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EthicsReview Questions

Ethics

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REVIEW QUESTIONS1.1 1. The CFA Institute's Code of Ethics specifically addresses all of the following EXCEPT: A. competence and independent judgment. B. integrity and respect. C. importance of contractual obligations. 2. Regarding competence, investment professionals are expected to A. maintains and improves competence B. maintain minimum standards C. exercise independent judgment. 3. According to CFA Institute's Code of Ethics, members must practice and encourage others to Practice in a professional and ethical manner that will: A. reflects credit on members and their profession. B. adds value for clients, prospects, employers, and employees. C. encourages talented and ethical individuals to enter the investments field and maintain the excellent reputation of CFA Institute and its members. 4. Investment professionals are expected to act with integrity when dealing with I. clients II. The public III. Fellow members. 5. Which of the following elements of the Code encourages use of independent professional Judgment? A. Professionalism B. Competence C. Reasonable care 6. The Code encourages professionals to act in a "manner that will reflect credit on members and their profession." This refers to A. Integrity B. Professionalism

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C. Reasonable care 1.2 2. Guidance for Standards I-VII. 1. Which of the following statements is/are NOT correct? I. The mere appearance of a conflict may present a problem in terms of this Standard. II. Several firms restrict their employee with regard to their investment freedom, and per these standard employees are obliged to adhere to those restrictions. III. If a profit is made on a conflicted situation then the profit on the conflicted situation will always need to be repaid to the Firm. IV. All potential conflicts should be reported to the employer. 2. You serve as a trustee on a non-profit organization where you advise the organization on investment decisions. The organization has a substantial position in a company you follow in your role as industry analyst at your full time position with an investment firm. I. As long as investment decisions of the non-profit organization are independent of your Recommendations developed for your firm; there is no violation of the Standards. II. You must inform your supervisor that you are serving as a trustee with discretionary power over investment decisions. III. You must inform your supervisor that the non-profit firm has a large position in a firm that you report on. 3. Your supervisor asks you to write a report on XYZ, Inc. He indicates that it is important for the firm to get a favorable evaluation since your firm's underwriting department is hoping to do substantial business with XYZ in the future. You engage in a lengthy analysis of the firm and are convinced, on the basis of your work, that the firm is indeed undervalued. A. You should issue a buy recommendation anyway to maintain independence. B. You should refrain from issuing any recommendation because objectivity is not possible. C. You should issue a buy recommendation if you believe your analysis was objective and adequate. 4. Wilfred Clark, CFA, accumulates several items of nonpublic information through contacts with computer companies. Although none of the information is "material" individually, Clark concludes, by combining the nonpublic information, that one of the computer companies will have unexpectedly high earnings in the coming year. According to CFA Institute's Standards of Professional Conduct, Clark: A. may not use the nonpublic information. B. may use the nonpublic information to make investment recommendations and decisions.

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C. must make reasonable efforts to achieve immediate public dissemination of the nonpublic information. D. may use the nonpublic information but only after gaining approval from a supervisory analyst Attesting to its non materiality. 5. Once a supervisor learns that an employee may have violated the Code and Standards, a Supervisor should: I. relies on the employee's statements about the extent of the violation. II. Rely on the employee's promises that the wrongdoing will not reoccur. III. Report the misconduct up the chain of command. IV. Warn the employee to cease the activity. V. initiate an investigation to ascertain the extent of the wrongdoing. VI. Take steps to ensure the violations will not be repeated, pending the outcome of the investigation. 6. Doe, a CFA candidate, is a junior research analyst with Howard & Sons, a brokerage and Investment banking firm. Howard's mergers and acquisitions department has represented Britland Company in all its acquisitions for the past 20 years. Two of Howard's senior officers are directors of various Britland subsidiaries. Doe has been asked to write a research report on Britland. What is Doe's best course of action? A. Doe may write the report but must refrain from expressing any opinions because of the special relationships between the two companies. B. Doe should not write the report because the two Howard officers are 'constructive insiders.' C. Doe may write the report if she discloses the special relationships with the company in the report. 7. Ron and Shawn are portfolio managers in a bank trust department. They are just awarded the right to use the CFA designation. The bank is going to place an advertisement that would state these two persons all passed the three CFA exams on their first tries (which is true). Is this ad appropriate? 8. Last year David worked as a CFA Institute exam grader. Earlier this year he decided to start a web site to provide test prep solutions for CFA candidates. On the home page of his site he claimed that he was a former grader and discussed several exam questions he graded. Did David violate the standard? 9. Clifford Brown is a partner in a money management firm. Brown recently attended a seminar where he learned about a quantitative model presented by Art Dixon. Upon returning to his office, Brown began testing the model and making a few minor alterations to it. He showed his model to his partners, who were impressed and decided to promote the model as proof of the money management firm's continuing innovation and value added. In the next newsletter mailed by the firm, Brown included a discussion of the model, the results of tests of the model, and financial data on several stocks selected by the model. These factual corporate financial data were taken from a Standard & Poor's publication. According to the CFA Institute's Standards of Professional Conduct, which of the following actions is Brown required to take?

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A. Brown must credit both Dixon for having developed the original model and Standard & Poor's as the source of the data. B. Brown must credit Dixon for having developed the original model, but he need not credit Standard & Poor's as the source of the data. C. Brown must credit Standard & Poor's as the source of the data, but he need not credit Dixon for having developed the original model. 10. You supervise five portfolio managers. One manager appears to be engaging in excessive trading in the portfolios he manages. While this manager is a CFA charter holder, your firm has no specific guidelines covering this activity. A. You have met your supervisory obligations since the firm has no clear policy. B. Since the manager is a Charter holder, the Code and Standards substitute for your supervisory Responsibilities. C. You must take action to regulate this practice and work to establish a policy regarding such Practices in the future. 12. Which of the following is (are) correct under the Code and Standards? I. CFA Institute's members are prohibited from undertaking independent practice in competition with their employer their employer. II. Written consent from the employer is necessary to permit independent practice that could result in compensation or other benefit in competition with a member's employer. III. Written consent from the outside prospective client is necessary to permit independent practice that could result in compensation or other benefit in competition with a member's employer. IV. Members are prohibited from making arrangements or preparations to go into a competitive Business before terminating their relationship with their employer. 13. CFA Institute's Standards of Professional Conduct prohibit CFA charter holders from making Statements misrepresenting their qualifications, their firm's services, or the expected performance of any investment. These Standards are intended to apply to: I. oral representations. II. Written statements. III. Advertising. Correct Answer: I, II and III. 14. Mr. A hears from the wife of the CEO of Company Q, that they are about to fire the CFO. Mr. A immediately sells his shares in Company

