Recommended procedures to comply with the Standard concerning priority of transactions are least likely to include:
Answer (B) is correct. Standard VI(B) Priority of Transactions. Front-running is the purchase or sale of securities in advance of client trades to take advantage of knowledge of client activity and should be completely prohibited, not simply limited. Blackout periods and pre-clearance of employee trades are ways of accomplishing this.
Juan Perez, CFA, is a research analyst for a large Wall Street brokerage firm where he follows the pharmaceuticals industry. While a large pharmaceuticals convention is in town, Perez happens to be in a restaurant where several analysts he has never met before are discussing their investment recommendations. Perez overhears the analysts agree that PharmCo, Inc. is a strong “Buy,” but cannot hear the details of why they are recommending purchasing stock in the company. The next day, Perez changes his “Sell” recommendation on PharmCo to “Buy,” based solely on the conversation he overheard between the analysts the night before. Perez most likely violated the Standard concerning:
Answer (A) is correct Perez violated Standard V(A) Diligence and Reasonable Basis. Perez is responsible for performing diligent and thorough research on the companies he recommends to clients. Overhearing a conversation among analysts who are recommending PharmCo does not constitute a reasonable basis for changing his recommendation and certainly does not suggest independence of thought in his investment recommendation.
Allen Winkler, CFA, an equity analyst, recently had lunch with his former professor, Kim Thompson. Thompson told him about a new theoretical stock valuation model she designed. Upon returning to his office, Winkler recreated Thompson’s model and revised it slightly. He then tested the revised model using historical stock prices from Standard & Poor’s (S&P) equity databases. The results were so impressive that his supervisors decided to create a small new fund called the Technical Fund directed toward their technically oriented clients. In the fund’s prospectus, Winkler included a discussion of the model and the results of his tests. According to the Standard on misrepresentation, is Winkler required to credit Thompson for having developed the original model and S&P as the source of the data?
Answer (C) is correct. Under Standard 1(C) Misrepresentation, Winkler must identify Thompson as having developed the original model to avoid the prohibition against plagiarism. The only permitted exception is using factual information published by recognized financial and statistical reporting services such as S&P.
Fran Lester, CFA, lives in a country that permits equity brokers receive shares in oversubscribed IPOs only with their employer’s permission. She works as a broker for a firm doing business country, which does not require brokers to get such permission IPOs. If Lester’s firm is distributing shares of an oversubscribed her firm’s country, can Lester receive shares in the IPO?
Answer (A) is correct. Standard 1(A) Knowledge of the Law requires members and candidates to comply with the strictest requirement among the law where they reside, the law in the area where they do business, and the Code and Standards. In this case, the Code and Standards is the strictest. Standard III(B) Fair Dealing prohibits members and candidates from withholding shares in oversubscribed IPOs from clients for their own benefit.
Diane Harris, a CFA Institute member, is a portfolio manager Worldwide Investments. Robert Cline, one of her clients, her the use of his condominium in Aspen for one week in if the performance of his portfolio is at least two percentage above that of the S&P 500 during the next 12 months. Immediately after learning about the offer, Harris informed her manager terms of this agreement in writing and received verbal consent the arrangement. At the end of the year, Harris met the performance criteria set by Cline and accepted the vacation. Did Harris Standard concerning additional compensation arrangements?
Answer (A) is correct. Standard 1V(B) Additional Compensation Arrangements requires that members and candidates obtain written consent from their employers to enter into the agreement for additional contingent compensation from a client. Harris only received verbal consent. The concern is that such an arrangement might create partiality to Cline’s portfolio over those of her other clients.
Stan White, CFA, heads the marketing department of a large brokerage firm, American Securities. He reports directly to the president of the firm, who has mandated that beginning this year, the firm must present all past performance results in accordance with the Global Investment Performance Standards. Which of the following statements is an acceptable indication of American Securities’ compliance with the Global Investment Performance Standards?
Answer (A) is correct. Once a firm has met all the required elements of the GIPS, the firm may only use the statement in answer choice A to indicate compliance. Any deviation in the compliance statement constitutes a violation of GIPS. (Study Session 1, LOS 3. c)
Six months ago, Tom Hayes, CFA, left his position as a portfolio manager and accepted a position as senior portfolio manager at a smaller boutique firm. One of Hayes’s first recommendations at his new job is Selldex. He had researched and recommended the stock six months ago while employed at his old firm, and he still believes it has great investment potential. He recreates his Selldex research using information from public sources and makes the recommendation. According to the CFA Institute Standards of Practice, Hayes’s actions:
Answer (A) is correct. The actions are not in violation of the Standards. Under Standard IV(A) use in new employment, of knowledge and experience gained in previous is not prohibited. He recreated the records from public sources as required V(C) Record Retention.
The CFA Institute Code of Ethics most likely requires members and candidates to:
Answer (C) is correct. The first requirement of the Code of Ethics is that members and candidates integrity, competence, diligence, respect, and in an ethical manner with clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.” Knowing laws and regulations is required by Standard 1(A) Knowledge of the Law. VII(A) Conduct as Members and Candidates in the CFA Program requires candidates not to compromise the integrity of CFA Institute.
Craig Boone, a Level I CFA candidate, is a trader on the fixed income desk at a large financial institution. He has observed that one of salesmen on the desk has been reallocating some trades at the end of the day, giving better execution to a large client at the expense of several smaller clients, a practice Boone suspects is illegal. The salesman tells Boone this is a common practice and that the firm’s senior management is aware of it. If Boone makes a personal record of the activity, takes it home for his personal files, and subsequently reveals it to regulatory authorities, he would:
Answer (C) is correct. According to Standard IV(A) Loyalty, the interests of a member or candidate’s are secondary to protecting the interests of the clients. In this circumstance, blowing is justified. As long as his motivation is clearly not for personal according to the Standards, violate employer policies in this case. While required to dissociate from the suspect activity, he is not prohibited from reporting it.
WEB, an investment-banking firm, is the principal underwriter for MTEX’s upcoming debenture issue. Lynn Black, CFA, is an analyst with WEB, and she learned from an employee in MTEX’s programming department that a serious problem was recently discovered in the software program of its major new product line. Infect, the problem is so bad that many customers have canceled their orders with MTEX. Black checked the debenture’s prospectus and found no mention of this development. The red herring prospectus already been distributed. According to the CFA Institute Standards Professional Conduct, Black’s best course of action is to:
Answer (A) is correct. The simplest, most conservative, and most effective way to comply with Preservation of Confidentiality is to avoid disclosing any information received client, except to authorized fellow employees who are also working for the client