Guidance For Standards I-VII

Question 1

What are the 2 rules for knowledge of the law?

Answer 1

1. Follow more strict law
2. Dissociate from any violation of such laws, rules, or regulations.

Question 2

What are the 2 rules for independence & objectivity?

Answer 2

1. Use reasonable care & good judgement to achieve and maintain independence & objective
2. Must not offer or accept gifts, compensation, etc; anything that could compromise own or another’s independence & objectivity

Question 3

What does omissions mean?

Answer 3

Being left out

Eg. When some transactions are completely omitted from the books of accounts or entered but not posted.

Question 4

Are employers allowed to issue reports without providing credit to the previous analyst? Additionally, are analyst allowed to publish reports if they no longer work for the firm?

Answer 4

• yes employers are allowed to issue reports without providing credit to the previous analyst
• no analysts cannot publish reports if they no longer work for the firm

Question 5

What are 2 things you should do to avoid plagiarism on a research report?

Answer 5

• maintain copies: keep copies of sources and everything used in report
• attribute quotations: give credit to the source

Question 6

What is misconduct?

Answer 6

Unacceptable or improper behavior

Question 7

What is material information?

Answer 7

Disclosure of information would have impact on price of a security

Question 8

What are the 2 ways to manipulate markets?

Answer 8

1. Information based manipulation
2. Transaction based manipulation

Question 9

What is information based manipulation?

Answer 9

Spread false rumors about company to change the price of security (pump & dump)

Question 10

What is transaction based manipulation?

Answer 10

Transactions that affect price or volume

Question 11

What are the 4 rules to loyalty, prudence, & care for duties to client?

Answer 11

-must act with reasonable care and exercise good judgement
-place client interest before employer or own interest
-soft dollar commissions are asset of client and may only be used for benefit of client (eg. research), does not include general education
-must provide performance statements at least quarterly

Question 12

What is soft commissions?

Answer 12

When investment manager uses client brokerage to purchase research services

Question 13

What is directed brokerage?

Answer 13

When client directs a manager to use the clients brokerage to execute transactions for the client

Question 14

How should you vote for proxy statements for clients?

Answer 14

Vote in a way that benefits the client the most

Question 15

What are the 3 keys to the trade allocation procedure?

Answer 15

1. Fairness
2. Timeliness
3. Accuracy

Question 16

How often must IPS be reviewed?

Answer 16

At least annually

Question 17

What is responsibility of supervisor code of standards?

Answer 17

Members and candidates who supervise people, must make sure they comply with applicable laws, rules, regulations, and codes & standards.

Question 18

What is secondary research?

Answer 18

Research conducted by someone else in the firm

Question 19

What is third-party research?

Answer 19

Research conducted by entities outside of the firm

Question 20

What is front running trades?

Answer 20

Entering a trade in advance to an non public block transaction about to incur from client.

(trading stocks or any asset based on insider knowledge of a future transaction that will affect its price)

Question 21

Knowledge of the law requires members and candidates to dissociate from any violation of laws, rules, regulations; however, do they have to report these suspicions to legal or regulatory authorities?

Answer 21

No they do not unless such action is required by law.

Question 22

When keeping independence and objectivity you can accept flat fees but can you accept options or equity positions?

Answer 22

No only flat fees, any fee based on how well the stock performs or firm performs is a violation

Question 23

Record retention requires you to keep records for at least 7 years, however, if statements are falsely sent out then later updated statements with accurate information is sent out, can you delete or destroy the false files?

Answer 23

No if there’s a mistake you must just label the statements with mistakes and update the new ones with accurate information

Question 24

Is testing out equipment from a company enough to justify diligence and reasonable basis?

Answer 24

No, you must do your research diligence

Question 25

What are the three requirements for Performance Presentation?

Answer 25

1. Must be fair 2. Must be accurate 3. Must be complete

Question 26

What are the 2 musts for responsibilities of supervisors?

Answer 26

1. System for supervision (must be established, communicated, and documented; and detect violations) 2. Must not accept role unless adequate compliance system (unless firm compliance is substandard and you can use your influence to improve system)

Question 27

What are 3 recommendation for recommended procedures for priority of transactions?

Answer 27

- Participation in equity IPO’s should be limited because it could appear to take away opportunities from clients. - Members & candidates must not obtain any shares in an oversubscribed IPO. - Get approval from firm in advance of IPO.

Question 28

For record retention if there are no regulatory guidance, how many years does CFA institute recommend you record records?

Answer 28

7 years.

Question 29

For reference to the CFA institute, designation, what are 2 rules for individuals to be considered to be candidates?

Answer 29

1. Are awaiting results for current exam 2. Are registered for an exam

Question 30

What is the 1 rule to diligence and basis if doing a group project?

Answer 30

Members and candidates who lack confidence in process used to arrive at a group consensus should disassociate from group’s work and remove name from any work based process.

Question 31

Members and candidates who receive compensation for referring clients, how often should they update employer about nature and amount of compensation received?

Answer 31

At least quarterly

Question 32

What is the 1 rule for material non-public information?

Answer 32

Members and candidates who possess material nonpublic information that could impact value of an investment must not act or cause others to act on information.

Question 33

To maintain CFA institute membership, a member must fulfill what 2 requirements?

Answer 33

1. Annually complete the Professional Conduct Statement 2. Pay applicable membership dues on an annual basis

Question 34

What is pro rata basis for oversubscribed IPO’s?

Answer 34

each investor receives a proportionate amount of shares relative to their initial request.

Question 35

What are the 2 rule to fair dealing?

Answer 35

-all clients participating in a block trade should be assigned the same price and charged same commission (pro rata basis allowed), however, deviations are allowed to account for minimum lot sizes. -treat all clients in a fair and impartial manner

Question 36

What is the 1 rule to loyalty for duties to employer?

Answer 36

-you can make arrangements to start a new business while still employed at old firm, as long as it doesn’t take an unreasonable amount of time away from job duties.

Question 37

Who are a fund managers primary duty of loyalty owed too?

Answer 37

the funds mandate

Question 38

What is the 1 rule for referral fees?

Answer 38

-members and candidates must disclose benefits for referring products or services and provide an estimate for its monetary value

Question 39

What is capsule form and what must you notify the client if information is in capsule from?

Answer 39

capsule form: information is generic (eg. recommended stock list) members and candidates should notify clients that additional information and analyses are available from the producer of the report.

Question 40

Who are a fund managers mandate owed to for pension funds?

Answer 40

the beneficiary of the pension fund

Question 41

When can you file and not file for bankruptcy?

Answer 41

- if bankruptcy is due to fraudulent or deceitful business conduct, the bankruptcy is a violation of misconduct

Question 42

What should a market maker do if they’re in possession of material non public information?

Answer 42

- instruct their market makers to remain passive with respect to the market—that is, to take only the contra side of unsolicited customer trades. Material Nonpublic Information, firms that continue market-making activity while in the possession of material nonpublic information should, however, instruct their market makers to remain passive with respect to the market—that is, to take only the contra side of unsolicited customer trades.

Question 43

How often must you disclose your holdings?

Answer 43

- disclosure by investment personnel to the firm should be made upon commencement of the employment relationship and at least annually thereafter.

Question 44

What should be excluded and included in code of ethics for investment firms?

Answer 44

- codes of ethics should be written in plain language and should address general fiduciary concepts. - They should be unencumbered by numerous detailed procedures.