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Q. Has Mr. A violated the standard? 15. Which of the following would be considered as material? I. An assumption based on speculation by a competitor about a significant new contract for a company. II. Factual information from a corporate insider regarding a significant new contract for a company. The source or relative reliability of the information determines materiality. The less reliable a source, the less likely the information provided would be considered material. 16. Which one of these four statements is not consistent with the recommended procedures for? Compliance? A. Investment recommendations may be changed by an analyst without prior approval of a supervisory analyst. B. Prior approval must be obtained for the personal investment transactions of all employees. C. Pursuant to privacy of information laws, personal transactions will not be compared to those of customers, clients, and the employer unless requested by regulatory organizations. D. Personal transactions for the purpose of these compliance procedures are limited to the employee and members of his or her immediate family and transactions involving a beneficial interest. 17. For three years, Alan Gordon, CFA, has been an investment banking consultant to Electronics, Inc. When Electronics decided to do a secondary public offering, the company asked Gordon to put out a favorable research report on Electronics. He agreed to do so, although he knew the company was having serious problems manufacturing its main product. His report included only: (1) a one-sentence summary of Electronics' line of business; (2) a table of Electronics' stock price history copied from Standard & Poor's, without acknowledgment; and (3) a statement that the price of Electronics' stock could probably double in the next year. Which of the following CFA Institute's Standards of Professional Conduct did Gordon violate? I. Standard III(C): Suitability. II. Standard I (D): Misconduct III. Standard III (B): Fair Dealing IV. Standard V (A): Diligence and Reasonable basis. V. Standard I (B): Independence and Objectivity 18. Simpson is a financial analyst with Flanders Brokerage Company. She is preparing a purchase recommendation on Burns Corporation. Which of the following situations would represent a conflict of interest for Simpson and, therefore, have to be disclosed? I. Simpson is on retainer as a consultant to Burns Corporation. II. Flanders holds for its own account a substantial common stock interest in Burns Corporation.

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III. Simpson has material beneficial ownership of Burns Corporation through a family trust. IV. Simpson's brother-in-law is a supplier to Burns Corporation. 19. Ann just passed the Level III exam. Immediately after receiving the notice from CFA Institute indicating that she passed, she asked her employer to put "Ann, CFA Charter holder" on her name card. Is this OK? Why? No. Final award of the charter is subject to CFA Program requirements and CFA Institute Board approval. Since Ann has not yet received the notice of having earned the CFA charter, she cannot state she is a CFA Charter holder. 20. When presenting performance of your investment firm. I. You should avoid misrepresentation. II. You should provide fair, accurate, and complete information. III. You should avoid any performance guarantees. 21. Which of the following are appropriate procedures for handling insider information inside a firm? I. Control information flow between departments. II. Monitor employee trading when in possession of sensitive information. III. Limit the number of employees with access to the information. 22. Cliff Fleisher, CFA, is an analyst with a brokerage company. This company has a large investment advisory department that manages three mutual funds and many other accounts. For some time, Fleisher has been recommending the purchase of Gifford Corporation as a long-term investment. Many of the company's brokerage and advisory clients and the three mutual funds have purchased shares of Gifford Corporation based on Fleisher's recommendation. At 9:00 a.m. Monday, Gifford Corporation makes an announcement that immediately leads Fleisher to change his recommendation from "buy" to "sold". Fleisher promptly tells the company's mutual fund managers, who immediately sell 50 percent of their holdings in the stock, causing the price to drop 20 percent. On Monday afternoon, Fleisher tells his company's large institutional clients about the change in his recommendations. On Tuesday morning, Fleisher publishes a research report for general circulation detailing the changed recommendation. According to CFA Institute's Standards of Professional Conduct, which of the following statements are true? I. Fleisher should have disclosed his changed recommendation to all of the company's clients as Soon as practical. II. Fleisher did not need to issue a new research report because a change from "buy" to "sold" is not material. III. Fleisher should not have disclosed the changed recommendation to the mutual fund manager and institutional clients before disseminating the report generally. 23. Daniel enrolled in the CFA program 3 years ago. He passed the Level I one year later, and since then he has not found time to prepare for the Level II. Recently he phoned CFA Institute about his status, and was told that he is

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still enrolled in the program. Can he state in his company's written promotional material that he is a CFA candidate? 24. To summarize his investment qualifications, John states in his resume as: Profile A CFA with more than 10 years' equity analysis experience. ...... Has John violated any CFA Institute's code? 25. Which of the following actions is/are NOT possible conflicted situations? I. Purchasing securities in a company that the analyst writes a report on. II. Purchasing securities that are prohibited by the employer. III. Purchasing securities that are allowed by the employer. IV. External Board positions taken up by the employee. Situations that may cause biased investment advice and conflicts that would cause a member not to act in the employer's best interests will need to be reported to the employer. This will involve the following actions: External Board positions taken up by the employee. Purchasing securities in a company that the analyst writes a report on

Any action that the employer expressly forbids is also not is performed by the employee only any action that the employer expressly forbids is also not is performed by the employee. Only possible conflicted situations that are expressly allowed by the employer are allowed under this standard.

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26. Phillips, a CFA candidate, works for an investment banking firm. The firm acts as an adviser for Ace Broadcasting, which has made a tender offer for Clark Communications' common stock. Ace is now thinking about raising the price offered for the Clark Communications' stock. As Ace's investment banker, Phillips is aware of this likely increase and subsequently buys the Clark stock for her firm before the increased offer is made public with the intention of tendering the stock. She does not inform Ace of this action. Based on CFA Institute's Standards of Professional Conduct, Phillips has: A. not violated the Standards, because an increase in the stock price is uncertain. B. violated the Standards by not dealing fairly with her client. C. violated the Standards by not disclosing the transaction to all other clients of the firm. 27. Standard V (B) states the following, "Members shall: Use reasonable judgment regarding the Inclusion or exclusion of relevant factors in research reports". Which of the following are included under the definition of report? I. A written report. II. A telephone communication. III. A media broadcast. IV. An E-mail message. 28. Mack works for an investment bank that headquarters in New York City. He lives and works in a country where local securities laws and regulations are stricter than CFA Institute's Code and Standards and US securities laws and regulations. Which securities law and regulations should Mack be subject to? 29. Zeller and Toffler have both passed Level II of the CFA Exam Program. Zeller circulates a resume stating that he is a candidate for the CFA designation and has passed Level II of the CFA Program. Toffler circulates a resume stating that he is a CFA II. Which of the following statements is correct? A. Both Zeller and Toffler have violated the Code and Standards. B. Only Zeller has violated the Code and Standards. C. Only Toffler has violated the Code and Standards. 30. The main purpose and scope of Standard VI (B) - Priority of Transactions is to make sure that members do not: A. disseminates investment recommendations to larger clients ahead of smaller clients. B. gives preferential treatment to larger clients. C. favors themselves ahead of their customers or employer. 31. In terms of Standard V (B), which of the following is a factor that does not need to be included in an analysts research report? A. Annual expected income.

