility actually increases.

Answer 76

• violation on two accounts
• basic nature of the straegy must be disclosed, including the extent to which leverage is used to generate the high returns when colatility falls
• the report must include how the straegy will perform if volatility rises, as well as if it falls

Question 77

Investment Analysis, Recommendations, and Actions -

Conflicts of interest VI(A) ex.

Hunter Weiss is a research analyst with Faramington Company, a broker and investment banking firm. Farmington’s merger and acquisition department has represented Vimco a conglomerate, in all of its acquisitions for 20 years. From time to time, Farmington officers sit on the boards of directors of various Cimco subsidiaries. Weiss is writing a research report on Vimco

Answer 77

• Weiss must diclose in his researh report Farminginton’s special relationship with Vimco
• broker/dealer management of and participation in public offerings must be disclosed in research reports
• independence and objectivity of the report is threatened and this must be disclosed

Question 78

Investment Analysis, Recommendations, and Actions -

Conflicts of interest VI(A) ex.

An investment mangement partnership sells a significant stake to a firm that is publicly traded. The partnership has added the firm’s stock to its recommended list and approved it commercial paper for cash management accounts.

Answer 78

• members are required to disclose such a change in the firm ownership to all clients
• must include a disclosure of the business relation between it and the partnership

Question 79

Investment Analysis, Recommendations, and Actions -

Conflicts of interest VI(A) ex.

A member’s investment banking firm receives a significant number of options as partial compensation for brining a firm public. The member will profit personally from a portion of these options as well.

Answer 79

• any research report on the public’s securities, the member must disclose the fact that these options exist and include their number and expiration date
• he must alos disclose the extent of his own participation in these options

Question 80

Investment Analysis, Recommendations, and Actions -

**Prior Transactions VI(B) **ex.

Erin Toffler, a portfolio manager at Esposito Investments, manages the retirement account established with the firm by her parents. Whenever IPOs become available, she first allocates shares to all her other clients for whom the investment is appropriate; only then does she place any remaing portion in her parents’ account, if the issue is appropriate for them. She has adopted this procedure so that no one can accuse her of favouring her parents.

Answer 80

• violation
• breached her duty to her parents by treadting them differently from her other accounts
• However, if Toffler has beneficial ownership in the account, she may have to preclear the trades and report the transactions to Esposito

Question 81

Investment Analysis, Recommendations, and Actions -

**Prior Transactions VI(B) **ex.

A brokerage’s insurance analyst, Denise Wilson, makes a closed-circuit report to her firm’s branches around the country. During the broadcast, she includes negative comments about a mojor company within the industry. The following day, WIlson’s report is printed and distributed to sales force and public customers. The report recommends that both short-term traders and intermediate investors take profits by selling that company’s sotkcs. Several minutes after the broad cast, Ellen Riley, head of the firm’s trading department, closes out a long call position in the stock. Shortly thereafter, Riley established a sizable “put” position in the stock. Riley claims she took this action to facilitate anticipated sales by institutional clients.

Answer 81

• violation of Standard VI(B)
• riley expected that both the stock and option markets would respond to the “sell” recommendation, but did not give customers a chance to buy or sell the options before the frim itself did
• could have been avoided if they waited until after clients had an opportunity to act on the recommendations

Question 82

Investment Analysis, Recommendations, and Actions -

Prior Transactions VI(B) ex.

A member who manages a fund get hot IPO shares for her husband’s account from syndicate firms, even when the fund is unable to get shares

Answer 82

• violation
• she must act in th einterest of the shareholders of the fund and place allocated shares there first
• must also inform her employer of her participation in these offers for her husband’s account

Question 83

Investment Analysis, Recommendations, and Actions -

Prior Transactions VI(B) ex.

A member reveals a sell rating on some securities in a broadast to all of her firm’s brokers. The changed rating is sent to clients the next day. Shortly after revealing the change to her firm’s borkers and prior to dissemination to clients, she buys puts on the stock for her firm’s account

Answer 83

• violation
• did not give clients adequate opporutnity to act on the change in recommendation before buying the puts for her firm’s account

Question 84

Investment Analysis, Recommendations, and Actions -

**Referral Fees VI(C) **ex.

James Handley works for the Trust Department of Central Trust Bank. He receives compensation for each referral he makes to Central Trust’s brokerage and personal financial management department that results in a sale. He refers several of his clients to the personal financial management department but does not disclose the arrangement within Central trust to his clients

Answer 84

• Violation of Standard IV(C)
• by not disclosing the referral arrangement at Central Trust Bank to his clients
• the Standard does not distinguish between referral fees paid and internal compensation arrangements paid
• Handley would be required to disclose, any referral fee and include the nature and the value of the benefit

Question 85

Investment Analysis, Recommendations, and Actions -

Referral Fees VI(C) ex.

Yeshao Wen is a portfolio manager for a bank. He receives additional monetary compensation from his employer when he is successful in assisting in the sales process and generation of assets under management. The assets in question will be invested in proprietary product offereings such as affiliate company mutual funds

Answer 85

• should disclose to clients that he is compensated for referring clients to firm products because assets are invested in “proprietary product offerings” and Wen wll get additional compensation
• otherwise, it is not a violation to refer new business to your employer