Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester of studies for her MBA. She took the Level 3 CFA® exam in June but has not yet received her score. Garvey’s work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo Engineering, a small stock he has tried repeatedly to convince the investment director to add to the monitored list. While the investment director does not like Vallo, Topel has faith in the company and has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last week at the office doing research on Koral. She has concluded that the stock is undervalued and consensus earnings estimates are conservative. However, she has not filed a report for Samson, nor does she intend to. She said she has purchased the stock for herself and advises her colleagues to do the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district to supplement her income. The dinner crowd includes many analysts and brokers who work at nearby businesses. While waiting tables that night, Garvey hears two employees of a major brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that the broker’s star analyst has issued a report with a buy rating on Metrona that morning. The diners plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon afterward, she receives a call from Harold Koons, one of Samson’s largest money-management clients. Koons says he got Garvey’s name from Bertha Witt, who manages the Koons’ account. Koons wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not mention the gift from Jones. May approves the Koons’ gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker. Garvey’s gathers quarterly data on the company’s sales and profits over the past two years. Garvey uses a simple linear regression to estimate the relationship between GDP growth and Zenith’s sales growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I’m not a bond expert, and I’ve turned to a colleague for advice on how to manage the fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries, instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an online placement service.
In it she makes the following two statements:
Statement 1: I’m a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of financial instruments as well as knowledge of the forces that drive our economy and financial markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester. As both an MBA and a CFA, I’ll be in high demand. Hire me now while you still have the chance.
During the lunch conversation, which CFA Institute Standard of Professional Conduct was most likely violated?
- A . III(B) Fair Dealing.
- B . IV(A) Loyalty.
- C . V(A) Reasonable Basis.
B
Explanation:
Topel recommended the stock to his superiors, but they chose not to buy it. While Topcl should not buy the stock in advance of his recommendation, he is not prohibited from purchasing it for himself should the company choose not to act. Kennedys research may have been thorough, and there is no evidence that she violated the reasonable-basis Standard.
However, the loyalty Standard requires that Kennedy put Samson Securities’ interest before her own and not deprive her employer of her skills and abilities. Since Kennedy spent five days of company time researching Koral Koatings, the company has a right to benefit from her research. (Study Session 1, LOS 2.a)
Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester of studies for her MBA. She took the Level 3 CFA® exam in June but has not yet received her score. Garvey’s work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo Engineering, a small stock he has tried repeatedly to convince the investment director to add to the monitored list. While the investment director does not like Vallo, Topel has faith in the company and has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last week at the office doing research on Koral. She has concluded that the stock is undervalued and consensus earnings estimates are conservative. However, she has not filed a report for Samson, nor does she intend to. She said she has purchased the stock for herself and advises her colleagues to do the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district to supplement her income. The dinner crowd includes many analysts and brokers who work at nearby businesses. While waiting tables that night, Garvey hears two employees of a major brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that the broker’s star analyst has issued a report with a buy rating on Metrona that morning. The diners plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon afterward, she receives a call from Harold Koons, one of Samson’s largest money-management clients. Koons says he got Garvey’s name from Bertha Witt, who manages the Koons’ account. Koons wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not mention the gift from Jones. May approves the Koons’ gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker. Garvey’s gathers quarterly data on the company’s sales and profits over the past two years. Garvey uses a simple linear regression to estimate the relationship between GDP growth and Zenith’s sales growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I’m not a bond expert, and I’ve turned to a colleague for advice on how to manage the fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries, instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an online placement service.
In it she makes the following two statements:
Statement 1: I’m a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of financial instruments as well as knowledge of the forces that drive our economy and financial markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester. As both an MBA and a CFA, I’ll be in high demand. Hire me now while you still have the chance.
Does Garvey’s acceptance of the gifts from Koons and Jones violate Standard 1(B) Independence and Objectivity?
- A . Accepting Koons’ gift was a violation.
- B . Accepting Jones* gift was a violation.
- C . Neither gift would result in a violation.
C
Explanation:
The Koons’ gift does not violate Standard 1(B). According to the standard, gifts from clients are different from gifts from other parties because the potential for obtaining influence to the detriment of other clients is not as great. Therefore, according to the standard, Garvey may accept the Koons’ gift as long as she discloses it to her employer, which she did. See Example 7 on pages 22 and 23 of the Standards of Practice Handbook, 9th edition^ for an example of how the standard was applied in a similar situation.
Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester of studies for her MBA. She took the Level 3 CFA® exam in June but has not yet received her score. Garvey’s work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo Engineering, a small stock he has tried repeatedly to convince the investment director to add to the monitored list. While the investment director does not like Vallo, Topel has faith in the company and has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last week at the office doing research on Koral. She has concluded that the stock is undervalued and consensus earnings estimates are conservative.
However, she has not filed a report for Samson, nor does she intend to. She said she has purchased the stock for herself and advises her colleagues to do the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district to supplement her income. The dinner crowd includes many analysts and brokers who work at nearby businesses. While waiting tables that night, Garvey hears two employees of a major brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that the broker’s star analyst has issued a report with a buy rating on Metrona that morning. The diners plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon afterward, she receives a call from Harold Koons, one of Samson’s largest money-management clients. Koons says he got Garvey’s name from Bertha Witt, who manages the Koons’ account. Koons wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not mention the gift from Jones. May approves the Koons’ gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker. Garvey’s gathers quarterly data on the company’s sales and profits over the past two years. Garvey uses a simple linear regression to estimate the relationship between GDP growth and Zenith’s sales growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I’m not a bond expert, and I’ve turned to a colleague for advice on how to manage the fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries, instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an online placement service.
In it she makes the following two statements:
Statement 1: I’m a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of financial instruments as well as knowledge of the forces that drive our economy and financial markets. Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.
As both an MBA and a CFA, I’ll be in high demand. Hire me now while you still have the chance.
Did Garvey violate Standard 11(A) Material Nonpublic Information when she purchased Vallo and Metrona?
- A . Buying Vallo was a violation.
- B . Buying Metrona was a violation.
- C . Neither purchase was a violation.
C
Explanation:
Topels purchases of Vallo do not violate Standard 11(A) because ii was not based on material nonpublic information, and he has no duty to keep the information to himself Therefore, Garvey’s purchase of Vallo for her own account is also consistent with Standard 11(A).
Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester of studies for her MBA. She took the Level 3 CFA® exam in June but has not yet received her score. Garvey’s work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo Engineering, a small stock he has tried repeatedly to convince the investment director to add to the monitored list. While the investment director does not like Vallo, Topel has faith in the company and has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last week at the office doing research on Koral. She has concluded that the stock is undervalued and consensus earnings estimates are conservative.
However, she has not filed a report for Samson, nor does she intend to. She said she has purchased the stock for herself and advises her colleagues to do the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district to supplement her income. The dinner crowd includes many analysts and brokers who work at nearby businesses. While waiting tables that night, Garvey hears two employees of a major brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that the broker’s star analyst has issued a report with a buy rating on Metrona that morning. The diners plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon afterward, she receives a call from Harold Koons, one of Samson’s largest money-management clients. Koons says he got Garvey’s name from Bertha Witt, who manages the Koons’ account. Koons wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not mention the gift from Jones. May approves the Koons’ gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker. Garvey’s gathers quarterly data on the company’s sales and profits over the past two years. Garvey uses a simple linear regression to estimate the relationship between GDP growth and Zenith’s sales growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I’m not a bond expert, and I’ve turned to a colleague for advice on how to manage the fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries, instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an online placement service.
In it she makes the following two statements:
Statement 1: I’m a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of financial instruments as well as knowledge of the forces that drive our economy and financial markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.
As both an MBA and a CFA, I’ll be in high demand. Hire me now while you still have the chance.
In her estimation of Zenith’s future growth rate, what standard did Garvey violate?
- A . Standard 1(C) Misrepresentation regarding plagiarism.
- B . Standard V(A) Diligence and Reasonable Basis.
- C . Both 1(C) and V(A).
B
Explanation:
Garveys idea for a growth estimate is interesting, but a number of factors affect the growth rate of a beverage company, many arguably more so than GDP growth. In addition, it is not sufficient to use two years worth of quarterly data (eight observations) to estimate a regression model and forecast growth over the following three years. The research was not thorough enough to satisfy Standard V(A).
Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester of studies for her MBA. She took the Level 3 CFA® exam in June but has not yet received her score. Garvey’s work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo Engineering, a small stock he has tried repeatedly to convince the investment director to add to the monitored list. While the investment director does not like Vallo, Topel has faith in the company and has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last week at the office doing research on Koral. She has concluded that the stock is undervalued and consensus earnings estimates are conservative.
However, she has not filed a report for Samson, nor does she intend to. She said she has purchased the stock for herself and advises her colleagues to do the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district to supplement her income. The dinner crowd includes many analysts and brokers who work at nearby businesses. While waiting tables that night, Garvey hears two employees of a major brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that the broker’s star analyst has issued a report with a buy rating on Metrona that morning. The diners plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon afterward, she receives a call from Harold Koons, one of Samson’s largest money-management clients. Koons says he got Garvey’s name from Bertha Witt, who manages the Koons’ account. Koons wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not mention the gift from Jones. May approves the Koons’ gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker. Garvey’s gathers quarterly data on the company’s sales and profits over the past two years. Garvey uses a simple linear regression to estimate the relationship between GDP growth and Zenith’s sales growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I’m not a bond expert, and I’ve turned to a colleague for advice on how to manage the fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries, instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an online placement service.
In it she makes the following two statements:
Statement 1: I’m a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of financial instruments as well as knowledge of the forces that drive our economy and financial markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.
As both an MBA and a CFA, I’ll be in high demand. Hire me now while you still have the chance.
Which of Bloomquist’s statements most likely applies to both the Prudent Man Rule and the Prudent Investor Rule?
- A . Statement 1.
- B . Statement 2.
- C . Statement 3.
B
Explanation:
The impartiality standard requires prudent handling of different interests, such as those of different beneficiaries. This standard changed very little with the adoption of the Prudent Investor Rule. All of the other statements reflect provisions of the Prudent Investor Rule rhat would not have been permitted under rhe old Prudent Man Rule. Under the old Prudent Man Rule:
– The trustee was not allowed to delegate any duties to others.
– The preservation of the principal and purchasing power by earning a return sufficient to offset inflation was required. Under the new Prudent Investor Rule, growth in the real value of the principal (returns in excess of inflation) is permissible. (Study Session 2, LOS lO.c)
Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester of studies for her MBA. She took the Level 3 CFA® exam in June but has not yet received her score. Garvey’s work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo Engineering, a small stock he has tried repeatedly to convince the investment director to add to the monitored list. While the investment director does not like Vallo, Topel has faith in the company and has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last week at the office doing research on Koral. She has concluded that the stock is undervalued and consensus earnings estimates are conservative.
