CFA Domain 1: Ethical and Professional Standards (Quiz 3)

One day after taking Level II of the CFA exam, Guyton Wyll visited a website used by several thousand CFA candidates and posted the following to a thread visible to candidates at all levels: "I can't believe that CFA Institute recommended that we study for more than 300 hours when they asked such easy questions on most topics. But the Ethics questions were so subjective, and I can't remember that any of them dealt with the Standards...really unfair!" Did Wyll's post most likely violate Standard VII(A)–Conduct as Participants in CFA Institute Programs?

"Rahul Agarwal, CFA, is the Chief Investment Officer of Bagh Capital. He is having lunch with a group of prospective clients and passes out a summary of the company's performance. The summary mentions that the firm was able to generate returns of 25% last year, 18% annualized over the past three years, and 15% annualized over the past five years. The returns exclude several portfolios that Bagh closed last year due to underperformance. The summary does not mention the exclusions but notes that it is limited in nature and that a detailed presentation is available upon request. By distributing this summary to clients, does Agarwal most likely violate Standard III(D) Performance Presentation?"

Andrei Ostrovsky, CFA has been employed as an advisor at Bolshoi Investments Inc. (BII) for several years. His employment agreement does not include a "noncompete" clause or termination policies. Ostrovsky decides to leave BII and start a new advisory firm. Prior to giving notice to his employer, Ostrovsky spends a few weekends setting up his new office. There he "connects" with as many of his clients as he can on social media, which is easy as he knows their names. Before leaving BII, he does not mention his departure from BII or his plans for his new firm to any client, on or off social media. One day after leaving BII, he posts a notice on a social media site that he has left BII and that he would be happy to continue to advise his former clients at his new firm. With regards to Standard IV(A) Loyalty, has Ostrovsky most likely violated the Standard?

The CEO of PrimeHealth, Inc., a publicly traded pharmaceutical company, hosted a conference call for approximately 15 analysts from 10 different investment banks. One of the listeners was Paula Pressly, Level II CFA candidate. The CEO of PrimeHealth announces that the company has received regulatory approval to sell its latest cancer drug. The CEO tells the assembled participants that he anticipates additional revenues of $3 billion this year, which he estimates will grow at 10% per year. After the call, but before the CEO's information has been widely distributed, Pressly buys 100 shares of PrimeHealth for her account. At the same time, she also calls her father and advises him to buy PrimeHealth stock, but he does not act on her advice. Which of the following most accurately describes any violations by Pressly of Standard II(A) Material Nonpublic Information?

Grace Chang, CFA, keeps two social media accounts: one for personal use and one firm-approved business account used for client engagement, which is monitored by her employer, Canyon Investments. After three years at Canyon, during which Chang has connected with all her clients through her business account, Chang decides to leave Canyon for LVL Bank. Canyon asks Chang to delete the business account before leaving. However, Chang confirms that she has not signed a noncompete agreement with Canyon and, upon starting at LVL, Chang updates her business account to reflect her new employer and continues to maintain both accounts. Has Chang most likely violated Standard IV(A) Loyalty?

Donota Rosa, CFA, currently works with her best friend and supervisor Maria Danek, CFA, at Broadwick Investment Partners (BIP). BIP is a private equity firm with award-winning funds. Each of BIP's funds has a $20 million investment minimum for new investors. After working with Danek for two years, Rosa leaves BIP to start her own firm. Six months later, Danek helps Rosa by convincing BIP's management to waive the $20 million investment minimum exclusively for Rosa's clients, but the exclusivity will last for only one month. Rosa clearly remembers how well BIP managed its funds and, based on her memory, is convinced it is an ideal investment for clients. Grateful for this assistance and to meet the one-month deadline, she quickly jumps at the opportunity and immediately recommends BIP's funds. With respect to the Standard V(A) Diligence and Reasonable Basis, does Rosa most likely violate the Standard?

Christina Wilkerson, CFA, is a portfolio manager for a well-known asset management firm. All managers include a brief biography on the firm's website. Wilkerson's entry reads: "The CFA program afforded me a wide range of knowledge on diverse financial instruments and concepts. I have held the CFA designation since 2011 and passed each level on my first attempt. For each level, my scores in the topics of Fixed Income and Alternative Investments rated in the highest category in CFA Institute's grading system." Assuming that all assertions in her entry can be verified, which of the following best describes whether Wilkerson's entry complies with Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program?