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B. Degree of uncertainty. C. Monthly income projections. 32. A breach of fiduciary duty occurs if the insider personally benefits from the disclosure. Benefits can be: I. pecuniary or reputational II. A gift of information to others III. through a quid pro quo relationship 33. Which of the following is an element of fiduciary duty? I. You should attempt to seek best price and execution for all clients. II. Client's interests come before your own. III. You must use discretion when a client reveals sensitive information regarding their financial Situation. 34. Dmitry often adds inappropriate expenses to expense reports over an extended period, although he is never criminally convicted. Is this OK with Standard I (D)? 35. True or false? If conflicts of interest exist, it is inherently unethical about individual managers, advisors, or mutual fund employees making money from personal investments. 36. Susan Miller, CFA, works for an investment counseling firm. James Sims, a new client of the firm, is meeting with Miller for the first time. Sims had used another counseling firm for financial advice for years, but has switched his account to Miller's firm. After a few minutes of 'get-acquainted' small talk, Miller explains to Sims that she has discovered a highly undervalued stock that offers large potential gains. She recommends that he purchase the stock for his account. Miller has committed a violation of CFA Institute's Standards of Professional Conduct. What should she have done differently? A. She should have thoroughly explained the characteristics of the company to Sims, including the characteristics of the industry in which the firm operates. B. She should have questioned Sims on the reasons that he changed counseling firms. If the discovery process indicated that he had been treated unfairly at the other firm, Miller has a Responsibility to notify CFA Institute of any violation. C. She should have determined Sims' needs, objectives, and tolerance for risk before making a Recommendation for any type of security. 37. Standard IV (A) precludes a member from entering into an independent business while still employed. True or false? 38. A confidential relationship exists if I. a relationship of trust exists between the client and the analyst. II. All special corporate relationships are disclosed to the client.

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39. Which one of the following statements is false with respect to the payment of brokerage? Commissions (soft dollars)? A. Brokerage commissions may be directed to pay for securities research used in managing the Clients portfolio. B. Brokerage commissions paid should be commensurate with the value of the brokerage and Research services received. C. Brokerage commissions may be directed to pay for the investment manager's operating expenses. 40. Jake Smith, an analyst with a large brokerage house, analyses a company called DDM. He rates the company as a "buy" recommendation. He recently hears in the market that the company is going to experience difficult times up ahead. He immediately changes his recommendation to a "sell". Has Jake violated the Code and the Standards? A. Yes, because he did not have a reasonable and adequate basis for his recommendation. B. Yes, because he should have rather changed his rating to a "hold" recommendation. C. Yes, because market information is not always reliable. 41. Personal transactions include transactions: I. for you own account II. for your families account III. for accounts in which you have a beneficial interest 42. Tim Gains, a CFA candidate, works for a regional brokerage firm. He estimates that Walkton Industries will increase its dividend by $1.50 per share during the next year. This increase is Contingent upon pending legislation that would, if enacted, give Walkton a substantial tax break. The Congressman in Walkton's home district has told Gains that, although he is lobbying hard for the bill and prospects for passage look good, concern over the federal deficit could cause the tax break bill to be voted down. The company has not made any statement regarding a change in dividend policy. Gains write in his research report, 'We expect Walkton's stock price to rise by at least $8.00 per share by the end of the year. Because the dividend will increase by $1.50 per share, the stock price gain will be fueled, in large part, by the increase in the dividend. Investors buying the stock at the current time should expect to realize a total return of at least 15% on the stock.' Which of the following is/are true? A. Gains violated CFA Institute's Standards of Professional Conduct because he used material inside information. B. Gains violated CFA Institute's Standards of Professional Conduct because he has a material Misrepresentation in his report.

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C. Gains violated CFA Institute's Standards of Professional Conduct because he failed to separate opinion from fact. 43. Tessa Dell has supervisory responsibility at GFR Brokerage. Due to extreme pressures Tessa Delegated all of her supervisory responsibility to David Form. David is an extremely lazy employee and readily accepts the increased paycheque but puts no work at all into his new supervisory responsibility. John Lart, an employee of the Firm, commits a violation of the Code and Standards that should have been picked up by David. Has Tessa violated Standard IV (C): Responsibilities of Supervisors, as a result of the violation by John? I. Yes, even though Tessa delegated her responsibility for supervision she is still ultimately Responsible for the overall supervisory function. II. No, Tessa delegated the responsibility to David. III. No, but David has violated Standard IV(C): Responsibilities of Supervisors. IV. Yes, but so has David has violated Standard IV (C): Responsibilities of Supervisors. 44. An analyst examines many different pieces of nonpublic, nonmaterial information regarding a firm and comes to a significant conclusion. According to the ______ theory, the analyst can act on this conclusion. A. Traditional B. Misappropriation C. Mosaic. 45. CFA Institute's members with supervisory responsibility are: I. not expected to prevent violations of laws, rules, and regulations by non-CFA-Institute member employees. II. Expected to establish and implement written compliance procedures about applicable statutes, Regulations and provisions of CFA Institute's Code and Standards III. in compliance with CFA Institute's Standards after warning an offending employee to stop violating the applicable statutes, regulations, and provisions of CFA Institute's Code and Standards. IV. Expected to evaluate personally the conduct of their employees concerning applicable statutes, regulations, and provisions of CFA Institute's Code and Standards on a continuing basis regardless of how many employees they supervise. 46. Which of the following are fiduciary duties? A. prudence, diversification, risk reduction and sound management. B. confidentiality, loyalty, prudence, diversification. C. loyalty, prudence, care.

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47. Standard IV A prohibits members and candidates from I. using, at one employer, the skills and experience obtained at another employer. II. Contacting clients of their previous firm. 48. In order to claim compliance with the Standards of Professional Conduct per Standard III (D) Performance Presentation, the following compliance officers, as detailed below, make comments about their compliance. Which of the below mentioned compliance officers are in fact in compliant with this Standard? I. Len states, "Our firm complies in most respects with CFA Institute's standards". II. John states, "Our firm complies in all respects with CFA Institute's standards". III. Janet states, "Our firm complies in all material respects with CFA Institute's standards". 49. Standard IV A requires members and candidates to: I. place employer interests ahead of personal interest in all matters. II. Subordinate important personal and family obligations to their work. 50. Arthur Miller, an analyst for an investment banking firm, recently discovered that John, one of his co-workers in the mergers and acquisitions department, has been illegally tipping off his cousin about upcoming merger. What should Arthur do? A. report this discovery to his supervisor B. do nothing, since it's not his department C. encourage John to stop 51. In terms of CFA Institute's Standards of Professional Conduct per Standard I. C (Misrepresentation), which of the following statements are correct? I. A misrepresentation is any untrue statement of a fact or any statement that is otherwise false or misleading. II. This statement includes any statement that guarantees superior returns will be earned. III. Members should avoid misrepresentations about their qualifications. 52. Smith, a CFA candidate employed by Hunter Investment Counselors, Inc., provides investment advice to the board of trustees of a private university endowment fund. The trustees have provided 52. Smith with the fund's financial information, including planned expenditures. Smith received a phone call on Friday afternoon from Murdock, a prominent alumnus, requesting that Smith fax to him comprehensive financial information about the fund. According to Murdock, he has a potential contributor but needs the information today