However, she has not filed a report for Samson, nor does she intend to. She said she has purchased the stock for herself and advises her colleagues to do the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district to supplement her income. The dinner crowd includes many analysts and brokers who work at nearby businesses. While waiting tables that night, Garvey hears two employees of a major brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that the broker’s star analyst has issued a report with a buy rating on Metrona that morning. The diners plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon afterward, she receives a call from Harold Koons, one of Samson’s largest money-management clients. Koons says he got Garvey’s name from Bertha Witt, who manages the Koons’ account. Koons wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not mention the gift from Jones. May approves the Koons’ gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker. Garvey’s gathers quarterly data on the company’s sales and profits over the past two years. Garvey uses a simple linear regression to estimate the relationship between GDP growth and Zenith’s sales growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I’m not a bond expert, and I’ve turned to a colleague for advice on how to manage the fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries, instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an online placement service.
In it she makes the following two statements:
Statement 1: I’m a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of financial instruments as well as knowledge of the forces that drive our economy and financial markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.
As both an MBA and a CFA, I’ll be in high demand. Hire me now while you still have the chance.
Did the two statements in Garvey’s biography violate Standard VII(B) Reference to CFA Institute, the CFA designation, and the CFA program?
- A . Statement 1 is a violation.
- B . Statement 2 is a violation.
- C . Both statements are violations.
C
Explanation:
In the first statement, Garvey accurately calls herself a CFA Level 3 candidate, but she is not permitted to project when she will receive the charter, as she must still meet the work and eligibility restrictions and pass the Level 3 exam. Therefore, the first statement violates Standard VII(B).
In the second statement, the use of the CFA mark as a noun also violates the Standard VII(B). {Study Session 1, LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market volatility has led Islandwide to incur record-high trading volume and commissions with Quadrangle for the quarter. In appreciation of Islandwide’s business, Quadrangle offers Harris an all-expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation between the president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that Progressive’s board of directors has just approved dropping the company’s cash dividend, despite its record of paying dividends for the past 46 quarters. The company plans to announce this information in about a week. Harris owns Progressive’s common stock and immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on the board of directors of Landmark Enterprises, a private company owned by her brother-in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on investing their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy’s. Clark participates in a conference call for several analysts in which the chief executive officer at Dex says his company’s board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a 40% premium over the market price. Clark contacts a friend and relates the information about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex’s stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the price of a small-cap stock, in which Islandwide owns shares, by approximately 5% because the orders were large in relation to the average daily trading volume of the stock. Michaels’ firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an oversubscribed IPO. One of his clients has been complaining about the execution price of a trade Park made for her last month, but Park knows from researching it that the trade received the best possible execution. In order to calm the client down. Park increases her allocation of shares in the IPO above what it would be if he allocated them to all suitable client accounts based on account size. He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary beneficiary.
By accepting the trip from Quadrangle, has Harris complied with the CFA Institute Code and Standards?
- A . Harris may accept the trip since she maintains a significant relationship with Quadrangle that contributes to the performance of client accounts.
- B . Harris may accept the trip since she disclosed the trip to her supervisor and compliance officer and accepted based on their approval.
- C . Harris may not accept the trip since the offer from Quadrangle could impede her ability to make objective investment decisions on behalf of the client.
C
Explanation:
Standard I{B) Professionalism: Independence and Objectivity prohibits members and candidates from accepting any gift that reasonably could be expected to compromise their independence and objectivity. The purpose of the gift appears to be to ensure that Islandwide continues to do business with Quadrangle and can be seen, therefore, as a clear attempt to influence her choice of brokers in the future. (Study Session 1, LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market volatility has led Islandwide to incur record-high trading volume and commissions with Quadrangle for the quarter. In appreciation of Islandwide’s business, Quadrangle offers Harris an all-expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation between the president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that Progressive’s board of directors has just approved dropping the company’s cash dividend, despite its record of paying dividends for the past 46 quarters. The company plans to announce this information in about a week. Harris owns Progressive’s common stock and immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on the board of directors of Landmark Enterprises, a private company owned by her brother-in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on investing their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy’s. Clark participates in a conference call for several analysts in which the chief executive officer at Dex says his company’s board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a 40% premium over the market price. Clark contacts a friend and relates the information about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex’s stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the price of a small-cap stock, in which Islandwide owns shares, by approximately 5% because the orders were large in relation to the average daily trading volume of the stock. Michaels’ firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an oversubscribed IPO. One of his clients has been complaining about the execution price of a trade Park made for her last month, but Park knows from researching it that the trade received the best possible execution. In order to calm the client down. Park increases her allocation of shares in the IPO above what it would be if he allocated them to all suitable client accounts based on account size. He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary beneficiary.
Has either Harris or Clark violated Standard 11(A) Integrity of Capital Markets: Material Nonpublic Information?
- A . Harris is in violation.
- B . Clark is in violation.
- C . Both are in violation.
C
Explanation:
Standard 11(A) Integrity of Capital Markets: Material Nonpublic Information prohibits members who possess material nonpublic information to act on or cause others to act on that information. Information disclosed to a select group of analysts is not made "public" by that fact. (Study Session 1, LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market volatility has led Islandwide to incur record-high trading volume and commissions with Quadrangle for the quarter. In appreciation of Islandwide’s business, Quadrangle offers Harris an all-expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation between the president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that Progressive’s board of directors has just approved dropping the company’s cash dividend, despite its record of paying dividends for the past 46 quarters. The company plans to announce this information in about a week. Harris owns Progressive’s common stock and immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on the board of directors of Landmark Enterprises, a private company owned by her brother-in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on investing their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy’s. Clark participates in a conference call for several analysts in which the chief executive officer at Dex says his company’s board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a 40% premium over the market price. Clark contacts a friend and relates the information about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex’s stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the price of a small-cap stock, in which Islandwide owns shares, by approximately 5% because the orders were large in relation to the average daily trading volume of the stock. Michaels’ firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an oversubscribed IPO. One of his clients has been complaining about the execution price of a trade Park made for her last month, but Park knows from researching it that the trade received the best possible execution. In order to calm the client down. Park increases her allocation of shares in the IPO above what it would be if he allocated them to all suitable client accounts based on account size. He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary beneficiary.
According to the Standards of Practice, with respect to the two offers from Adams and Baker, Harris:
- A . may accept both offers if she discloses them to her employer.
- B . may accept both gifts only if she discloses them to her employer and receives permission.
- C . must disclose the offer from Adams to her employer if she accepts it but must receive her employer’s permission to accept the offer from Baker.
C
Explanation:
Standard 1(B) Professionalism: Independence and Objectivity indicates that gifts from clients are seen to less likely affect a member’s independence and objectivity, and only disclosure is required. The offer from Baker is based on future performance and is seen to carry greater risk of affecting objectivity because preferential treatment for one client could be detrimental to others. Thus, according to Standard IV (B) Duties to Employer: Additional Compensation Arrangements, Harris must disclose the offer to her employer (in writing) and receive the employer’s permission before accepting the offer from Baker. (Study Session 1, LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market volatility has led Islandwide to incur record-high trading volume and commissions with Quadrangle for the quarter. In appreciation of Islandwide’s business, Quadrangle offers Harris an all-expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation between the president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that Progressive’s board of directors has just approved dropping the company’s cash dividend, despite its record of paying dividends for the past 46 quarters. The company plans to announce this information in about a week. Harris owns Progressive’s common stock and immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on the board of directors of Landmark Enterprises, a private company owned by her brother-in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on investing their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy’s. Clark participates in a conference call for several analysts in which the chief executive officer at Dex says his company’s board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a 40% premium over the market price. Clark contacts a friend and relates the information about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex’s stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the price of a small-cap stock, in which Islandwide owns shares, by approximately 5% because the orders were large in relation to the average daily trading volume of the stock. Michaels’ firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an oversubscribed IPO. One of his clients has been complaining about the execution price of a trade Park made for her last month, but Park knows from researching it that the trade received the best possible execution. In order to calm the client down. Park increases her allocation of shares in the IPO above what it would be if he allocated them to all suitable client accounts based on account size. He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary beneficiary.
Has Michaels violated Standard 11(B) Integrity of Capital Markets: Manipulation with respect to any of the following?
- A . The buy program is a violation.
- B . The liquidity activity is a violation.
- C . There is no violation.
C
Explanation:
Michaels has not violated Standard 11(B) Integrity of Capital Markets: Market Manipulation by either of these actions. In neither case is there the intent to mislead market participants. A large buy program may well increase the price of a stock. The trading desk has informed market participants that they will create additional liquidity for a period of 90 days after the offering and created no expectation that the liquidity of the stock will permanently remain at that level. (Study Session 1, LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market volatility has led Islandwide to incur record-high trading volume and commissions with Quadrangle for the quarter. In appreciation of Islandwide’s business, Quadrangle offers Harris an all-expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation between the president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that Progressive’s board of directors has just approved dropping the company’s cash dividend, despite its record of paying dividends for the past 46 quarters. The company plans to announce this information in about a week. Harris owns Progressive’s common stock and immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on the board of directors of Landmark Enterprises, a private company owned by her brother-in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on investing their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy’s. Clark participates in a conference call for several analysts in which the chief executive officer at Dex says his company’s board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a 40% premium over the market price. Clark contacts a friend and relates the information about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex’s stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the price of a small-cap stock, in which Islandwide owns shares, by approximately 5% because the orders were large in relation to the average daily trading volume of the stock. Michaels’ firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an oversubscribed IPO. One of his clients has been complaining about the execution price of a trade Park made for her last month, but Park knows from researching it that the trade received the best possible execution. In order to calm the client down. Park increases her allocation of shares in the IPO above what it would be if he allocated them to all suitable client accounts based on account size. He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary beneficiary.
According to Standard IV Duties to Employers, which of the following is most likely required of Swamy? Swamy must:
- A . secure written permission from her employer before performing services for the symphony.
- B . inform her immediate supervisor at Dillon in writing that she (Swamy) must comply with the Code and Standards.
- C . disclose to her employer any additional compensation she receives from Landmark Enterprises and secure written permission to serve on the board.
A
Explanation:
According co Standard IV Duties to Employers, Swamy must secure written permission before undertaking the investment advisory work for the symphony because this work competes with her employer and could create a conflict of interest, as she is receiving compensation in the form of season tickets. Her service on her brother-in-law’s board may be subject to employer rules about outside employment but is not covered by the Standard since there is no likely competition or potential conflict with her employer. The question says most likely, so it is important to focus on rhe key difference between the two outside activities. Both are compensated; the fact that one is cash and the other tickets is irrelevant. The key difference is that for the symphony, Swamy is acting as an investment advisor for a large endowment, which clearly competes with her employer’s business. (Study Session 1, LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market volatility has led Islandwide to incur record-high trading volume and commissions with Quadrangle for the quarter. In appreciation of Islandwide’s business, Quadrangle offers Harris an all-expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation between the president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that Progressive’s board of directors has just approved dropping the company’s cash dividend, despite its record of paying dividends for the past 46 quarters. The company plans to announce this information in about a week. Harris owns Progressive’s common stock and immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on the board of directors of Landmark Enterprises, a private company owned by her brother-in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on investing their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy’s. Clark participates in a conference call for several analysts in which the chief executive officer at Dex says his company’s board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a 40% premium over the market price. Clark contacts a friend and relates the information about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex’s stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the price of a small-cap stock, in which Islandwide owns shares, by approximately 5% because the orders were large in relation to the average daily trading volume of the stock. Michaels’ firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an oversubscribed IPO. One of his clients has been complaining about the execution price of a trade Park made for her last month, but Park knows from researching it that the trade received the best possible execution. In order to calm the client down. Park increases her allocation of shares in the IPO above what it would be if he allocated them to all suitable client accounts based on account size. He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary beneficiary.