Stephanie Chang, CFA, is a financial advisor to individual clients for SMF Investments (SMF). She also manages the account of her father, who is a client of SMF. SMF secures a portion of shares for the oversubscribed initial public offering (IPO) of Trek Corp and assigns the IPO shares to its financial advisors to allocate to their clients' portfolios. After reviewing Trek's suitability for her clients' portfolios, Chang concludes that she would allocate 2,500 shares to her clients, including 100 to her father. She also likes Trek for her personal portfolio and wants to allocate 300 shares for herself. However, she receives only 2,000 shares of Trek from SMF. To avoid violating Standard III(B) Fair Dealing, Chang should most likely allocate IPO shares to her nonfamilial clients:

"Sarah Cohen, CFA, is a portfolio manager at Mountain Peak Capital (MPC) and manages the firm's multi-cap equity growth fund. Cohen often directs the firm's trading desk to place orders through certain brokerage firms that have assisted her in idea generation or in investment decision-making. Cohen has recently agreed to enter into a new soft dollar relationship with Large-Cap Capital (LCC) for research services. Cohen sends a large order for a thinly traded small-cap stock to the firm's trading desk. Cohen usually prefers small-cap stock trades to be directed to Small-Cap Specialists, Inc. (SCSI), as they are better able to source liquidity (ie, find buyers and sellers) to fill these trades than most of their competitors. The trader suggests the order be routed through LCC to help satisfy MPC's new soft dollar commitment. LCC can execute the order, but it would likely be at market prices, and the large order size will almost certainly negatively affect the execution. After discussing the situation with the firm's trader, Cohen instructs the trader to send the order to LCC. Cohen most likely violates Standard III(A) Loyalty, Prudence, and Care, by:"

Matt Fabiano, CFA, is the senior portfolio manager at Marco Investment Advisors (MIA). All of MIA's clients gave Fabiano discretion over their accounts and, as part of his service, he directs trades to a number of brokerage firms. Fabiano discovers that if he trades exclusively with Strollo Brokerage Inc. (SB), MIA could participate in SB's client referral program, allowing MIA to serve more clients. Based on MIA's analysis, Fabiano concludes that clients are neither harmed by nor benefit from using SB as a broker. With respect to Standard III(A) Loyalty, Prudence, and Care, if Fabiano trades exclusively with SB, most likely he:

Jacqueline Dumont, CFA, is an adviser to high-net-worth clients. For over 20 years, she advised Marc and Denise Paraguet, who divorced three years ago. As a condition of the divorce, all of their joint accounts were closed, and their assets were divided between them. After the divorce was settled at the end of 20X1, Denise Paraguet remained Dumont's client for one year, then ended their advisory relationship and moved her investments to another firm. Marc Paraguet, who remains a client of Dumont's, recently asked Dumont for information about Denise's investment activities during 20X2, when she was still Dumont's client. To comply with Standard III(E) Preservation of Confidentiality, which of the following is Dumont's best course of action?

Margareta Schiffrin, CFA, is an investment adviser at a firm that advises high-net-worth clients and has adopted the CFA Institute's Code and Standards. Schiffrin informs the firm's compliance director that she just attended the World Cup alpine ski finals as a guest of one of the firm's long-standing clients, who had been pleased with his portfolio's superior performance. Regarding Standard I(B) Independence and Objectivity, did Schiffrin most likely violate the Standard?

Bao Pham, CFA, is an investment adviser serving high–net worth retail clients. Several of Pham's younger clients prefer using instant messaging to communicate with him. Pham often receives requests and investment questions from clients via his personal phone and social media accounts. Pham does not forward any of these items to his firm since he considers them personal. The firm has no stated policy on data collection via personal devices or social media. Does Pham's conduct most likely comply with Standard V(C) Record Retention?

Trevor Halcott is a practicing lawyer and a CFA charterholder. He meets with the legal team of a potential client, Smith & Smith, Inc., to discuss a case that involves derivatives and portfolio management. At the beginning of the meeting, he hands out business cards that give his name as "Trevor Halcott, JD, CFA." Later, he tells the legal team, "completing the CFA Program greatly improved my knowledge of portfolio management and derivatives." Has Halcott violated most likely VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program?

