Ethics 1.11 Test

Kirsten Kelso, CFA, is a research analyst at an independent research firm. Kelso is part of a team of analysts who focus on the automobile industry. Recently, Kelso disagreed with two research sell recommendations written by her team even though she felt confident the research process was properly conducted. In a webcast open to all institutional but not retail clients, Kelso states “even though my name is on the sell reports, these stocks are a buy in part because sales and share prices for both auto companies will rise significantly due to strong demand for their vehicles.” Kelso’s actions would least likely violate which of the following CFA Institute Standards of Professional Conduct?

• A. Fair Dealing
• B. Communication with Clients
• C. Diligence and Reasonable Basis

Q. Smith, a research analyst with a brokerage firm, decides to change his recommendation for the common stock of Green Company, Inc., from a “buy” to a “sell.” He mails this change in investment advice to all the firm’s clients on Wednesday. The day after the mailing, a client calls with a buy order for 500 shares of Green Company. In this circumstance, Smith should:

• A. Accept the order.
• B. Advise the customer of the change in recommendation before accepting the order.
• C. Not accept the order because it is contrary to the firm’s recommendation.

According to the GIPS® standards, a verification report confirms all of the following except whether:

• A. specific composite presentations are accurate.
• B. a firm has complied with all firm-wide composite construction requirements.
• C. processes and procedures are designed to calculate and present performance results in compliance with the GIPS standards.

Can an individual most likely cause the public to lose confidence in the global financial markets?

• A. Yes.
• B. No, a negative event would need to be considered systemic.
• C. No, a single person does not have enough influence.

William Wong, CFA, is an equity analyst with Hayswick Securities. Based on his fundamental analysis, Wong concludes that the stock of a company he follows, Nolvec Inc., is substantially undervalued and will experience a large price increase. He delays revising his recommendation on the stock from “hold” to “buy” to allow his brother to buy shares at the current price. Wong is least likely to have violated the CFA Institute Standards of Professional Conduct related to:

• A. duty to clients.
• B. reasonable basis.
• C. priority of transactions.

Which of the following statements concerning the Global Investment Performance Standards (GIPS®) is most likely correct?

• A. Clients or prospective clients benefit from the GIPS standards because the historical track record of compliant firms is accurate and precise.
• B. The GIPS standards eliminate the need for in-depth due diligence by investors.
• C. Compliance with the GIPS standards enhances the credibility of investment management firms.

Q. Andrews, a private wealth manager, is conducting interviews for a new research analyst for his firm. One of the candidates is Wright, an analyst with a local investment bank. During the interview, while Wright is describing his analytical skills, he mentions a current merger in which his firm is acting as the adviser. Andrews has heard rumors of a possible merger between the two companies, but no releases have been made by the companies concerned. Which of the following actions by Andrews is least likely a violation of the Code and Standards?

• A. Waiting until the next day before trading on the information to allow time for it to become public.
• B. Notifying all investment managers in his firm of the new information so none of their clients are disadvantaged.
• C. Placing the securities mentioned as part of the merger on the firm’s restricted trading list.

Amanda Covington, CFA, works for McJan Investment Management. McJan employees must receive prior clearance of their personal investments in accordance with McJan’s compliance procedures. To obtain prior clearance, McJan employees must provide a written request identifying the security, the quantity of the security to be purchased, and the name of the broker through which the transaction will be made. Pre-cleared transactions are approved only for that trading day. As indicated below, Covington received prior clearance. Security Quantity Broker Prior Clearance A 100 Easy Trade Yes B 150 Easy Trade Yes Two days after she received prior clearance, the price of Stock B had decreased, so Covington decided to purchase 250 shares of Stock B only. In her decision to purchase 250 shares of Stock B only, did Covington violate any CFA Institute Standards of Professional Conduct?

• A. No.
• B. Yes, relating to diligence and reasonable basis.
• C. Yes, relating to her employer’s compliance procedures.

Benefits of compliance with the CFA Institute Global Investment Performance Standards (GIPS®) least likely include:

• A. strengthening of internal controls.
• B. participation in competitive bidding.
• C. elimination of in-depth due diligence for investors.

Q. As part of the Duties to Clients standard, members and candidates must:

• A. document client financial constraints after an initial investment action.
• B. maintain an equal balance of interests owed to their clients and employers.
• C. deal fairly and objectively with all clients when engaging in professional activities.