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to close the deal and cannot contact any of the trustees. Based on CFA Institute's Standards of Professional Conduct: A. Smith may send Murdock the information because it is not material nonpublic information and disclosure would benefit the client. B. Smith may not send Murdock the information to preserve confidentiality. C. Smith may send Murdock the information provided he promptly notifies the trustees. 53. Which one of the following is not a basic consideration necessary in applying "Suitability?" Standard? A. considers the basic characteristics of the portfolio/investments. B. considers the needs and circumstances of the client. C. considers the simultaneous recommendations to all clients. 54. You participate in a conference call for analysts following XYZ. During the call, the CEO of the firm reveals that EPS will be 20% below previous expectations. A. You should refrain from trading until the information is more broadly disseminated. B. You should inform clients with a position in XYZ as soon as possible. C. You can never trade on this information because it is inside information. The participants in the conference call would be viewed as a select group. The SEC expects that management will be careful not to disclose information to a select group that has not been previously or simultaneously publically disseminated. The Standards require that CFA Institute's members refrain from trading on information released to a select group before that information is more broadly disseminated 55. You are given the CFA after you meet all CFA Institute's requirements. True or false? 56. Gaines, a financial analyst for Skinner Investment Counseling, is told by the investor relations representative for Firebird Avionics, a major aircraft manufacturer that the firm is in the final stages of building a new fuel efficient jet engine. This information is divulged by Firebird at the most recent quarterly conference call for analysts. In a research report, Gaines uses this information along with other information he obtained from the company distributed to the public in a research report that includes a 'buy' recommendation for Firebird stock. Which of the following statements is/are true? A. Gaines violated CFA Institute's Standards of Professional Conduct because he used material Inside information. B. Gaines violated CFA Institute's Standards of Professional Conduct because he has a material Misrepresentation in his report.

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C. Gaines' actions did not violate CFA Institute's Standards of Professional Conduct. 57. Frank changes his investment decision based solely on a conversation overheard in a restaurant. Which standard has he violated? A. mosaic theory standard. B. prohibition against the use of material nonpublic information. C. diligence and reasonable basis. 58. Mark Meyers is a CFA charter holder. His marketing brochure contains the following sentence: "Mark Meyers, CFA, guarantees average annual performance of 30% or above." Which of the following standards did Mr. Meyers violate? A. reasonable and adequate basis B. prohibition against misrepresentation of services C. use of CFA designation 59. Kite has been hired by Watson Industries, Inc. to manage its pension fund. Kite's fiduciary duty is to: A. The shareholders of Watson. B. The management of Watson. C. The participants and beneficiaries of Watson's pension plan. 60. Janzen tells a prospective client, 'I may not have a long-term track record yet, but I'm sure that you'll be very pleased with my recommendations and service. In the three years that I've been in business, my equity-oriented clients have averaged a total return of more than 26 percent per year.' The statement is true, but Janzen only has a few clients, and one of his clients took a large position in a penny stock (against Janzen's advice) and realized a huge gain. This large gain caused the average of all of Janzen's clients to exceed 26 percent a year. Without this one investment, the average gain would have been 8 percent a year. Has Janzen violated the Standards? A. Yes, because the statement misrepresents Janzen's track record. B. Yes, because the statement about return ignores the risk preferences of his clients. C. No, because the statement is a true and accurate description of Janzen's track record, and Janzen is not promising that he can earn a 26 percent return in the future. 61. Clinton, a portfolio manager with Northwest Bank, has just been given investment authority for a newlyacquired pension account. Client objectives have not yet been established. On the day the account was received, $2 million in bonds matured, representing 4% of the portfolio. Which one of the following is Clinton's best course of action on that day? A. Contact the client's former investment advisor to find out the appropriate investment action based on previously-used guidelines.

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B. Invest the proceeds in cash equivalents until a meeting can be arranged to establish fund Objectives. C. Make no decision until client objectives have been established. 62. Smith works for an investment bank which is the principal underwriter for a client. As a member of the underwriting team, Smith discovers that the earnings per share in the client's income statement are overstated. However, the client's prospectus which contains a condensed copy of financial statements has already been distributed. What should Smith do? He should: Report his findings to the appropriate supervisory persons in the firm. If the matter is not remedied, he should sever all his connections with the underwriting. Seek advice of the investment bank's general counsel. If he believes that the attorney is Competent, he should follow the attorney's advice without material variation.

63. Which one of the following least accurately describes CFA Institute's Standard about using? Material nonpublic information? A. An analyst using material nonpublic information may be fined by CFA Institute. B. An analyst may violate this Standard by passing information to others even when it has been obtained from outside the company. C. An analyst may use material nonpublic information if it has been developed from a combination of Nonmaterial items of information. D. An analyst may use material nonpublic information secured from sources which have neither Neither breached their duty nor misappropriated the information. 64. Which of the following is/are not prohibited by the loyalty rule? I. purchases of property to finance the employer II. Defraying administration expenses III. Stock purchases to prevent takeover bids IV. Lending below prevailing interest rates 65. In terms of CFA Institute's Standards of Professional Conduct per Standard VI (B): Priority of Transactions, when dealing with compliance procedures, which of the following procedures should be included to assist in complying with this standard? I. Define personal transactions. II. Define investment, this would include any investment, including real estate etc.

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III. Establish control over trading activity. IV. Define clearly prohibited transactions. 66. As part of your financial advising services, you refer clients to a friend for their insurance needs. Your friend provides you with a referral fee for these clients. A. You must disclose this fee to your clients. B. You do not need to disclose the fee if your friend provides the proper service at the least cost. C. You do not need to disclose the fee unless it is in excess of $100. D. You cannot accept a referral fee because you have a fiduciary duty to your client. 67. What would happen if a CFA charter holder fails to pay annual CFA Institute dues? The person's use of the CFA designation would be suspended. During the period the person cannot state or imply he/she is an active CFA charter holder. However, the person can still state that he/she was awarded the CFA charter in the year of as long as he/she does not imply he is a current or practicing CFA charter holder. After he /she resume paying CFA Institute dues his/her right to use the CFA designation will be reinstated. 68. Which of the following are forms of plagiarism? I. Citing quotations said to be attributable to 'leading analysts' or 'investment experts' without specific reference II. Presenting statistical forecasts by others with the sources identified but without the qualifying Statements that may have been used by the originator III. Using factual information published by a recognized financial statistics reporting service without acknowledgment IV. Making a verbal comment at a meeting with associates giving the impression analysis is original when in reality it is attributable to another analyst 69. A CFA charter holder must comply with all laws and regulations relating to the use of material nonpublic information. 'Material' refers to information likely to affect significantly the market price of the issuing company's securities or which: A. is derived by the financial analyst from direct communication with an issuing company's Management. B. is acquired by the financial analyst as a result of a special or confidential relationship with the Issuing Company. C. is likely to be considered important by reasonable investors in determining whether to trade a Particular security. 70. Susan Roberts, CFA, a portfolio manager for Howard Investment Counsel, has just received a call from Michael Moore, an institutional broker. Moore is calling to recommend buying Megamove, an obscure stock on the Nasdaq