"Stuart Grimaldi, CFA, is the compliance officer for a large hedge fund with several hundred employees. Grimaldi has implemented a comprehensive set of rules for employees to comply with applicable laws and regulation. He appropriately updates the rules and communicates all changes to the employees. He also holds regular meetings to advise employees of different compliance issues. The fund permits employees to maintain investment accounts with outside firms but requires the employees to send Grimaldi duplicate confirmations for all trades. The rule applies for accounts that the employee establishes in his or her own name as well as those for immediate family members such as a spouse, domestic partner, children, or parents. About half of the employees have outside accounts. Grimaldi does not regularly check the confirmations but believes that the employees are complying with the rule. Recently, an employee tried to circumvent the rule by having his neighbor open an account at another firm, with the employee directing the trades made in the account. Grimaldi was not aware of this activity until the neighbor who ""owned"" the account was charged with insider trading. The neighbor then implicated the employee who was directing the trades. Of the following, the most appropriate statement is that Grimaldi violated Standard IV(C) Responsibilities of Supervisors with respect to:"

Zoey Baines, CFA, works in the investment management division of a large bank. As part of the bank's incentives for driving revenue growth, it offers Baines $300 for each investment management client she refers to either the bank's banking or financial planning divisions. At year end, the employee with the most referrals receives an additional $5,000 bonus. Baines does not share her compensation structure with her clients since she feels her compensation is a private matter. Does Baines most likely violate Standard VI(C) Referral Fees?

Stephen Cutler, State Treasurer, is responsible for overseeing the teachers' pension plan. Cutler hires Louise Gartner, a consultant, to advise the state on investments. Gartner hires Valarie Norton, CFA to manage the pension plan. Norton delivers investment reports to Cutler and Gartner on a semiannual basis. Under Standard III(A) Loyalty, Prudence, and Care, the client(s) to whom Norton most likely owes a duty of loyalty is (are):

"Kalim Emara, Level I CFA Candidate, works for a national nonprofit charity and is responsible for investing the organization's surplus funds. Due to the recent retirement of the charity's chief financial officer, Emara has been assigned to temporarily take on some additional responsibilities regarding management accounting and internal auditing. These additional responsibilities have reduced the amount of time Emara can devote to investment research. To comply with the equity allocation guidelines of his organization's investment policy, Emara invests in a popular broad-based equity index fund without performing any specific evaluation of the fund. Emara is also an activist with a community group that opposes a regional hospital's plan to close down its local emergency services. Emara has been arrested twice while participating in weekend protests of the hospital's plans. Based on this information, has Emara most likely violated Standard I(D)?"

Zhang Yong, CFA, is a CFA Institute volunteer who is helping create material for the upcoming Level III CFA exam. Zhang meets with CFA Institute staff and other question writers and is assigned to write an essay question about portfolio management for a college endowment fund. At dinner one night, Zhang tells his friend, Li Min, CFA, about the question he is working on. Li manages the endowment fund of a local university, and Zhang believes that Li can provide helpful insight. Has Zhang most likely violated Standard VII(A) Conduct as Participants in CFA Institute Programs?

"Deshawn Walker, CFA, and Jevon Glover, MD, grew up together and remain close friends today. Walker is a manager at Primary Partners Associates (PPA) and works on the Small Cap Sciences Fund, which focuses on health-care securities with great upside potential. Glover recently left his medical practice and now works for a sell-side securities firm where he is researching Cancer Advances Corp. (CAC), a company that uses artificial intelligence to design cancer drugs. CAC has yet to become profitable, but Glover feels optimistic based on its pipeline. He strongly suggests that Walker take a position in CAC since he expects the company to outperform. Walker conducts thorough due diligence and concludes that CAC is riskier than its peers but also that the company could see significantly higher returns if regulators approve certain drugs. Therefore, he deems CAC appropriate for the Small Cap Sciences Fund. Regarding the purchase of CAC stock for the fund, Walker will most likely comply with Standard VI(A) Disclosure of Conflicts if he:"