CFA Domain 1: Ethical and Professional Standards (Quiz 1)

According to CFA Institute, which of the following best describes the motivation for codifying an investment firm's belief system?

The CFA Institute's Professional Conduct staff (PCS) finds that Simon Perret, CFA, has violated the Standards. Perret rejects the PCS's proposed sanctions. Which of the following is most likely to occur?

An investment firm has multiple subsidiaries across countries. The subsidiaries have different business names but operate under the same brand name. When defining the firm to claim compliance with GIPS standards, which subsidiaries should the firm most appropriately include?

The investment profession most likely builds and maintains trust by:

When comparing ethical standards with legal standards, which of the following statements is most appropriate?

The most appropriate reason why trust is needed in the investment profession is so that investment managers can:

Stephanie Williams, CFA, is the portfolio manager of the Lantern Latin American Equity Fund (LLAEF). LLAEF is a mutual fund that invests exclusively in stocks listed in Central and South America. While attending her daughter's gymnastics practice, Williams discusses LLAEF with Jeffrey Jones, who also has a daughter in the class. Jones states that he is a conservative investor, investing primarily in a balanced fund, and has never considered investing in Latin American equities before. Williams gives a very optimistic assessment of the economic conditions in the region and states that Latin American equities are among the most undervalued globally. Williams says, "I believe Latin America is likely to be the best performing emerging market region in the world over the next few years. This fund is a 'no brainer' and adds great diversification benefits to any portfolio." Has Williams most likely violated Standard III(C) Suitability?

Which of the following is one of the six elements of the CFA Institute's Code of Ethics? Members and candidates must:

Standard VI(C) of the Standard of Professional Conduct on Conflicts of Interest most appropriately requires Members and Candidates to:

An investment management firm most likely can claim compliance with the Global Investment Performance Standards (GIPS) if it:

Fulvio Lombardi, CFA, a research analyst, recently left Primo Investment, where he had published research on Breve Latte Inc. (BLI). Lombardi joins Risultati Research and uses publicly available information and material from management's latest earnings release to create a new research report on BLI based on updated information. The public information includes material from Twitter posts and online blogs by BLI's chief executive officer and chief financial officer. Lombardi verifies the information in the social media sources when possible and feels comfortable including them in his analysis. Since these tweets and blogs are hosted on electronic servers and are easily accessible, Lombardi does not see the need to maintain them in his files, yet he keeps documentation of personal notes, articles, and other research documents. Lombardi publishes the report without obtaining permission from or citing his former employer. Which of Lombardi's actions are most likely in compliance with Standard V(C) Record Retention?

Based on the GIPS fundamentals of compliance, a firm must define:

Rachel Barrett, CFA, is in charge of calculating and disseminating the investment performance of client accounts. In her calculations, she identifies a material error due to a reporting system failure. Due to this error, the past performance of the firm's largest client, a large endowment, was understated: the client realized a gain instead of a reported loss. If the endowment's trustees discover this error, it is unclear if the trustees will terminate Barrett's firm. If they do terminate, her firm will lose a significant amount of revenue and Barrett's bonus would be negatively affected. Standard III(A) Loyalty, Prudence, and Care, most likely:

Christine Hansen, CFA, works as an investment advisor at a large regional bank. Many of Hansen's larger clients can benefit from comprehensive estate planning, including the need for various trusts and insurance policies. For the trust work, Hansen refers these clients to an outside law firm, and for their insurance needs, she refers them to the bank's internal insurance subsidiary. Hansen receives a one-time $100 bonus for every insurance policy sold by the subsidiary on her referral. The law firm is a corporate sponsor of the local professional basketball team and gives Hansen two courtside tickets for each referral. With regard to Standard VI(C) Referral Fees, Hansen is required to disclose:

Halim Gamal, CFA, is a research analyst at Nile Capital Bank (NCB). He conducts independent research on health care companies and participates in group research on the industry with other NCB analysts. Gamal meets with the research group to discuss the impact of a new law on the industry. Most of the analysts expect the regulations written to enforce the new law to create unintended consequences that will shrink health care industry profits. Although Gamal believes the basis for the group's conclusion is reasonable and adequate, he thinks the law will ultimately benefit the industry. The most senior NCB health care analyst writes the report for the group with a conclusion drawn for the majority. Gamal does not ask that his name be removed from the report despite disagreeing with the conclusion. Has Gamal violated Standard V(A) Diligence and Reasonable Basis?

Matthew Beck, CFA, recently joined an investment management firm as a senior analyst after many years of working in the same role for a competitor. Beck's spouse is a director of a publicly traded company that Beck will cover for his new employer. His spouse has been a director for several years, and Beck wrote analyst reports about the company for his previous employer. Beck also serves as a trustee for the youth soccer association in his town. Part of his responsibilities as a trustee is to coordinate the association's fundraising efforts, but Beck does not directly solicit money. The association is a relatively new entity, and Beck anticipates a significant time commitment for the next several months. Standard VI(A) Disclosure of Conflicts most likely requires Beck to disclose to his new employer:

For Global Investment Performance Standards (GIPS®) compliant firms, which of the following best describes the purpose of composite construction?

Liam Haughton, CFA, is an investment strategist at Joffery Securities, Ltd. (JSL). Through his meticulous research, he develops an algorithm that delivers exceptional risk-adjusted performance using a complex trading process. JSL wants to market this discovery as an additional service to its current and prospective clients. Haughton prepares the communication to advise clients about the algorithm and strategy but is concerned that most clients will be unable to comprehend it. He does not detail his algorithm, valuation models, or asset allocation structures in his communications. He believes clients need to know the changes in the portfolio and how they impact performance. Haughton settles on discussing how the three biggest trades impact performance in his monthly report. With respect to Standard V(B) Communication with Clients and Prospective Clients, Haughton most likely:

"Olga Ivanova, CFA, plans to leave her employer, Vector Advisors LLC (""Vector""), since they allow advisors to invest only in traditional assets. Ivanova plans to start her own investment advisory business where she can take riskier strategies. She has not signed a noncompete agreement with Vector. Before she leaves Vector, Ivanova: Searches for office space, on weekends, for the new company, Completes forms and begins the process to get the new company registered, and Calls Sergey Aslanov, her golf partner, to convince him to be her first client. Ivanova recently solicited Aslanov's business on behalf of Vector, but to date Aslanov has remained undecided about whether he will become a client. Has Ivanova most likely violated Standard IV(A) Loyalty?"

"Krishan Patel, CFA, a senior analyst at CityStock, conducts due diligence of Specialty Products Corp. (SPC) and determines that it is a compelling buy and that the stock price will soon increase. Patel hesitates to recommend SPC since CityStock places a five-day blackout period on all recommended stocks. Instead, he purchases 300 shares of SPC for his account without sharing his analysis and recommendation with CityStock. SPC's price subsequently drops by 30%. Patel reviews his analysis and, still convinced that SPC is a great buying opportunity, submits his analysis and buy recommendation to the investment committee at CityStock. Patel most likely violates Standard VI(B) Priority of Transactions:"