Ethics TE8 Test

To comply with the GIPS® standards, firms most likely must:

• A. apply standards on a firm-wide basis.
• B. be verified before they can claim compliance.
• C. be defined as separate legal entities.

Q. Which one of the following actions will help to ensure the fair treatment of brokerage firm clients when a new investment recommendation is made?

• A. Informing all people in the firm in advance that a recommendation is to be disseminated.
• B. Distributing recommendations to institutional clients prior to individual accounts.
• C. Minimizing the time between the decision and the dissemination of a recommendation.

When Jefferson Piedmont, CFA, joined Branch Investing, Branch began using a quantitative stock selection model Piedmont had developed on his own personal time prior to his employment with Branch. One year later when Piedmont left the firm, he found the original copy of the model he had developed in a file at his home and presented it to his new employer, who immediately began using the model. According to the Standards of Practice Handbook, did Piedmont most likely violate any CFA Institute Standards of Professional Conduct?

• A. No.
• B. Yes, because he misappropriated property now belonging to Branch.
• C. Yes, because he failed to inform his new employer the model was the same one used by his previous employer.

A central bank fines a commercial bank it supervises for not following statutory regulations regarding non-performing loan provisions on three large loans as a result of the bank’s loan provisioning policy. Louis Marie Buffet, CFA, sits on the Board of Directors of the commercial bank as a non-executive director, representing minority shareholders. He also chairs the internal audit committee of the bank that determines the loan provisioning policy of the bank. Mercy Gatabaki, CFA, is the bank’s external auditor and follows international auditing standards whereby she tests the loan portfolio by randomly selecting loans to check for compliance in all aspects of central bank regulations. Which charterholder is most likely in violation of the Code and Standard?

• A. Both.
• B. Buffet.
• C. Gatabaki.

Oliver Opdyke, CFA, works for an independent research organization that does not manage any client money. In the course of his analysis of Red Ribbon Mining he hears rumors that the president of Red Ribbon, Richard Leisberg, has recently been diagnosed with late stage Alzheimer’s disease, a fact not publicly known. The final stage of Alzheimer’s is when individuals lose the ability to respond to their environment, the ability to speak, and, ultimately, the ability to control movement. Leisberg is the charismatic founder of Red Ribbon, and under his leadership the company grew to become one of the largest in the industry. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the most appropriate action for Opdyke is to:

• A. immediately publish a sell recommendation for Red Ribbon Mining.
• B. confirm the president’s diagnosis before publishing his research report.
• C. encourage Red Ribbon Mining management to disclose the president’s medical condition.

Q. Albert and Tye, who recently started their own investment advisory business, have registered to take the Level III CFA examination. Albert’s business card reads, “Judy Albert, CFA Level II.” Tye has not put anything about the CFA designation on his business card, but promotional material that he designed for the business describes the CFA requirements and indicates that Tye participates in the CFA Program and has completed Levels I and II. According to the Standards:

• A. Albert has violated the Standards, but Tye has not.
• B. Tye has violated the Standards, but Albert has not.
• C. Both Albert and Tye have violated the Standards.

Which of the following is not part of the nine major sections of the GIPS® standards?

• A. Performance Fees
• B. Input Data
• C. Disclosure

Which of the following least likely reflects the two primary principles of the CFA Institute Rules of Procedure for Proceedings Related to Professional Conduct?

• A. Confidentiality of proceedings
• B. Public disclosure of disciplinary sanctions
• C. Fair process to the member and candidate

Q. Brown works for an investment counseling firm. Green, a new client of the firm, is meeting with Brown for the first time. Green used another counseling firm for financial advice for years, but she has switched her account to Brown’s firm. After spending a few minutes getting acquainted, Brown explains to Green that she has discovered a highly undervalued stock that offers large potential gains. She recommends that Green purchase the stock. Brown has committed a violation of the Standards. What should she have done differently?

• A. Brown should have determined Green’s needs, objectives, and tolerance for risk before making a recommendation of any type of security.
• B. Brown should have thoroughly explained the characteristics of the company to Green, including the characteristics of the industry in which the company operates.
• C. Brown should have explained her qualifications, including her education, training, and experience and the meaning of the CFA designation.

Teresa Avila, CFA, is a micro cap investment analyst at a hedge fund. The fund requires Avila to hold any securities she recommends for the fund in her own account as well. Because Avila has such a small account, whenever she trades for her own portfolio she combines the transactions with those of the hedge fund so she is sure to have her account aligned with the fund. Has Avila most likely violated any CFA Institute Standards of Professional Conduct?

• A. No.
• B. Yes, related to Misconduct.
• C. Yes, related to Priority of Transactions.