According to Standard IV Duties to Employers, which of the following is most likely required of Swamy? Swamy must:
Which action by Park violated Standard III(B) Duties to Clients: Fair Dealing?
- A . Increasing allocation to the problem client.
- B . Decreased allocation to the brother-in-law and other firm clients.
- C . Both actions are violations.
C
Explanation:
Standard III(B) Fair Dealing requires that shares of an oversubscribed IPO be prorated fairly to all subscribers. Arbitrarily increasing the allocation to the "problem client" is a violation, as is the resulting under allocation to the remainder of the firm’s clients. (Study Session 1, LOS 2.a)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm that employs three investment professionals and currently has approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts to a $30 million private school endowment. In addition to Burton’s administrative responsibilities as the managing partner at United, he also serves as an investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United’s business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners. Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for the private school endowment, Unitcd’s largest client. Burton states that the composite’s management style and performance results are representative of the management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United’s three investment professionals. Crossley notices that all three of United’s investment professionals are described as "CFA charterholders," but he is not familiar with the designation. In response to Crossley’s inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts Crossley’s brother-in-law and determines that Security Bank’s trade execution is competitive, but Crossley’s account alone would not generate enough volume to warrant any soft dollar arrangement for research materials.
However, Crossley’-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United’s clients to Security Bank’s retail banking division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley’s trades but will use research materials provided by the other two brokers to assist in the management of Crossley’s account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare’s IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare equity. Crossley heeds Burton’s advice and tells him to purchase 5,000 shares. Before placing Crossley’s order, Burton reads the SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley’s portfolio. United Partners, being a small firm, has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton adds his order to Crossley’s order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley’s account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a position, though smaller than requested, in such a "hot" offering.
Did the marketing materials presented to Crossley by Burton violate Standard III(D) Performance Presentation or Standard VI 1(B) Reference to CFA Institute, the CFA Designation, and the CFA Program?
- A . Standard III(D) only.
- B . Standard VII(B) only.
- C . Both Standard III(D) and Standard VIT(B) are violated.
A
Explanation:
By presenting one client account as a representative composite of United’s past performance, as well as implying that it is representative of future performance, Burton is in violation of Standard III(D) Performance Presentation. A member or candidate should give a fair and complete presentation of performance and not state or imply that clients will obtain or benefit from a rate of return that was generated in the past.
Burton’s references to the CFA program in his marketing materials were acceptable according Standard V1I(B) Reference to CFA Institute, the CFA Designation, and the CFA Program. The Standard states that members and candidates may make references to the rigor of the program and the commitment of members and candidates to ethical and professional standards.
However, statements must not exaggerate the meaning or implications of the designation, membership in CFA Institute, or candidacy. {Study Session l, LOS 2.a)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm that employs three investment professionals and currently has approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts to a $30 million private school endowment. In addition to Burton’s administrative responsibilities as the managing partner at United, he also serves as an investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United’s business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners. Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for the private school endowment, Unitcd’s largest client. Burton states that the composite’s management style and performance results are representative of the management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United’s three investment professionals. Crossley notices that all three of United’s investment professionals are described as "CFA charterholders," but he is not familiar with the designation. In response to Crossley’s inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts Crossley’s brother-in-law and determines that Security Bank’s trade execution is competitive, but Crossley’s account alone would not generate enough volume to warrant any soft dollar arrangement for research materials.
However, Crossley’-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United’s clients to Security Bank’s retail banking division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley’s trades but will use research materials provided by the other two brokers to assist in the management of Crossley’s account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare’s IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare equity. Crossley heeds Burton’s advice and tells him to purchase 5,000 shares. Before placing Crossley’s order, Burton reads the SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley’s portfolio. United Partners, being a small firm, has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton adds his order to Crossley’s order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley’s account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a position, though smaller than requested, in such a "hot" offering.
The trading arrangement between Burton and Security Bank is most likely to be a violation of the CFA Institute Soft Dollar Standards because:
- A . the practice of directed brokerage violates the member’s or candidate’s duty of loyalty to the client.
- B . although Security Bank’s execution is competitive, Burton will not be able to always obtain the best execution for his client.
- C . the other clients’ brokerage will be used to pay for research that will be utilized in the management of Crossley’s account.
C
Explanation:
According to CFA Institute Soft Dollar Standards, research paid for by client brokerage is the property of the client, and the research should benefit the client. If the research is for the benefit of other clients, in this case Crossley, disclosure must be made to the client, and prior permission must be obtained. (Study Session I, LOS 3.b)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm that employs three investment professionals and currently has approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts to a $30 million private school endowment. In addition to Burton’s administrative responsibilities as the managing partner at United, he also serves as an investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United’s business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners. Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for the private school endowment, Unitcd’s largest client. Burton states that the composite’s management style and performance results are representative of the management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United’s three investment professionals. Crossley notices that all three of United’s investment professionals are described as "CFA charterholders," but he is not familiar with the designation. In response to Crossley’s inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts Crossley’s brother-in-law and determines that Security Bank’s trade execution is competitive, but Crossley’s account alone would not generate enough volume to warrant any soft dollar arrangement for research materials.
However, Crossley’-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United’s clients to Security Bank’s retail banking division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley’s trades but will use research materials provided by the other two brokers to assist in the management of Crossley’s account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare’s IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare equity. Crossley heeds Burton’s advice and tells him to purchase 5,000 shares. Before placing Crossley’s order, Burton reads the SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley’s portfolio. United Partners, being a small firm, has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton adds his order to Crossley’s order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley’s account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a position, though smaller than requested, in such a "hot" offering.
According to CFA Institute Standards of Professional Conduct, which of the following statements best describes the circumstances under which Burton may enter into the referral agreement with Security Bank? Burton may enter into the agreement:
- A . under no circumstances.
- B . only after receiving written permission from clients.
- C . only after fully disclosing the referral arrangement to clients and prospective clients.
C
Explanation:
Standard VI(C) Referral Fees states that members and candidates must disclose to their clients and prospective clients any compensation or benefit received for the recommendation of services. In this case. Burton may accept a referral fee if he discloses it to the client so that the client may evaluate any partiality shown in the recommendation. (Study Session 1, LOS 2.a)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm that employs three investment professionals and currently has approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts to a $30 million private school endowment. In addition to Burton’s administrative responsibilities as the managing partner at United, he also serves as an investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United’s business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners. Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for the private school endowment, Unitcd’s largest client. Burton states that the composite’s management style and performance results are representative of the management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United’s three investment professionals. Crossley notices that all three of United’s investment professionals are described as "CFA charterholders," but he is not familiar with the designation. In response to Crossley’s inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts Crossley’s brother-in-law and determines that Security Bank’s trade execution is competitive, but Crossley’s account alone would not generate enough volume to warrant any soft dollar arrangement for research materials.
However, Crossley’-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United’s clients to Security Bank’s retail banking division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley’s trades but will use research materials provided by the other two brokers to assist in the management of Crossley’s account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare’s IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare equity. Crossley heeds Burton’s advice and tells him to purchase 5,000 shares. Before placing Crossley’s order, Burton reads the SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley’s portfolio. United Partners, being a small firm, has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton adds his order to Crossley’s order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley’s account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a position, though smaller than requested, in such a "hot" offering.
With respect to the road show meeting regarding the initial public offering of Solution Ware, did Security Bank comply with the requirements and recommendations of the CFA Institute Research Objectivity Standards?
- A . No, because it publicly revealed that it also provides corporate finance services for Solution Ware.
- B . No, because it failed to provide Burton with adequate information to make an investment decision.
- C . No, because it allowed an analyst to participate in a marketing road show for a company that he covers.
C
Explanation:
According to Requirement 4.0 Investment Banking of the CFA Institute Research Objectivity Standards, firms must prohibit communication between members of the research and investment banking divisions. Recommended compliance procedures for Requirement 4.0 include prohibiting analysts from participating in marketing road shows. Therefore, while Security Bank complies with all of the requirements of the Standards, it does not comply with all of the recommendations.
Under Requirement 10.0 Disclosure, firms are required to disclose all conflicts of interest to which the firm or its covered employees are subject, including whether the firm engages in any investment banking or other corporate finance activities. Therefore, "publicly revealing" the relationship is not a violation of the client’s confidentiality. (Study Session 1, LOS 4.b)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm that employs three investment professionals and currently has approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts to a $30 million private school endowment. In addition to Burton’s administrative responsibilities as the managing partner at United, he also serves as an investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United’s business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners. Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for the private school endowment, Unitcd’s largest client. Burton states that the composite’s management style and performance results are representative of the management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United’s three investment professionals. Crossley notices that all three of United’s investment professionals are described as "CFA charterholders," but he is not familiar with the designation. In response to Crossley’s inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts Crossley’s brother-in-law and determines that Security Bank’s trade execution is competitive, but Crossley’s account alone would not generate enough volume to warrant any soft dollar arrangement for research materials.
However, Crossley’-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United’s clients to Security Bank’s retail banking division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley’s trades but will use research materials provided by the other two brokers to assist in the management of Crossley’s account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare’s IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare equity. Crossley heeds Burton’s advice and tells him to purchase 5,000 shares. Before placing Crossley’s order, Burton reads the SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley’s portfolio. United Partners, being a small firm, has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton adds his order to Crossley’s order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley’s account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a position, though smaller than requested, in such a "hot" offering.
According to CFA Institute Standards of Professional Conduct, Burton’s recommendation to Crossley that he purchase shares of the Solution Ware initial public offering is most likely:
- A . in violation of Standard III(C) Suitability for not determining the appropriateness of the investment for the portfolio and Standard III(B) Fair Dealing for not making the investment recommendation to all of his clients at the same time.
- B . in violation of Standard V(A) Diligence and Reasonable Basis for not thoroughly analyzing the investment before making a recommendation and in violation of Standard III(C) Suitability for not determining the appropriateness of the investment for the portfolio.
- C . in violation of Standard V(A) Diligence and Reasonable Basis for not thoroughly analyzing the investment before making a recommendation and in violation of Standard III(B) Fair Dealing for not making the investment recommendation to all of his clients at the same time.
B
Explanation:
Standard V(A) Diligence and Reasonable Basis stares that the member or candidate must exercise diligence, independence, and thoroughness before making an investment recommendation. The Standard also requires that members and candidates have a reasonable and adequate basis supported by research and investigation for any investment recommendations or actions. Burton made his purchase recommendation to Crossley purely on the basis of the Security Bank road show and did not perform his own evaluation to determine whether or not the SolutionWarc IPO was a good investment opportunity. Burton has therefore violated Standard V(A).