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Stock Market, as a takeover candidate. In the past, Moore has demonstrated an ability to pick takeover candidates. If Roberts buys the stock, is she violating CFA Institute's Standards of Professional Conduct involving trading on material nonpublic information? A. Yes, because Roberts is receiving confidential information. B. No, because Roberts is basing the purchase on the "mosaic theory." C. Yes, because Moore and his sources are breaching fiduciary duty and are receiving personal Benefits as a result. D. No, because Roberts neither knows nor has any reason to know of a breach in the laws about Using material nonpublic information. 71. When an investment professional has a limited number of shares of an initial public offering to distribute, which of the following allocation methods violate CFA Institute's Standards of Professional Conduct? I. First fill the orders of individual clients, and then fill the orders of institutional clients. II. First fill the orders of the clients who have generated the most commissions during the past year. III. First fill the orders of those who have been clients of the investment professional for the longest period of time. 72. Dixie Miller, CFA, heads the research department of a large brokerage firm. The firm has many analysts, some of whom are subject to CFA Institute's Code of Ethics and Standards of Professional Conduct. If Miller delegates some supervisory duties, which statement best describes her responsibilities under CFA Institute's Code and Standards? A. Miller's supervisory responsibilities do not apply to those subordinates who are not subject to CFA Institute's Code and Standards. B. Miller no longer has supervisory responsibility for those duties delegated to her subordinates. C. Miller retains supervisory responsibility for all subordinates, despite her delegation of some duties. 73. Which one of the following statements about material non-public information is incorrect? A. Restricting personal and proprietary trading will assist members in complying with the above mentioned standard of professional conduct. B. A member may create and use material non-public information as long as the information is constructed together from publicly available information, or the information is constructed together from non-material information. C. An analyst will violate the above mentioned standard of professional conduct if he makes use of the "mosaic theory". 74. A written or implied contract must exist between employee and employer. True e or false?

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An employee is someone in the service of another who has the power or right to control and direct the employee in the material details of how the work is to be performed. A written or implied contract may or may not exist. This question applies to Standard IV as a whole. 75. The 'mosaic theory' holds that an analyst: A. can use material public information or nonmaterial nonpublic information in his analysis. B. should use all available and relevant information in support of an investment recommendation. C. should distinguish between facts and opinions in research reports. 76. In order for the member to comply with this standard, the member is required to disclose Additional compensation to his: A. Clients. B. Employer and Clients. C. Employer. 77. CFA Institute's Standards of Professional Conduct state that a financial analyst shall not, when presenting material to others, copy or use in substantially the same form, material prepared by another person without acknowledging its use and identifying the name of the author or publisher of such material. The analyst, however, may use information from other sources without acknowledgment if the information: A. includes the analyst's own conclusions. B. is only being reported in a one-to-one client presentation. C. is only being reported to the analyst's employer or associates. D. is factual information published in recognized financial and statistical reporting services. 78. Which of the following is (are) correct regarding a member's duty under the Code and Standards? I. In the absence of specific applicable law or other regulatory requirements, the Code and Standards govern the member's actions. II. A member is required to comply with applicable local laws, rules, regulations, or customs, even though CFA Institute's Code and Standards may impose a higher degree of responsibility or a higher duty on the member. III. A member who trades securities in a foreign securities market where no applicable local laws or stock exchange rules regulate the use of material nonpublic information may take investment action based on material nonpublic information. 79. The corporate finance department of an investment banking firm decides to compete for the Business of ETV Corporation. Knowing that the brokerage department of the investment banking firm now has a "sell"

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recommendation on ETV, the director of corporate finance department writes a letter to the director of the brokerage department asking for a change in the recommendation to "buy". According to CFA Institute's Standards of Professional Conduct, which of the following is the best action for the brokerage department to take? A. Assign a new analyst to decide if the stock should receive a "buy" recommendation. B. Have the director of the corporate finance department review the recommendation for the stock rating to ensure its accuracy. C. Change the recommendation to "buy" only after receiving written direction from the director of the corporate finance department. D. Remove ETV Corporation from the research universe and put it on a restricted list giving only factual information about the company. 80. Mike is a financial analyst and outside director of Lester Trust Corporation. The Lester's board of directors learns that the company management has, in its financial statements, concealed a significant loss from a severe loss in its foreign operations due to a two-month strike. Although this will result in illegally misleading financial statements, the Lester's board of directors votes not to disclose the loss what should Mike do? 81. According to fiduciary duty standards set by ERISA, A. every individual investment must be suitable on its own. B. managers are expected to diversify to reduce risk of loss. C. pension fund managers act solely for the benefit of the plan sponsor. 82. Rick is a security analyst at Sunshine Advisers Group. Yesterday he's charged with possession of a controlled substance (marijuana) -- a misdemeanor under the state law. This is the third time in a year that he has faced the minor drug-related charges. However, it is believed by Rick's boss that this conduct does not affect his work. Does Rick violate Standard I (D)? 83. A financial analyst has lunchtime drinking every day and is intoxicated at work after that. This behavior constitutes a violation of Standard I (D). True or false? 84. After completing his Level I exam in New York, Sam immediately called his friend in Tokyo and told him some questions on the exam. Four hours later his friend went to take the Level 1 exam in Tokyo. Did Sam violate the standard? A. No He did not as he did not cheat on the exam, plus the exam questions could be different. B. No he did not as candidates should be allowed to discuss these questions after writing their Exams. C. Yes he violated the standard by attempting to give his friend an unfair advantage. 85. Based on Standard III (E) - Preservation of Confidentiality, the financial analyst must preserve the confidentiality of information received from a client if which two of the following criteria are met? I. Information must be material and nonpublic.

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II. Information must result from or be relevant to that portion of the client's business that is the subject of the special or confidential relationship. III. The financial analyst must be in a relationship of trust with the client. IV. Information could reasonably be expected to impair the analyst's ability to render unbiased and objective advice. 86. The stated purposes of Standard VI (C), Referral Fees, are to: I. Help the customer/client evaluate the full cost of the services. II. Help the customer/client evaluate any possible partiality shown in the recommendations of services. III. Help the customer/client evaluate potential conflicts of interest as result of the participation of immediate family in transactions. 87. Tim just passed his Level II exam, and registered to take the Level III exam next June. On his Business card he states that he has "completed Chartered Financial Analyst II. Is this appropriate? 88. Which of the following is not a specific element relating to standard "diligence and reasonable basis"? I. fiduciary duty II. Maintain appropriate records III. Avoid material misrepresentation IV. Diligence and thoroughness in recommendations. 89. A manager enters into a soft dollar agreement with a brokerage firm to provide both brokerage and research services to aid in the investment process. Which of the following are not required for compliance with CFA Institute's soft dollar standards? I. disclosure of soft dollar arrangements to clients II. Determine whether research provided meets Standard III (A) - Loyalty, Prudence, and Care. III. Obtain best execution on behalf of clients 90. Alan works for an investment bank that headquarters in New York City. He lives and works in a developing country where local securities laws and regulations are less strict than CFA Institute's Code and Standards. Which securities law and regulations should Alan be subject to? 91. Beth Patrick, a fixed income analyst at a brokerage company, assists her company's traders by developing inhouse bond ratings to supplement those of the major bond rating services. The traders use disparities in the ratings to construct profitable investment strategies. Patrick makes inferences from nonmaterial private information and news events, which she reflects in her bond ratings. Patrick's approach: A. reflects the mosaic theory. B. violates confidentiality rules.

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C. violates insider trading rules. 92. Orlando, a CFA charter holder, is a research analyst with a brokerage firm. He decided to change his recommendation on the common stock of Idibi, Inc. from a 'buy' o a 'sell'. He faxed this change in investment advice to all his current customers. The next day, a new customer calls with a 'buy' order for 500 shares of Idibi. In this circumstance, Orlando: I. may accept the order because he has complied with the standard on fair dealing with customers. II. Should advise the customer of the change in recommendation before accepting the order. III. Should delay executing the order until five days have elapsed after the communication of the Change in recommendation. IV. May accept the order when the customer specifies in writing that he was notified of the change in the recommendation. 93. Frank should disclose to clients about companies he recommends if he I. has an underwriting relationship with the company II. Is acting as the company's market maker? III. Has a 30% ownership of the company IV. Is a director in the company? 94. One of your clients asks you to purchase securities that you do not believe are legal for this Investor to hold. You consult with a legal advisor who is knowledgeable in this area and she says that there is no problem. A. You have satisfied the Standards and should purchase the securities for your client. B. You should seek an opinion from an investment manager in an independent firm. C. You should tell your client that the Standards prohibit you from purchasing the securities. 95. Maggert is scheduled to visit the corporate headquarters of Hoch Industries. Maggert expects to use the information obtained to complete his research report on Hoch stock. Maggert learns that Hoch plans to pay all of Maggert's expenses for the trip, including the costs of meals, hotel room, and air transportation. Which of the following actions would be the best course for Maggert to take under the Code and Standards? A. Write the report without taking the trip. B. Accept the expense-paid trip, write an objective report and disclose the value of the services Accepted in the report. C. Pay for all travel expenses, including costs of meals and incidental items. 96. Juan Mendez, CFA, is an investment advisor who operates as a sole proprietor and has five Clients. If Mendez seeks additional employment with a brokerage firm and is later hired he:

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A. must get written consent from his new employer to keep his old clients and must advise his old clients in writing of his employment with the brokerage firm. B. must get written consent from his new employer to keep his old clients but does not have to advise his old clients in writing of his employment with the brokerage firm. C. must advise his old clients in writing of his employment with the brokerage firm but does not have to get written consent from his new employer to keep his old clients. 97. In terms of CFA Institute's Standards of Professional Conduct when dealing with the procedures for compliance per Standard VI (A): Disclosure of Conflicts, which of the following ways is/are effective method(s) for member compliance? I. Members should report any beneficial interest that they may have in securities to their employers. II. Members should report any beneficial interest that they may have in any corporate directorships, trustee positions, or any other relationships that could pose a conflict of interest with their responsibilities to their employers. III. When in doubt if the situation represent a conflict it should be discussed with the compliance officer or supervisor. 98. George Moses, CFA, follows Technicorp as an analyst for a brokerage company. Extensive study has led Moses to rate Technicorp as a sold, largely because of increasing competition in the industry. At a recent CFA Institute's society meeting, Moses discussed Technicorp's prospects with two other analysts who also follow the company. Although the other analysts did not say why, both said that Technicorp was about to experience rapid earnings growth. Upon returning to his office, Moses released a "buy" recommendation based on this new information. Moses was in: A. violation of CFA Institute's Standards because he copied the opinions of others. B. violation of CFA Institute's Standards because he did not seek approval of the change from his Supervisor. C. violation of CFA Institute's Standards because he did not have a reasonable and adequate basis for his recommendation. 99. Alan Johnson, a CFA member, is a portfolio manager with an investment firm based in New York. One of his firm's clients told Johnson that she would compensate him beyond that provided by his firm, based on the capital appreciation of the portfolio each year. Johnson should: A. Turn down the additional compensation because it will result in conflicts with the interests of the other client accounts. b. Get written permission from his employer before he is going to accept the compensation Arrangement. Turn down the additional compensation because it would create undue pressure on him to achieve strong short-term performance results.

c.

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100. The Standards clearly prohibit trading for yourself in advance of your clients. You are working in a Country where this is common practice and is not illegal. A. the Standards allows you to follow local practices if they are not illegal. B. the Standards allow this practice only if approved by a supervisor. C. the Standards takes precedence over local practice and prohibits you from such trading. 101. in voting proxies, fund managers should give priority to the A. interest of the shareholders of the company where fund managers work. B. interest of the fund's sponsors. C. interest of the fund's beneficiaries. 1.3 1. Which statement(s) is/are true? I. Verification can be performed either by an independent third party or by the firm itself. II. Firms may claim compliance without the verification. III. Firms may only claim verified compliance for those years that have actually been verified. IV. Verification can be performed on specific composites. 2. John Smith, an Investment Manager at a large brokerage firm, is presenting his firms credentials to a prospective client. The client asks John which portfolios John's firm includes in their composites and how fee-paying portfolio and discretionary portfolios are handled by the Firm . Which statement(s) is/are incorrect? I. Only portfolios that pay management fees will be included in the composite. II. Non fee-paying portfolios may be included in the composite but special disclosure is required. III. Non fee-paying portfolios may be included in the composite but prior permission from CFA Institute is required. IV. Only portfolios over which the firm has discretion over their management may be included. 3. According to the Global Investment Performance Standards (GIPS), when dealing with the Statement of "firm composites must be defined according to similar investment objectives and Strategies" under the heading of composite Construction, which statement(s) is/are correct? A firm may combine the following portfolios into a composite: I. Two bond portfolios, both that aim for long-term performance.

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II. An equity and a bond portfolio, both that aim for long-term performance. III. Two bond portfolios, one that has a long-term strategy and the other with a short-term strategy. IV. An equity portfolio and a bond portfolio, one that has a long-term strategy and the other with a shortterm strategy. 4. According to the Global Investment Performance Standards (GIPS), which of the following Statements are correct when dealing with Verification? I. Verification tests whether the firm has complied with the composite construction requirements on a firm wide basis. II. Verification tests whether the firm has processes and procedures in place to calculate and to Present performance results to ensure that they comply with the GIPS. III. A verification report is issued in respect to the whole firm and NOT just with respect to a single composite. 5. Which statement(s) is/are false? I. Although verification must be performed with respect to an entire firm, different verification reports can be issued for different Composites. II. Firms that have been verified can add a disclosure to Composite presentations stating that the firm has been verified. III. By undergoing verification, a firm may improve its internal policies and procedures with regard to all aspects of complying with the GIPS standards. Only I is false. A single verification report is issued in respect to the whole firm.

1.4

1. After 2 years of claiming compliance, a firm has to present a ___-year performance record. A. 5. B. 7. C. 10. A firm must add an additional year of compliant performance results each year until it reaches 10 years of results. 2. Which of the following are NOT objectives of the Global Investment Performance Standards (GIPS)? A. To foster the notion of industry self-regulation on a global basis.