Standard Iil(C) Suitability was also violated because there is no indication that Burton made any effort to determine if the investment was appropriate for Crossley’s portfolio. Burton should have determined that the investment was consistent with Crossley’s written objectives and constraints before he recommended the investment. Even though he later determined that the investment was suitable, he did not know this was the case before he told Crossley that he should purchase shares in the IPO. (Study Session 1, LOS 2.a)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm that employs three investment professionals and currently has approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts to a $30 million private school endowment. In addition to Burton’s administrative responsibilities as the managing partner at United, he also serves as an investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United’s business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners. Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for the private school endowment, Unitcd’s largest client. Burton states that the composite’s management style and performance results are representative of the management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United’s three investment professionals. Crossley notices that all three of United’s investment professionals are described as "CFA charterholders," but he is not familiar with the designation. In response to Crossley’s inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts Crossley’s brother-in-law and determines that Security Bank’s trade execution is competitive, but Crossley’s account alone would not generate enough volume to warrant any soft dollar arrangement for research materials.
However, Crossley’-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United’s clients to Security Bank’s retail banking division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley’s trades but will use research materials provided by the other two brokers to assist in the management of Crossley’s account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare’s IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare equity. Crossley heeds Burton’s advice and tells him to purchase 5,000 shares. Before placing Crossley’s order, Burton reads the SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley’s portfolio. United Partners, being a small firm, has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton adds his order to Crossley’s order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley’s account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a position, though smaller than requested, in such a "hot" offering.
According to CFA Standards of Professional Conduct, Burton’s participation in the Solution Ware offering most likely:
- A . is in violation of the Standards because his actions adversely affected the interests of Crossley.
- B . is in violation of the Standards because he did not disclose his participation in the offering to Security Bank.
- C . is not in violation of the Standards since the shares obtained in the IPO were distributed equitably on a pro rata basis.
A
Explanation:
Standard VI(B) Priority of Transactions clearly states that-investment transactions for clients must have priority over members’ and candidates’ transactions. Members and candidates can profit from personal investments as long as the client is not disadvantaged by the trade. By taking a portion of the IPO shares for his own account, Burton has ensured that Crosslcy’s order will not be completely filled. It does not matter that the trade allocation was done on a pro rata basis; Burton should have placed his client’s transaction ahead of his own. (Study Session 1, LOS 2.a)
Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment advice and financial planning services globally to institutional and retail clients. Shortly after the company opened an office in Malaysia, Montpier’s supervisor in the New York office. Rick Reynolds, asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a source of international investment opportunities for U.S. clients. Montpier’s main task is to cover small-cap stocks in the region and develop a network of contacts with other investment firms in the region.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of material nonpublic information is common practice in analyst research reports and recommendations. Such practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she recently observed several investment bankers meeting numerous times at an exclusive local country club with the CEOs of two Malaysian rival companies. It is public information that one of the companies is searching for potential acquisition targets. She has thought several times about issuing a recommendation on one of the companies but has not done so for fear of breaking the law. After learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition target, which she had already established as a good investment through prior research.
Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements by investment professionals. It is common for analysts and portfolio managers to maintain ongoing consulting contracts with entities other than their primary employer. As a result of this, Montpier has begun financial service consultations for members of a local investment club. The club is developing an appropriate compensation package for her services, which to date have included financial planning activities and investment research. When Montpier established the relationship with the investment club, she informed them that she had a full-time job at World Renowned Advisers, which offers similar services.
After a year of consulting with the investment club, Malaysian law changed, requiring investment bankers, securities analysts, and portfolio managers to register with the Malaysian Securities Commission in order to engage in independent consulting practice. Since she is unaware of the change, Montpier does not file the proper registration forms and is later investigated, fined, and temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the sanction, but not the fine, removed after appealing the Commission’s ruling. Montpier’s counterpart in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for approximately seven years. Taylor researches health care and biotech stocks for the firm and participates in client meetings when managers are recommending stocks that Taylor covers. Taylor recently completed Level 1 of the CFA examination and is waiting for his results so he can register for the Level 2 examination.
In preparation for a client meeting, Taylor’s supervisor, Jessica James, asks him to prepare a research report on attractive companies in the health care industry. Since Taylor is busy preparing for company conference calls, James tells him to "throw something together from the street." To meet James’ request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has heard about but has not researched. Taylor takes the original reports he obtains from a third-party, adds some general industry information, and submits "strong buy" recommendations to James for the stocks. He does not credit the original authors in the report, which is a violation of copyright law. Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA Program." Although written procedures require James to review all analyst reports prior to release, time constraints often prevent her from reviewing the reports prior to distribution. James recommends the stocks to her clients, who then purchase them. Several months later, the clients are able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21% and 17%, respectively. James informs Taylor of the clients’ successful investments and requests that he begin investigating potential biotech investments for the same group of investors.
To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor indicates that he has the appropriate medical condition for the study and signs a confidentiality agreement, but he leaves the question about his occupation blank. During the study, Taylor learns that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have serious negative side effects in patient testing. This information confirms existing research that Taylor has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next Breakthrough releases information that the drugs in question have been held up by a regulatory agency pending additional investigation. The stock plunges over 30% on the news.
Has Montpier likely violated any CFA Standards of Professional Conduct by recommending the stock of the acquisition target company?
- A . Yes
- B . No, because she has already researched the company and deemed it a good investment.
- C . No, because she is recommending the stock based on information assembled under the mosaic theory.
C
Explanation:
If Montpier uses material, nonpublic information in her research reports and/or recommendations, she will comply with local industry practice and local law but will violate the Code and Standards [Standard 1(A) Knowledge of the Law and Standard 11(A) Material Nonpublic Information]. Montpicr has not used materia! nonpublic information, however. She has merely observed meetings between investment bankers and the company executives. By assembling this information with the well-known fact that one of the companies in the meetings is actively trying to acquire other companies, the information becomes material. This is the mosaic theory. Montpier has come to a conclusion of a material and nonpublic nature by assembling both public information and nonpublic, non-material information. Therefore she has not violated the Standards. (Study Session 1, LOS 2.a)
Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment advice and financial planning services globally to institutional and retail clients. Shortly after the company opened an office in Malaysia, Montpier’s supervisor in the New York office. Rick Reynolds, asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a source of international investment opportunities for U.S. clients. Montpier’s main task is to cover small-cap stocks in the region and develop a network of contacts with other investment firms in the region.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of material nonpublic information is common practice in analyst research reports and recommendations. Such practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she recently observed several investment bankers meeting numerous times at an exclusive local country club with the CEOs of two Malaysian rival companies. It is public information that one of the companies is searching for potential acquisition targets. She has thought several times about issuing a recommendation on one of the companies but has not done so for fear of breaking the law. After learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition target, which she had already established as a good investment through prior research.
Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements by investment professionals. It is common for analysts and portfolio managers to maintain ongoing consulting contracts with entities other than their primary employer. As a result of this, Montpier has begun financial service consultations for members of a local investment club. The club is developing an appropriate compensation package for her services, which to date have included financial planning activities and investment research. When Montpier established the relationship with the investment club, she informed them that she had a full-time job at World Renowned Advisers, which offers similar services.
After a year of consulting with the investment club, Malaysian law changed, requiring investment bankers, securities analysts, and portfolio managers to register with the Malaysian Securities Commission in order to engage in independent consulting practice. Since she is unaware of the change, Montpier does not file the proper registration forms and is later investigated, fined, and temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the sanction, but not the fine, removed after appealing the Commission’s ruling. Montpier’s counterpart in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for approximately seven years. Taylor researches health care and biotech stocks for the firm and participates in client meetings when managers are recommending stocks that Taylor covers. Taylor recently completed Level 1 of the CFA examination and is waiting for his results so he can register for the Level 2 examination.
In preparation for a client meeting, Taylor’s supervisor, Jessica James, asks him to prepare a research report on attractive companies in the health care industry. Since Taylor is busy preparing for company conference calls, James tells him to "throw something together from the street." To meet James’ request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has heard about but has not researched. Taylor takes the original reports he obtains from a third-party, adds some general industry information, and submits "strong buy" recommendations to James for the stocks. He does not credit the original authors in the report, which is a violation of copyright law. Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA Program." Although written procedures require James to review all analyst reports prior to release, time constraints often prevent her from reviewing the reports prior to distribution. James recommends the stocks to her clients, who then purchase them. Several months later, the clients are able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21% and 17%, respectively. James informs Taylor of the clients’ successful investments and requests that he begin investigating potential biotech investments for the same group of investors.
To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor indicates that he has the appropriate medical condition for the study and signs a confidentiality agreement, but he leaves the question about his occupation blank. During the study, Taylor learns that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have serious negative side effects in patient testing. This information confirms existing research that Taylor has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next Breakthrough releases information that the drugs in question have been held up by a regulatory agency pending additional investigation. The stock plunges over 30% on the news.
By not filing the proper registration forms with the Malaysian Securities Commission, did Montpier likely violate any CFA Institute Standards of Professional Conduct?
- A . Yes. Montpier attempted to deceive the Malaysian Securities Commission, which violates the Standards.
- B . No. Montpier‘s sanction was later removed, indicating the Commission did not hold her responsible for the oversight.
- C . Yes. Montpier should have regularly updated her knowledge about local laws and by not doing so violated the Standards.
C
Explanation:
Montpier has violated Standard I (A) Knowledge of the Law. It is a good idea for members to meet the compliance officer when starting a new job and periodically thereafter to keep informed about appropriate rules and regulations within the organization and in the regulatory environment that governs the member’s job responsibilities. This may be especially important if the member changes job functions or relocates to another location or jurisdiction. Maintaining current Hies of appropriate statutes, rules, and regulations, as well as internal policies and procedures, is also effective for maintaining compliance. (Study Session 1, LOS 2.a)
Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment advice and financial planning services globally to institutional and retail clients. Shortly after the company opened an office in Malaysia, Montpier’s supervisor in the New York office. Rick Reynolds, asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a source of international investment opportunities for U.S. clients. Montpier’s main task is to cover small-cap stocks in the region and develop a network of contacts with other investment firms in the region.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of material nonpublic information is common practice in analyst research reports and recommendations. Such practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she recently observed several investment bankers meeting numerous times at an exclusive local country club with the CEOs of two Malaysian rival companies. It is public information that one of the companies is searching for potential acquisition targets. She has thought several times about issuing a recommendation on one of the companies but has not done so for fear of breaking the law. After learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition target, which she had already established as a good investment through prior research.
Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements by investment professionals. It is common for analysts and portfolio managers to maintain ongoing consulting contracts with entities other than their primary employer. As a result of this, Montpier has begun financial service consultations for members of a local investment club. The club is developing an appropriate compensation package for her services, which to date have included financial planning activities and investment research. When Montpier established the relationship with the investment club, she informed them that she had a full-time job at World Renowned Advisers, which offers similar services.