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B. To obtain countywide acceptance of a standard for the calculation and presentation of investment performance in a fair, comparable format that provides full disclosure. C. To ensure accurate and consistent investment performance data for reporting, record keeping, marketing, and presentation. D. To promote fair, global competition among investment firms for all markets without creating Barriers to entry for new firms. 3. ______ creates defined boundaries whereby total firm assets can be determined. A. Firm definition. B. calculation methodology. C. Composite construction. 4. According to the Global Investment Performance Standards (GIPS), when dealing with compliance, which of the following statements are NOT correct? A. If there is any discrepancy between the different languages then the English version of the GIPS is the controlling version. B. If there is any discrepancy between the different languages then the language of the country will be the controlling version. C. Firms are strongly recommended to comply with the recommended section of the standards as well. D. In order for a firm to claim compliance with the GIPS they must comply with the required section of the standards. 5. GIPS standards require that: I. Portfolio valuations must be based on book values. II. Unrealized gains should not be used in the calculation of portfolio returns. III. Actual trading expenses should be deduced when calculating returns. 6. Which statement(s) is/are false? I. Compliance with the GIPS standards is required by CFA Institute. II. A firm can claim partial compliance if it does not meet all the requirements of the GIPS standards. 7. According to the Global Investment Performance Standards (GIPS), when a firm starts to comply With the GIPS, the following statements are correct: I. The firm, when starting to comply with the GIPS, must present at least five years of historical Performance.

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II. The firm, when starting to comply with the GIPS, must present at least ten years of historical Performance. III. If the firm has not been around for the correct time period, it must show its performance since its inception. IV. After it has disclosed its results for a five-year period it must then show the next five-year period as well. 8. According to the Global Investment Performance Standards (GIPS), when dealing with compliance, which of the following statements are correct? I. Independent third parties may not be used to enhance the firms' performance measurement Activities. II. Independent third parties may assist with performance measurement and composite construction. III. Software suppliers can assist managers in complying with the GIPS but they themselves cannot claim compliance of the GIPS. 9. Select the false statement(s): I. Compliance with applicable law or regulation leads to compliance with the GIPS standards. II. Firms must provide a compliant presentation for any composite listed on the firm's list, and can optionally choose to provide a composite description to any client that makes such a request. III. Discontinued composites should be listed on the firm's list for at least 12 months. 10. Which of the following is not part of the eight main sections of GIPS? A. Composite. B. Vision statement. C. Firm definition. 11. The GIPS standards require: I. Benchmarks should be selected on an ex-ante basis. II. Benchmarks should be selected after the fact. III. Composites should be created on an ex-ante basis. IV. Composites should be created after his fact. 12. Which statement(s) is/are false? I. Disclosures are to be considered to be dynamic information as a firm may disclose different Information from period to period, depending on the performance of the firm. II. The "Real Estate" provisions do not apply to real estate investments with leverage.

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III. The GIPS standards mandate the use of certain calculation methodologies for composites, not for portfolios. 13. The Private Equity provisions apply to all the following except for I. Buy-out investing. II. Evergreen funds. III. Fund-of-funds investing. IV. Secondary investing. 14. Select the correct statement(s): I. Firms cannot adopt the revised GIPS standards for performance presentations of 2005. II. Firms can use third-party performance measurement only if the third-party is GIPS-compliance. III. Third parties can construct GIPS-compliance composites for firms. 15. in cases where applicable local laws conflicts with the GIPS standards, A. the GIPS standards take precedence. B. Local laws take precedence. C. The firm should comply with the stricter of the two.

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Answers: 1.1 1. 2. 3. 4. 5. 6. Correct Answer: C. Correct Answer: A. Correct Answer: A. Correct Answer: I, II and III Correct Answer: C. Correct Answer: B.

1.2 1. Correct Answer: III only. If a profit is made on a conflicted situation then the firm will need to decide the best course of action under the circumstances. However, it is incorrect to say that the profit on the conflicted situation will always need to be repaid to the Firm. Correct Answer: II and III. Correct Answer: C. Correct Answer: B. Correct Answer: V and VI. I, II, III and IV are not enough. Correct Answer: C. No. The proposed advertisement does not represent use of the designation in a dignified and judicious manner since it implies that those people who pass the exams on the first try will be more successful than those who do not, which is misleading. Yes. As a grader he was required to sign a CFA Institute Grader Agreement and agreed not to reveal or discuss the exam materials with anyone outside the CFA Institute. Correct Answer: B. Correct Answer: C. Correct Answer: II only. Correct Answer: I, II and III. The source or relative reliability of the information determines materiality. The less reliable a source, the less likely the information provided would be considered material. Correct Answer: C. Correct Answer: IV and V. Correct Answer: I, II and III. Correct Answer: I, II and III. Correct Answer: I, II and III. Correct Answer: I and III. No. Even though he is still enrolled, he is not a CFA candidate since he is not registered to take the next scheduled exam. However, he may state that he has passed CFA Level I exam. Situations that may cause biased investment advice and conflicts that would cause a member not to act in the employer's best interests will need to be reported to the employer. This will involve the following actions:

2. 3. 4. 5. 6. 7.

8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

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22. External Board positions taken up by the employee. 23. Purchasing securities in a company that the analyst writes a report on 24. Any action that the employer expressly forbids is also not is performed by the employee only any action that the employer expressly forbids is also not is performed by the employee. Only possible conflicted situations that are expressly allowed by the employer are allowed under this standard. 25. Correct Answer: B. 26. Correct Answer: All of the above. 27. The term report is not confined to a written report, but includes a report via any means of communication, e.g. telephone communication, media broadcast, E-mail message. 28. Because applicable law is stricter than the Code and Standards, Mack must follow the strict requirements of the local law. 29. Correct Answer: A. 30. Correct Answer: C. 31. Correct Answer: C. 32. The following factors should be included in an analysts research report: 33. Expected annual rates of return. 34. Annual expected income. 35. Current rate of income 36. Current rate of income. 37. Degree of uncertainty. 38. Degree of marketability / liquidity. 39. Other risks. 40. Correct Answer: I, II and III. 41. No. Although this is not a criminal activity, Dmitry has violated Standard I (D) since he is engaged in intentional dishonest conduct. 42. False. 43. Although conflicts of interest exist, there is nothing inherently unethical as long as (1) the client is not disadvantaged by the trade, (2) the investment professional does not benefit personally from trades undertaken for clients, and (3) the investment professional complies with applicable regulatory requirements. 44. Correct Answer: C. 45. False. In this case a member must secure written permission from the employer to undertake independent practice. 46. Correct Answer: I. 47. Correct Answer: C. 48. Correct Answer: A. 49. Correct Answer: I, II and III. 50. Correct Answer: C.

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51.

52. 53. 54. 55.

56.

57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69.

Gains make the statement ('we expect...') knowing that the dividend will increase only if Congress enacts certain legislation, an uncertain prospect. By stating that the dividend will increase, Gains failed to separate fact from opinion. Correct Answer: I and IV. Although Tessa delegated her responsibility for supervision she is still ultimately responsible for the overall supervisory function. Delegation of the responsibility does NOT release Tessa from her supervisory responsibility. Correct Answer: C. Correct Answer: II. Correct Answer: C. Correct Answer: None of them is true. Once an employee has left the firm, the skills and experience that an employee obtains while employed are not "confidential" or "privileged" information unless they are deemed such by an agreement or by law. As long the contact information does not come from the records of the former employer or violate an application non-co m Pete agreement, yes members and candidates can contact clients of their previous firm. Correct Answer: II and III only. Len cannot compliance with this Standard just because in most respects he complies. In order to claim compliance Len would need to comply in all material respects with CFA Institute's standards. Correct Answer: None of them is true. They should talk to their employer about balancing personal and employment obligations. Correct Answer: A. Correct Answer: B. Correct Answer: C. Correct Answer: A. False: you are only awarded the right to use the CFA designation. Correct Answer: C. Correct Answer: C. Correct Answer: B. Correct Answer: C. Correct Answer: A Correct Answer: B. He should:

70. Report his findings to the appropriate supervisory persons in the firm. 71. If the matter is not remedied, he should sever all his connections with the underwriting. Seek advice of the investment bank's general counsel. If he believes that the attorney is 72. Competent, he should follow the attorney's advice without material variation. 73. Correct Answer: A. 74. Correct Answer: II Correct Answer: I, II and IV only. Compliance procedures designed to assist members in complying with this Standard are as follows

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75. Define personal transactions 76. Define investment; this would include any investment, including real estate etc. 77. Define clearly prohibited transactions. III is a compliance procedure that relates to Standard III (B): Fair Dealing 78. Correct Answer: A. 79. The person's use of the CFA designation would be suspended. During the period the person cannot state or imply he/she is an active CFA charter holder. However, the person can still state that he/she was awarded the CFA charter in the year of as long as he/she does not imply he is a current or practicing CFA charter holder. After he /she resume paying CFA Institute dues his/her right to use the CFA designation will be reinstated. 80. Correct Answer: I, II and IV. 81. Correct Answer: C. 82. Correct Answer: D. 83. Correct Answer: I, II and III. 84. Correct Answer: C. 85. Correct Answer: C. Insider trading should not result when a perceptive analyst reaches a conclusion about a corporate action through analysis of public information and items of non-material non-public information (that is, a "mosaic" of I Information). Statements "Restricting personal and proprietary trading will assist members in complying with the abovementioned standard of professional conduct", "A member may use material non-public Information as long as the information is constructed together from publicly available information" and "A member may use material non-public information as long as the information is constructed together from non-material information" are all correct statements relating to Insider trading. 86. An employee is someone in the service of another who has the power or right to control and direct the employee in the material details of how the work is to be performed. A written or implied contract may or may not exist. 87. This question applies to Standard IV as a whole. Correct Answer: A. Members shall disclose to their employer in writing all 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. Correct Answer: D. Correct Answer: I and II. Correct Answer: D. He should:

88. 89. 90. 91.

92. Resign from the board and sever his connections with Lester Trust. 93. Consider reporting the situation to appropriate regulators 94. Correct Answer: B. 95. Yes.

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Rick's conduct reflects adversely on his fitness as a CFA charter holder. Convictions of even minor offenses might rise to the level of violate ng Standard I (D) if committed with a frequency suggesting gross disgard for the law. 96. Correct Answer: C. 97. Correct Answer: II and III. 98. Correct Answer: I and II only. Statements I and II give the two primary reasons listed in the Standards of Practice Handbook for disclosing referral fees to clients. The purpose given in statement III is not a primary consideration. 99. No. There is no designation for someone who has passed Level I, II or III of the CFA exams. Tim can state that he passed Level II and is a Level III candidate in the CFA program state that he passed Level II and is a Level III candidate in the CFA program. 100. Correct Answer: I. 101. Correct Answer: II only. 102. Because applicable law is less strict than the Code and Standards, Alan must adhere to the Code and Standards. 103. Correct Answer: A. 104. Correct Answer: II and IV. 105. Correct Answer: I, II, III and IV. 106. Correct Answer: A. 107. Correct Answer: C. 108. Correct Answer: B. 109. Correct Answer: I, II and III. 110. Correct Answer: C. 111. Correct Answer: B. 112. Correct Answer: C. 113. Correct Answer: C. 1.3 1. 2. Correct Answer: II only. Correct Answer: III only. Only portfolios that pay management fees will be included in the composite. Non fee-paying portfolios may be included in the composite but special disclosure is required. Only portfolios over which the firm has discretion over their management may be included. Portfolios that have restrictions or guidelines as to their management that prevents the manager from managing in a certain manner will term non-discretionary for the purpose of assigning portfolios to composites. Non-discretionary portfolios may only be included if special disclosure is provided Correct Answer: I. All the other solutions that do not fit in with the definition of "firm composites must be defined according to similar investment objectives and strategies" as they are NOT similar investment objectives strategies. Correct Answer: All of the above. Verification tests:

3.

4. 5.

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Whether the firm has complied with the composite construction requirements on a firm wide basis. Whether the firm has processes and procedures in place to calculate and to present performance results to ensure that they comply with the GIPS. The verification report must confirm the above. A verification report is issued in respect to the whole firm and NOT just with respect to a single composite. Only I is false. A single verification report is issued in respect to the whole firm.

6. 1.4 1.

2.

3.

Correct Answer: B. A firm must add an additional year of compliant performance results each year until it reaches 10 years of results. Correct Answer: B. One of the objectives of the GIPS is to gain worldwide acceptance and not just countrywide acceptance. Correct Answer: A.

Firm definition is the foundation for firm-wide compliance. 4. Correct Answer: B. If there is any discrepancy between the different languages then the English version of the GIPS is the controlling version, and not the language of the country 5. Correct Answer: III only. I. They should be based on market values. II. Total return which includes realized and unrealized gains and losses plus income should be used. III. Actual, not estimated, trading expenses should be deducted. 6. Correct Answer: I and II. Both are false. Compliance with the GIPS standards is voluntary. A firm cannot claim partial compliance. 7. Correct Answer: I and III. II is incorrect: Performance of five years must be presented. IV is incorrect: After it shows GIPS-compliant history for a minimum of five years, a firm must subsequently build toward a 10-year compliant track record. 8. Correct Answer: II and III. Independent third parties may be used to enhance the firms' performance measurement activities. This will involve using independent third parties to assist with performance measurement and composite construction. Software suppliers can assist managers in complying with the GIPS but they themselves cannot claim compliance of the GIPS (they are not the Firms). 9. Correct Answer: I, II and III. I: Sometimes local or country-specific laws or regulations conflict with the GIPS standards. II: Firms must present the list AND a composite description. III: the minimum is 5 years. 10. Correct Answer: B. 11. Correct Answer: I and III.

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This is to ensure the integrity of input data. 12. Correct Answer: I, II and III. I is false as disclosures are to be considered static information which does not normally change from period to period. II is false as they apply to real estate investments with leverage or gearing . III is false as they mandate the use of certain calculation methodologies for both composites and for portfolios 13. Correct Answer: II. 14. Correct Answer: III. 15. Although the effective date of the revised Standards is December 31, 2005, early adoption is encouraged by CFA Institute 16. Firms can use such composites in a GIPS-compliant presentation only if the composites meet the requirements of the GIPS standards. 17. Correct Answer: B. However, the firm should make full disclosure of the conflict.

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Review Questions.doc - Ethics