After a year of consulting with the investment club, Malaysian law changed, requiring investment bankers, securities analysts, and portfolio managers to register with the Malaysian Securities Commission in order to engage in independent consulting practice. Since she is unaware of the change, Montpier does not file the proper registration forms and is later investigated, fined, and temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the sanction, but not the fine, removed after appealing the Commission’s ruling. Montpier’s counterpart in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for approximately seven years. Taylor researches health care and biotech stocks for the firm and participates in client meetings when managers are recommending stocks that Taylor covers. Taylor recently completed Level 1 of the CFA examination and is waiting for his results so he can register for the Level 2 examination.
In preparation for a client meeting, Taylor’s supervisor, Jessica James, asks him to prepare a research report on attractive companies in the health care industry. Since Taylor is busy preparing for company conference calls, James tells him to "throw something together from the street." To meet James’ request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has heard about but has not researched. Taylor takes the original reports he obtains from a third-party, adds some general industry information, and submits "strong buy" recommendations to James for the stocks. He does not credit the original authors in the report, which is a violation of copyright law. Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA Program." Although written procedures require James to review all analyst reports prior to release, time constraints often prevent her from reviewing the reports prior to distribution. James recommends the stocks to her clients, who then purchase them. Several months later, the clients are able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21% and 17%, respectively. James informs Taylor of the clients’ successful investments and requests that he begin investigating potential biotech investments for the same group of investors.
To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor indicates that he has the appropriate medical condition for the study and signs a confidentiality agreement, but he leaves the question about his occupation blank. During the study, Taylor learns that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have serious negative side effects in patient testing. This information confirms existing research that Taylor has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next Breakthrough releases information that the drugs in question have been held up by a regulatory agency pending additional investigation. The stock plunges over 30% on the news.
In providing financial planning and investment research services to the investment club, has Montpier likely violated any CFA Institute Standards of Professional Conduct?
- A . Yes. She has not received consent from her employer to all of the terms of the arrangement.
- B . Yes. She has not received verbal approval from her employer and written approval from her financial service client.
- C . No. She has not yet received any compensation for her consulting services and has informed her financial service client of her firm and its services.
A
Explanation:
Montpier is nor in compliance with Standard IV(R) Additional Compensation Airangements. She has undertaken an independent practice in competition with her employer, World Renowned Advisers, which will result in compensation without obtaining the prior consent of her employer to the terms of the arrangement. Although no compensation has yet been paid to Montpier, she has still violated Standard IV (B). As a practical matter, in her statement to her employer, Montpier should include (1) the types of services to be provided, (2) expected time frame of the services, and (3) compensation to be received. (Study Session 1, LOS 2.a)
Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment advice and financial planning services globally to institutional and retail clients. Shortly after the company opened an office in Malaysia, Montpier’s supervisor in the New York office. Rick Reynolds, asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a source of international investment opportunities for U.S. clients. Montpier’s main task is to cover small-cap stocks in the region and develop a network of contacts with other investment firms in the region.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of material nonpublic information is common practice in analyst research reports and recommendations. Such practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she recently observed several investment bankers meeting numerous times at an exclusive local country club with the CEOs of two Malaysian rival companies. It is public information that one of the companies is searching for potential acquisition targets. She has thought several times about issuing a recommendation on one of the companies but has not done so for fear of breaking the law. After learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition target, which she had already established as a good investment through prior research.
Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements by investment professionals. It is common for analysts and portfolio managers to maintain ongoing consulting contracts with entities other than their primary employer. As a result of this, Montpier has begun financial service consultations for members of a local investment club. The club is developing an appropriate compensation package for her services, which to date have included financial planning activities and investment research. When Montpier established the relationship with the investment club, she informed them that she had a full-time job at World Renowned Advisers, which offers similar services.
After a year of consulting with the investment club, Malaysian law changed, requiring investment bankers, securities analysts, and portfolio managers to register with the Malaysian Securities Commission in order to engage in independent consulting practice. Since she is unaware of the change, Montpier does not file the proper registration forms and is later investigated, fined, and temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the sanction, but not the fine, removed after appealing the Commission’s ruling. Montpier’s counterpart in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for approximately seven years. Taylor researches health care and biotech stocks for the firm and participates in client meetings when managers are recommending stocks that Taylor covers. Taylor recently completed Level 1 of the CFA examination and is waiting for his results so he can register for the Level 2 examination.
In preparation for a client meeting, Taylor’s supervisor, Jessica James, asks him to prepare a research report on attractive companies in the health care industry. Since Taylor is busy preparing for company conference calls, James tells him to "throw something together from the street." To meet James’ request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has heard about but has not researched. Taylor takes the original reports he obtains from a third-party, adds some general industry information, and submits "strong buy" recommendations to James for the stocks. He does not credit the original authors in the report, which is a violation of copyright law. Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA Program." Although written procedures require James to review all analyst reports prior to release, time constraints often prevent her from reviewing the reports prior to distribution. James recommends the stocks to her clients, who then purchase them. Several months later, the clients are able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21% and 17%, respectively. James informs Taylor of the clients’ successful investments and requests that he begin investigating potential biotech investments for the same group of investors.
To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor indicates that he has the appropriate medical condition for the study and signs a confidentiality agreement, but he leaves the question about his occupation blank. During the study, Taylor learns that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have serious negative side effects in patient testing. This information confirms existing research that Taylor has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next Breakthrough releases information that the drugs in question have been held up by a regulatory agency pending additional investigation. The stock plunges over 30% on the news.
In referencing his participation in the CFA program, has Taylor likely violated any CFA Institute Standards of Professional Conduct?
- A . No, since he did not imply superior investment ability as a result of his candidacy.
- B . Yes, since he must refer to himself as a Level 1 candidate, not a Level 2 candidate.
- C . No, since he appropriately referenced his candidacy and did not imply a partial designation.
B
Explanation:
According to Standard VH(B), Taylor may reference his participation or candidate status in the CFA program but must not misrepresent the meaning of his participation. Taylor has taken the Level 1 exam but has not received his results or registered for the next exam. Therefore, he may refer to himself as a Level 1 candidate but not as a Level 2 candidate. (Study Session 1, LOS 2.a)
Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment advice and financial planning services globally to institutional and retail clients. Shortly after the company opened an office in Malaysia, Montpier’s supervisor in the New York office. Rick Reynolds, asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a source of international investment opportunities for U.S. clients. Montpier’s main task is to cover small-cap stocks in the region and develop a network of contacts with other investment firms in the region.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of material nonpublic information is common practice in analyst research reports and recommendations. Such practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she recently observed several investment bankers meeting numerous times at an exclusive local country club with the CEOs of two Malaysian rival companies. It is public information that one of the companies is searching for potential acquisition targets. She has thought several times about issuing a recommendation on one of the companies but has not done so for fear of breaking the law. After learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition target, which she had already established as a good investment through prior research.
Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements by investment professionals. It is common for analysts and portfolio managers to maintain ongoing consulting contracts with entities other than their primary employer. As a result of this, Montpier has begun financial service consultations for members of a local investment club. The club is developing an appropriate compensation package for her services, which to date have included financial planning activities and investment research. When Montpier established the relationship with the investment club, she informed them that she had a full-time job at World Renowned Advisers, which offers similar services.
After a year of consulting with the investment club, Malaysian law changed, requiring investment bankers, securities analysts, and portfolio managers to register with the Malaysian Securities Commission in order to engage in independent consulting practice. Since she is unaware of the change, Montpier does not file the proper registration forms and is later investigated, fined, and temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the sanction, but not the fine, removed after appealing the Commission’s ruling. Montpier’s counterpart in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for approximately seven years. Taylor researches health care and biotech stocks for the firm and participates in client meetings when managers are recommending stocks that Taylor covers. Taylor recently completed Level 1 of the CFA examination and is waiting for his results so he can register for the Level 2 examination.
In preparation for a client meeting, Taylor’s supervisor, Jessica James, asks him to prepare a research report on attractive companies in the health care industry. Since Taylor is busy preparing for company conference calls, James tells him to "throw something together from the street." To meet James’ request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has heard about but has not researched. Taylor takes the original reports he obtains from a third-party, adds some general industry information, and submits "strong buy" recommendations to James for the stocks. He does not credit the original authors in the report, which is a violation of copyright law. Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA Program." Although written procedures require James to review all analyst reports prior to release, time constraints often prevent her from reviewing the reports prior to distribution. James recommends the stocks to her clients, who then purchase them. Several months later, the clients are able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21% and 17%, respectively. James informs Taylor of the clients’ successful investments and requests that he begin investigating potential biotech investments for the same group of investors.
To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor indicates that he has the appropriate medical condition for the study and signs a confidentiality agreement, but he leaves the question about his occupation blank. During the study, Taylor learns that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have serious negative side effects in patient testing. This information confirms existing research that Taylor has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next Breakthrough releases information that the drugs in question have been held up by a regulatory agency pending additional investigation. The stock plunges over 30% on the news.
In creating his report on Immune Healthcare and Remedy Corp., Taylor likely violated the CFA Institute Standards of Professional Conduct for all of the following reasons except that he failed to:
- A . give proper credit to the sources of information used in his report.
- B . establish a reasonable and adequate basis for his recommendation.
- C . determine the suitability of the investment for his firm’s clients.
C
Explanation:
Standard 1(C) Misrepresentation is violated because Taylor uses research reports from outside the firm without acknowledging or identifying the original author(s) of the reports. Although Taylor added "some general industry information" and indicated a "strong buy" rating, he must still credit the original author(s) for the material that he did not create. A violation of Standard 1(C) involving plagiarism also causes a violation of Standard 1(A) Knowledge of the Law, which prohibits knowingly violating any laws, rules, or regulations. The unauthorized use of the external research material violates copyright laws, as Taylor did not obtain permission to use information from the research reports. Taylor violated Standard V(A) Diligence and Reasonable Basis because he does not appear to have exercised diligence and thoroughness in making his investment recommendation, nor does he have a reasonable and adequate basis for his recommendation. The fact that Taylor has not researched the companies in his report and uses the research information provided by another analyst indicates that he has not adequately investigated and supported his recommendation. Because Taylor is not recommending the investment to a particular client, his recommendation docs not violate Standard III(C) Suitability. If he had been making investment recommendations or taking investment action on the behalf of a client as part of an advisory relationship, he would have needed to establish that the investment was appropriate for the client’s portfolio. (Study Session 1, LOS 2.a)
Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment advice and financial planning services globally to institutional and retail clients. Shortly after the company opened an office in Malaysia, Montpier’s supervisor in the New York office. Rick Reynolds, asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a source of international investment opportunities for U.S. clients. Montpier’s main task is to cover small-cap stocks in the region and develop a network of contacts with other investment firms in the region.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of material nonpublic information is common practice in analyst research reports and recommendations. Such practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she recently observed several investment bankers meeting numerous times at an exclusive local country club with the CEOs of two Malaysian rival companies. It is public information that one of the companies is searching for potential acquisition targets. She has thought several times about issuing a recommendation on one of the companies but has not done so for fear of breaking the law. After learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition target, which she had already established as a good investment through prior research.
Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements by investment professionals. It is common for analysts and portfolio managers to maintain ongoing consulting contracts with entities other than their primary employer. As a result of this, Montpier has begun financial service consultations for members of a local investment club. The club is developing an appropriate compensation package for her services, which to date have included financial planning activities and investment research. When Montpier established the relationship with the investment club, she informed them that she had a full-time job at World Renowned Advisers, which offers similar services.
After a year of consulting with the investment club, Malaysian law changed, requiring investment bankers, securities analysts, and portfolio managers to register with the Malaysian Securities Commission in order to engage in independent consulting practice. Since she is unaware of the change, Montpier does not file the proper registration forms and is later investigated, fined, and temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the sanction, but not the fine, removed after appealing the Commission’s ruling. Montpier’s counterpart in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for approximately seven years. Taylor researches health care and biotech stocks for the firm and participates in client meetings when managers are recommending stocks that Taylor covers. Taylor recently completed Level 1 of the CFA examination and is waiting for his results so he can register for the Level 2 examination.
In preparation for a client meeting, Taylor’s supervisor, Jessica James, asks him to prepare a research report on attractive companies in the health care industry. Since Taylor is busy preparing for company conference calls, James tells him to "throw something together from the street." To meet James’ request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has heard about but has not researched. Taylor takes the original reports he obtains from a third-party, adds some general industry information, and submits "strong buy" recommendations to James for the stocks. He does not credit the original authors in the report, which is a violation of copyright law. Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA Program." Although written procedures require James to review all analyst reports prior to release, time constraints often prevent her from reviewing the reports prior to distribution. James recommends the stocks to her clients, who then purchase them. Several months later, the clients are able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21% and 17%, respectively. James informs Taylor of the clients’ successful investments and requests that he begin investigating potential biotech investments for the same group of investors.
To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor indicates that he has the appropriate medical condition for the study and signs a confidentiality agreement, but he leaves the question about his occupation blank. During the study, Taylor learns that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have serious negative side effects in patient testing. This information confirms existing research that Taylor has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next Breakthrough releases information that the drugs in question have been held up by a regulatory agency pending additional investigation. The stock plunges over 30% on the news.
By using the information obtained as a result of participating in the drug study, did Taylor likely violate any CFA Institute Standards of Professional Conduct?
- A . Yes.
- B . No. By participating in the study, Taylor had permission to use the information for the benefit of his clients.
- C . No. The information received supplemented Taylor’s existing research and was non-material, nonpublic information.
A
Explanation:
Although the information received supplemented Taylors current research, it was material, nonpublic information. The fact that Taylor obtained the information by participating in a confidential study, and the fact that once the news was eventually released by Next Breakthrough the stock plunged by over 30%, confirms that the information was material and nonpublic. Taylors sell recommendation to clients based on the information received was a violation of Standard 11(A) Material Nonpublic Information, which prohibits trading or causing others to trade on material nonpublic information. (Study Session 1, LOS 2.a)
Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment advice and financial planning services globally to institutional and retail clients. Shortly after the company opened an office in Malaysia, Montpier’s supervisor in the New York office. Rick Reynolds, asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a source of international investment opportunities for U.S. clients. Montpier’s main task is to cover small-cap stocks in the region and develop a network of contacts with other investment firms in the region.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of material nonpublic information is common practice in analyst research reports and recommendations. Such practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she recently observed several investment bankers meeting numerous times at an exclusive local country club with the CEOs of two Malaysian rival companies. It is public information that one of the companies is searching for potential acquisition targets. She has thought several times about issuing a recommendation on one of the companies but has not done so for fear of breaking the law. After learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition target, which she had already established as a good investment through prior research.
Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements by investment professionals. It is common for analysts and portfolio managers to maintain ongoing consulting contracts with entities other than their primary employer. As a result of this, Montpier has begun financial service consultations for members of a local investment club. The club is developing an appropriate compensation package for her services, which to date have included financial planning activities and investment research. When Montpier established the relationship with the investment club, she informed them that she had a full-time job at World Renowned Advisers, which offers similar services.
After a year of consulting with the investment club, Malaysian law changed, requiring investment bankers, securities analysts, and portfolio managers to register with the Malaysian Securities Commission in order to engage in independent consulting practice. Since she is unaware of the change, Montpier does not file the proper registration forms and is later investigated, fined, and temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the sanction, but not the fine, removed after appealing the Commission’s ruling. Montpier’s counterpart in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for approximately seven years. Taylor researches health care and biotech stocks for the firm and participates in client meetings when managers are recommending stocks that Taylor covers. Taylor recently completed Level 1 of the CFA examination and is waiting for his results so he can register for the Level 2 examination.
In preparation for a client meeting, Taylor’s supervisor, Jessica James, asks him to prepare a research report on attractive companies in the health care industry. Since Taylor is busy preparing for company conference calls, James tells him to "throw something together from the street." To meet James’ request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has heard about but has not researched. Taylor takes the original reports he obtains from a third-party, adds some general industry information, and submits "strong buy" recommendations to James for the stocks. He does not credit the original authors in the report, which is a violation of copyright law. Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA Program." Although written procedures require James to review all analyst reports prior to release, time constraints often prevent her from reviewing the reports prior to distribution. James recommends the stocks to her clients, who then purchase them. Several months later, the clients are able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21% and 17%, respectively. James informs Taylor of the clients’ successful investments and requests that he begin investigating potential biotech investments for the same group of investors.
To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor indicates that he has the appropriate medical condition for the study and signs a confidentiality agreement, but he leaves the question about his occupation blank. During the study, Taylor learns that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have serious negative side effects in patient testing. This information confirms existing research that Taylor has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next Breakthrough releases information that the drugs in question have been held up by a regulatory agency pending additional investigation. The stock plunges over 30% on the news.
By using the information obtained as a result of participating in the drug study, did Taylor likely violate any CFA Institute Standards of Professional Conduct?
- A . Yes.
- B . No. By participating in the study, Taylor had permission to use the information for the benefit of his clients.
- C . No. The information received supplemented Taylor’s existing research and was non-material, nonpublic information.
A
Explanation:
Although the information received supplemented Taylors current research, it was material, nonpublic information. The fact that Taylor obtained the information by participating in a confidential study, and the fact that once the news was eventually released by Next Breakthrough the stock plunged by over 30%, confirms that the information was material and nonpublic. Taylors sell recommendation to clients based on the information received was a violation of Standard 11(A) Material Nonpublic Information, which prohibits trading or causing others to trade on material nonpublic information. (Study Session 1, LOS 2.a)
Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment advice and financial planning services globally to institutional and retail clients. Shortly after the company opened an office in Malaysia, Montpier’s supervisor in the New York office. Rick Reynolds, asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a source of international investment opportunities for U.S. clients. Montpier’s main task is to cover small-cap stocks in the region and develop a network of contacts with other investment firms in the region.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of material nonpublic information is common practice in analyst research reports and recommendations. Such practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she recently observed several investment bankers meeting numerous times at an exclusive local country club with the CEOs of two Malaysian rival companies. It is public information that one of the companies is searching for potential acquisition targets. She has thought several times about issuing a recommendation on one of the companies but has not done so for fear of breaking the law. After learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition target, which she had already established as a good investment through prior research.
Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements by investment professionals. It is common for analysts and portfolio managers to maintain ongoing consulting contracts with entities other than their primary employer. As a result of this, Montpier has begun financial service consultations for members of a local investment club. The club is developing an appropriate compensation package for her services, which to date have included financial planning activities and investment research. When Montpier established the relationship with the investment club, she informed them that she had a full-time job at World Renowned Advisers, which offers similar services.
After a year of consulting with the investment club, Malaysian law changed, requiring investment bankers, securities analysts, and portfolio managers to register with the Malaysian Securities Commission in order to engage in independent consulting practice. Since she is unaware of the change, Montpier does not file the proper registration forms and is later investigated, fined, and temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the sanction, but not the fine, removed after appealing the Commission’s ruling. Montpier’s counterpart in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for approximately seven years. Taylor researches health care and biotech stocks for the firm and participates in client meetings when managers are recommending stocks that Taylor covers. Taylor recently completed Level 1 of the CFA examination and is waiting for his results so he can register for the Level 2 examination.
In preparation for a client meeting, Taylor’s supervisor, Jessica James, asks him to prepare a research report on attractive companies in the health care industry. Since Taylor is busy preparing for company conference calls, James tells him to "throw something together from the street." To meet James’ request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has heard about but has not researched. Taylor takes the original reports he obtains from a third-party, adds some general industry information, and submits "strong buy" recommendations to James for the stocks. He does not credit the original authors in the report, which is a violation of copyright law. Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA Program." Although written procedures require James to review all analyst reports prior to release, time constraints often prevent her from reviewing the reports prior to distribution. James recommends the stocks to her clients, who then purchase them. Several months later, the clients are able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21% and 17%, respectively. James informs Taylor of the clients’ successful investments and requests that he begin investigating potential biotech investments for the same group of investors.
To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor indicates that he has the appropriate medical condition for the study and signs a confidentiality agreement, but he leaves the question about his occupation blank. During the study, Taylor learns that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have serious negative side effects in patient testing. This information confirms existing research that Taylor has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next Breakthrough releases information that the drugs in question have been held up by a regulatory agency pending additional investigation. The stock plunges over 30% on the news.
By using the information obtained as a result of participating in the drug study, did Taylor likely violate any CFA Institute Standards of Professional Conduct?
- A . Yes.
- B . No. By participating in the study, Taylor had permission to use the information for the benefit of his clients.
- C . No. The information received supplemented Taylor’s existing research and was non-material, nonpublic information.
A
Explanation:
Although the information received supplemented Taylors current research, it was material, nonpublic information. The fact that Taylor obtained the information by participating in a confidential study, and the fact that once the news was eventually released by Next Breakthrough the stock plunged by over 30%, confirms that the information was material and nonpublic. Taylors sell recommendation to clients based on the information received was a violation of Standard 11(A) Material Nonpublic Information, which prohibits trading or causing others to trade on material nonpublic information. (Study Session 1, LOS 2.a)
Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment advice and financial planning services globally to institutional and retail clients. Shortly after the company opened an office in Malaysia, Montpier’s supervisor in the New York office. Rick Reynolds, asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a source of international investment opportunities for U.S. clients. Montpier’s main task is to cover small-cap stocks in the region and develop a network of contacts with other investment firms in the region.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of material nonpublic information is common practice in analyst research reports and recommendations. Such practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she recently observed several investment bankers meeting numerous times at an exclusive local country club with the CEOs of two Malaysian rival companies. It is public information that one of the companies is searching for potential acquisition targets. She has thought several times about issuing a recommendation on one of the companies but has not done so for fear of breaking the law. After learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition target, which she had already established as a good investment through prior research.
Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements by investment professionals. It is common for analysts and portfolio managers to maintain ongoing consulting contracts with entities other than their primary employer. As a result of this, Montpier has begun financial service consultations for members of a local investment club. The club is developing an appropriate compensation package for her services, which to date have included financial planning activities and investment research. When Montpier established the relationship with the investment club, she informed them that she had a full-time job at World Renowned Advisers, which offers similar services.
After a year of consulting with the investment club, Malaysian law changed, requiring investment bankers, securities analysts, and portfolio managers to register with the Malaysian Securities Commission in order to engage in independent consulting practice. Since she is unaware of the change, Montpier does not file the proper registration forms and is later investigated, fined, and temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the sanction, but not the fine, removed after appealing the Commission’s ruling. Montpier’s counterpart in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for approximately seven years. Taylor researches health care and biotech stocks for the firm and participates in client meetings when managers are recommending stocks that Taylor covers. Taylor recently completed Level 1 of the CFA examination and is waiting for his results so he can register for the Level 2 examination.
In preparation for a client meeting, Taylor’s supervisor, Jessica James, asks him to prepare a research report on attractive companies in the health care industry. Since Taylor is busy preparing for company conference calls, James tells him to "throw something together from the street." To meet James’ request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has heard about but has not researched. Taylor takes the original reports he obtains from a third-party, adds some general industry information, and submits "strong buy" recommendations to James for the stocks. He does not credit the original authors in the report, which is a violation of copyright law. Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA Program." Although written procedures require James to review all analyst reports prior to release, time constraints often prevent her from reviewing the reports prior to distribution. James recommends the stocks to her clients, who then purchase them. Several months later, the clients are able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21% and 17%, respectively. James informs Taylor of the clients’ successful investments and requests that he begin investigating potential biotech investments for the same group of investors.
To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor indicates that he has the appropriate medical condition for the study and signs a confidentiality agreement, but he leaves the question about his occupation blank. During the study, Taylor learns that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have serious negative side effects in patient testing. This information confirms existing research that Taylor has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next Breakthrough releases information that the drugs in question have been held up by a regulatory agency pending additional investigation. The stock plunges over 30% on the news.
By using the information obtained as a result of participating in the drug study, did Taylor likely violate any CFA Institute Standards of Professional Conduct?
- A . Yes.
- B . No. By participating in the study, Taylor had permission to use the information for the benefit of his clients.
- C . No. The information received supplemented Taylor’s existing research and was non-material, nonpublic information.
A
Explanation:
Although the information received supplemented Taylors current research, it was material, nonpublic information. The fact that Taylor obtained the information by participating in a confidential study, and the fact that once the news was eventually released by Next Breakthrough the stock plunged by over 30%, confirms that the information was material and nonpublic. Taylors sell recommendation to clients based on the information received was a violation of Standard 11(A) Material Nonpublic Information, which prohibits trading or causing others to trade on material nonpublic information. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
In the context of the Code and Standards, which of the items from the background check would most likely indicate that Zonding should not have hired Cooken?
- A . Item i.
- B . Item ii.
- C . Item iii.
A
Explanation:
Item (i) is a likely violation of the Code and Standards. Working as a waitress is not a conflict of interest for an investment analyst, but Cooken’s employer can reasonably assume that a 30-hour-a-week side job could be tiring, depriving the company of her skills and ability during her internship which would violate Standard IV(A) Loyalty (to employer).
Cooken’s description of the CFA exam is accurate, and she takes no liberties with a title. Thus she has not violated Standard VII{B) Reference to CFA Institute, the CFA Designation, and the CFA Program.
One conviction as a teenager before working as an investment professional is not a violation of Standard 1 (D) Misconduct. Standard IV(A) Loyalty (to employer) does not hold when illegal activities are involved, and Cooken’s willingness to talk to the FBI would most likely not be considered a violation. The Standards do suggest, however, that the member consult with his employer’s compliance personnel or outside counsel before disclosing any confidential client information. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
In the context of the Code and Standards, which of the items from the background check would most likely indicate that Zonding should not have hired Cooken?
- A . Item i.
- B . Item ii.
- C . Item iii.
A
Explanation:
Item (i) is a likely violation of the Code and Standards. Working as a waitress is not a conflict of interest for an investment analyst, but Cooken’s employer can reasonably assume that a 30-hour-a-week side job could be tiring, depriving the company of her skills and ability during her internship which would violate Standard IV(A) Loyalty (to employer).
Cooken’s description of the CFA exam is accurate, and she takes no liberties with a title. Thus she has not violated Standard VII{B) Reference to CFA Institute, the CFA Designation, and the CFA Program.
One conviction as a teenager before working as an investment professional is not a violation of Standard 1 (D) Misconduct. Standard IV(A) Loyalty (to employer) does not hold when illegal activities are involved, and Cooken’s willingness to talk to the FBI would most likely not be considered a violation. The Standards do suggest, however, that the member consult with his employer’s compliance personnel or outside counsel before disclosing any confidential client information. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
In the context of the Code and Standards, which of the items from the background check would most likely indicate that Zonding should not have hired Cooken?
- A . Item i.
- B . Item ii.
- C . Item iii.
A
Explanation:
Item (i) is a likely violation of the Code and Standards. Working as a waitress is not a conflict of interest for an investment analyst, but Cooken’s employer can reasonably assume that a 30-hour-a-week side job could be tiring, depriving the company of her skills and ability during her internship which would violate Standard IV(A) Loyalty (to employer).
Cooken’s description of the CFA exam is accurate, and she takes no liberties with a title. Thus she has not violated Standard VII{B) Reference to CFA Institute, the CFA Designation, and the CFA Program.
One conviction as a teenager before working as an investment professional is not a violation of Standard 1 (D) Misconduct. Standard IV(A) Loyalty (to employer) does not hold when illegal activities are involved, and Cooken’s willingness to talk to the FBI would most likely not be considered a violation. The Standards do suggest, however, that the member consult with his employer’s compliance personnel or outside counsel before disclosing any confidential client information. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
In the context of the Code and Standards, which of the items from the background check would most likely indicate that Zonding should not have hired Cooken?
- A . Item i.
- B . Item ii.
- C . Item iii.
A
Explanation:
Item (i) is a likely violation of the Code and Standards. Working as a waitress is not a conflict of interest for an investment analyst, but Cooken’s employer can reasonably assume that a 30-hour-a-week side job could be tiring, depriving the company of her skills and ability during her internship which would violate Standard IV(A) Loyalty (to employer).
Cooken’s description of the CFA exam is accurate, and she takes no liberties with a title. Thus she has not violated Standard VII{B) Reference to CFA Institute, the CFA Designation, and the CFA Program.
One conviction as a teenager before working as an investment professional is not a violation of Standard 1 (D) Misconduct. Standard IV(A) Loyalty (to employer) does not hold when illegal activities are involved, and Cooken’s willingness to talk to the FBI would most likely not be considered a violation. The Standards do suggest, however, that the member consult with his employer’s compliance personnel or outside counsel before disclosing any confidential client information. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Which of the following statements provides the least appropriate , justification for Cooken’s caution about
revising the report on Mocline Tobacco?
- A . Cooken knows next to nothing about Mocline stock.
- B . Cooken’s uncle, George Whales, is the CFO of Mocline.
- C . In college, Cooken worked for Mocline but never declared the income on her taxes.
C
Explanation:
While Cookcn’s tax avoidance may represent a professional-conduct issue, it has no bearing on her ability to write a report on Mocline. While damson may be an expert on Mocline Tobacco, Cooken does not know enough about the stock to write about it without taking the risk of being in violation of Standard V(A) Diligence and Reasonable Basis. Because of Cooken’s relationship to the CFO of Mocline and ownership of Mocline stock, her objectivity might be questioned. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Which of the following statements provides the least appropriate , justification for Cooken’s caution about
revising the report on Mocline Tobacco?
- A . Cooken knows next to nothing about Mocline stock.
- B . Cooken’s uncle, George Whales, is the CFO of Mocline.
- C . In college, Cooken worked for Mocline but never declared the income on her taxes.
C
Explanation:
While Cookcn’s tax avoidance may represent a professional-conduct issue, it has no bearing on her ability to write a report on Mocline. While damson may be an expert on Mocline Tobacco, Cooken does not know enough about the stock to write about it without taking the risk of being in violation of Standard V(A) Diligence and Reasonable Basis. Because of Cooken’s relationship to the CFO of Mocline and ownership of Mocline stock, her objectivity might be questioned. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Which of the following statements provides the least appropriate , justification for Cooken’s caution about
revising the report on Mocline Tobacco?
- A . Cooken knows next to nothing about Mocline stock.
- B . Cooken’s uncle, George Whales, is the CFO of Mocline.
- C . In college, Cooken worked for Mocline but never declared the income on her taxes.
C
Explanation:
While Cookcn’s tax avoidance may represent a professional-conduct issue, it has no bearing on her ability to write a report on Mocline. While damson may be an expert on Mocline Tobacco, Cooken does not know enough about the stock to write about it without taking the risk of being in violation of Standard V(A) Diligence and Reasonable Basis. Because of Cooken’s relationship to the CFO of Mocline and ownership of Mocline stock, her objectivity might be questioned. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Which of the following statements provides the least appropriate , justification for Cooken’s caution about
revising the report on Mocline Tobacco?
- A . Cooken knows next to nothing about Mocline stock.
- B . Cooken’s uncle, George Whales, is the CFO of Mocline.
- C . In college, Cooken worked for Mocline but never declared the income on her taxes.
C
Explanation:
While Cookcn’s tax avoidance may represent a professional-conduct issue, it has no bearing on her ability to write a report on Mocline. While damson may be an expert on Mocline Tobacco, Cooken does not know enough about the stock to write about it without taking the risk of being in violation of Standard V(A) Diligence and Reasonable Basis. Because of Cooken’s relationship to the CFO of Mocline and ownership of Mocline stock, her objectivity might be questioned. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
By not telling Zonding about the bartending position, Cooken has most likely violated:
- A . no Standards.
- B . Standard IV(B) Additional Compensation Arrangements.
- C . Standard IV(A) Loyalty (to employer) and Standard IV(B) Additional Compensation Arrangements.
A
Explanation:
Standard IV(A) Loyalty (to employer) requires that members and candidates act for the benefit of their employer and not deprive the employer of their skills and abilities. In addition, members and candidates must not cause harm to their employers. It’s safe to say that a bar does not compete with a stock-analysis company, and a 6-hour-a-week part-time job should not interfere with her ability to perform analysis duties. Standard IV(B) Additional Compensation Arrangements relates to additional compensation related to an employee’s services to the employer. The moonlighting is not related to her analysis job and, as such, does not violate the standard. There is nothing inherently unethical about working as a bartender, and moonlighting as a barkeeper does not compromise Cooken’s professional reputation, integrity, or competence. Thus, Standard 1(D) Misconduct has not been violated. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
By not telling Zonding about the bartending position, Cooken has most likely violated:
- A . no Standards.
- B . Standard IV(B) Additional Compensation Arrangements.
- C . Standard IV(A) Loyalty (to employer) and Standard IV(B) Additional Compensation Arrangements.
A
Explanation:
Standard IV(A) Loyalty (to employer) requires that members and candidates act for the benefit of their employer and not deprive the employer of their skills and abilities. In addition, members and candidates must not cause harm to their employers. It’s safe to say that a bar does not compete with a stock-analysis company, and a 6-hour-a-week part-time job should not interfere with her ability to perform analysis duties. Standard IV(B) Additional Compensation Arrangements relates to additional compensation related to an employee’s services to the employer. The moonlighting is not related to her analysis job and, as such, does not violate the standard. There is nothing inherently unethical about working as a bartender, and moonlighting as a barkeeper does not compromise Cooken’s professional reputation, integrity, or competence. Thus, Standard 1(D) Misconduct has not been violated. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
By not telling Zonding about the bartending position, Cooken has most likely violated:
- A . no Standards.
- B . Standard IV(B) Additional Compensation Arrangements.
- C . Standard IV(A) Loyalty (to employer) and Standard IV(B) Additional Compensation Arrangements.
A
Explanation:
Standard IV(A) Loyalty (to employer) requires that members and candidates act for the benefit of their employer and not deprive the employer of their skills and abilities. In addition, members and candidates must not cause harm to their employers. It’s safe to say that a bar does not compete with a stock-analysis company, and a 6-hour-a-week part-time job should not interfere with her ability to perform analysis duties. Standard IV(B) Additional Compensation Arrangements relates to additional compensation related to an employee’s services to the employer. The moonlighting is not related to her analysis job and, as such, does not violate the standard. There is nothing inherently unethical about working as a bartender, and moonlighting as a barkeeper does not compromise Cooken’s professional reputation, integrity, or competence. Thus, Standard 1(D) Misconduct has not been violated. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
By not telling Zonding about the bartending position, Cooken has most likely violated:
- A . no Standards.
- B . Standard IV(B) Additional Compensation Arrangements.
- C . Standard IV(A) Loyalty (to employer) and Standard IV(B) Additional Compensation Arrangements.
A
Explanation:
Standard IV(A) Loyalty (to employer) requires that members and candidates act for the benefit of their employer and not deprive the employer of their skills and abilities. In addition, members and candidates must not cause harm to their employers. It’s safe to say that a bar does not compete with a stock-analysis company, and a 6-hour-a-week part-time job should not interfere with her ability to perform analysis duties. Standard IV(B) Additional Compensation Arrangements relates to additional compensation related to an employee’s services to the employer. The moonlighting is not related to her analysis job and, as such, does not violate the standard. There is nothing inherently unethical about working as a bartender, and moonlighting as a barkeeper does not compromise Cooken’s professional reputation, integrity, or competence. Thus, Standard 1(D) Misconduct has not been violated. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Which of the requests, if fulfilled, is most likely to place Basch in violation of Standard III(E) Preservation of Confidentiality?
- A . Request 1.
- B . Request 2.
- C . Request 3.
C
Explanation:
Request 3 is a likely violation. Potential clients are not entitled to performance data beyond what the company chooses to disclose. Providing data, particularly client-specific data, could he a violation of the clients’ confidentiality.
Members and candidates must answer questions asked by CFA Institutes Professional Conduct Program. Members and candidates may report illegal activities (and in some cases may have a legal obligation to report such activities) on the parr of clients without fear of violating Standard 111(E) Preservation of Confidentiality, so 1 is not likely a violation. And unless the firm’s policy requires silence about job openings, answering questions about them is ethical, if not always wise, so 2 is not likely a violation. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Which of the requests, if fulfilled, is most likely to place Basch in violation of Standard III(E) Preservation of Confidentiality?
- A . Request 1.
- B . Request 2.
- C . Request 3.
C
Explanation:
Request 3 is a likely violation. Potential clients are not entitled to performance data beyond what the company chooses to disclose. Providing data, particularly client-specific data, could he a violation of the clients’ confidentiality.
Members and candidates must answer questions asked by CFA Institutes Professional Conduct Program. Members and candidates may report illegal activities (and in some cases may have a legal obligation to report such activities) on the parr of clients without fear of violating Standard 111(E) Preservation of Confidentiality, so 1 is not likely a violation. And unless the firm’s policy requires silence about job openings, answering questions about them is ethical, if not always wise, so 2 is not likely a violation. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Which of the requests, if fulfilled, is most likely to place Basch in violation of Standard III(E) Preservation of Confidentiality?
- A . Request 1.
- B . Request 2.
- C . Request 3.
C
Explanation:
Request 3 is a likely violation. Potential clients are not entitled to performance data beyond what the company chooses to disclose. Providing data, particularly client-specific data, could he a violation of the clients’ confidentiality.
Members and candidates must answer questions asked by CFA Institutes Professional Conduct Program. Members and candidates may report illegal activities (and in some cases may have a legal obligation to report such activities) on the parr of clients without fear of violating Standard 111(E) Preservation of Confidentiality, so 1 is not likely a violation. And unless the firm’s policy requires silence about job openings, answering questions about them is ethical, if not always wise, so 2 is not likely a violation. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Which of the requests, if fulfilled, is most likely to place Basch in violation of Standard III(E) Preservation of Confidentiality?
- A . Request 1.
- B . Request 2.
- C . Request 3.
C
Explanation:
Request 3 is a likely violation. Potential clients are not entitled to performance data beyond what the company chooses to disclose. Providing data, particularly client-specific data, could he a violation of the clients’ confidentiality.
Members and candidates must answer questions asked by CFA Institutes Professional Conduct Program. Members and candidates may report illegal activities (and in some cases may have a legal obligation to report such activities) on the parr of clients without fear of violating Standard 111(E) Preservation of Confidentiality, so 1 is not likely a violation. And unless the firm’s policy requires silence about job openings, answering questions about them is ethical, if not always wise, so 2 is not likely a violation. (Study Session 1, LOS 2.a)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Is Basch correct or incorrect with regard to her statement about the five required fiduciary standards and her statement about the duty to delegate investment authority?
- A . Incorrect about fiduciary standards only.
- B . Incorrect about delegation of authority only.
- C . Incorrect about fiduciary standards and delegation of authority.
B
Explanation:
The five general fiduciary standards for a trustee that carry over from the old Prudent Man Rule to the new Prudent Investor Rule arc care, caution, impartiality, loyalty, and skill. The ability to delegate investment authority is a new feature of the Prudent Investor rule that was prohibited under the Prudent Man rule. (Study Session 2, LOS 10-c)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Is Basch correct or incorrect with regard to her statement about the five required fiduciary standards and her statement about the duty to delegate investment authority?
- A . Incorrect about fiduciary standards only.
- B . Incorrect about delegation of authority only.
- C . Incorrect about fiduciary standards and delegation of authority.
B
Explanation:
The five general fiduciary standards for a trustee that carry over from the old Prudent Man Rule to the new Prudent Investor Rule arc care, caution, impartiality, loyalty, and skill. The ability to delegate investment authority is a new feature of the Prudent Investor rule that was prohibited under the Prudent Man rule. (Study Session 2, LOS 10-c)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Is Basch correct or incorrect with regard to her statement about the five required fiduciary standards and her statement about the duty to delegate investment authority?
- A . Incorrect about fiduciary standards only.
- B . Incorrect about delegation of authority only.
- C . Incorrect about fiduciary standards and delegation of authority.
B
Explanation:
The five general fiduciary standards for a trustee that carry over from the old Prudent Man Rule to the new Prudent Investor Rule arc care, caution, impartiality, loyalty, and skill. The ability to delegate investment authority is a new feature of the Prudent Investor rule that was prohibited under the Prudent Man rule. (Study Session 2, LOS 10-c)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
Is Basch correct or incorrect with regard to her statement about the five required fiduciary standards and her statement about the duty to delegate investment authority?
- A . Incorrect about fiduciary standards only.
- B . Incorrect about delegation of authority only.
- C . Incorrect about fiduciary standards and delegation of authority.
B
Explanation:
The five general fiduciary standards for a trustee that carry over from the old Prudent Man Rule to the new Prudent Investor Rule arc care, caution, impartiality, loyalty, and skill. The ability to delegate investment authority is a new feature of the Prudent Investor rule that was prohibited under the Prudent Man rule. (Study Session 2, LOS 10-c)
A potential client contacted an employee and wanted detailed performance records of client accounts so he can decide whether to invest with the firm."
Basch goes on to say that she is responsible for developing a presentation on the differences between the Prudent Investor and the Prudent Man rules for managing trust portfolios. Basch explains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciary standards in managing the assets of a trust account, including care, skill, caution, loyalty, and impartiality. She states that although there are many differences between the Prudent Man and the newer Prudent Investor rule, one element of continuity is the duty of the trustee to delegate investment authority in the event that the trustee lacks sufficient investment knowledge.
Toward the end of the lunch meeting, Basch suggests that in exchange for research published by Cooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small for their firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangement sounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over and get back with her next week with a decision.
According to CFA Institute Standards of Professional Conduct, which of the following statements is most accurate with regard to the arrangement proposed by Basch to Cooken?
- A . Under no circumstances may Cooken agree to the arrangement as proposed by Basch.
- B . Cooken may agree to the arrangement only if it is disclosed to her employer, clients, and prospects.
- C . Cooken may agree to the arrangement but need only make appropriate disclosure to prospective clients.
B
Explanation:
According to Standard VI(C) Referral Fees, members and candidates must disclose to their employer, clients, and prospective clients any compensarion, consideration, or benefit obtained from or given to other entities in exchange for referrals related to products or services. There is no prohibition on such arrangements as long as they are disclosed so clients and prospects can assess the full cost of services. (Study Session 1, LOS 2.a)
Carol Blackwell, CFA, has been hired to manage trust assets for Blanchard Investments. Blanchard’s trust manager, Thaddeus Baldwin, CFA, has worked in the securities business for more than 50 years. On Blackwell’s first day at the office, Baldwin gives her several instructions.
Instruction 1: Limit risk by avoiding stock options.
Instruction 2: Above all, ensure that our clients’ capital is kept safe.
Instruction 3: We take pride in our low cost structure, so avoid unnecessary transactions.
Instruction 4: Remember that every investment must have the quality to stand on its own.
Baldwin realizes that many of the firm’s practices and policies would benefit from a compliance check. Because Blackwell recently received her CFA charter, Baldwin tells her she is the "perfect person to work with the compliance officer to update the policy on proxy voting and the procedures to comply with Standard VI(B) Priority of Transactions." Baldwin also wants Blackwell to evaluate whether the firm wants to, or can, claim compliance with the soft dollar standards.
Baldwin hands Blackwell a handwritten outline he created, which includes the following statements:
Statement 1: CFA Institute’s soft-dollar rules are not mandatory. In any case, ‘ client brokerage can be used to pay for a portion of mixed-use research.
Statement 2: Investment firms can use client brokerage to purchase research that does not immediately benefit the client. Commissions generated by outside trades are considered soft dollars, but commissions from internal trading desks are not.
During a local society luncheon, Blackwell is seated next to CFA candidate Lucas Walters, who has been assigned the task of creating a compliance manual for Borchard & Sons, a small brokerage firm. Walters asks for her advice.
When Walters returns to work, he is apprised of the following situation: Borchard & Sons purchased 25,000 shares of CBX Corp. for equity manager Quintux Quantitative just minutes before the money manager called back and said it meant to buy 25,000 shares of CDX Corp. Borchard then purchased CDX shares for Quintux, but not before shares of CBX Corp. declined by 1.5%. The broker is holding the CBX shares in its own inventory.
Borchard proposes three methods for dealing with the trading error.
Method 1: Quintux directs additional trades to Borchard worth a dollar value equal to the amount of the trading loss.
Method 2: Borchard receives investment research from Quintux in exchange for Borchard covering the costs of the trading error.
Method 3: Borchard transfers the ordered CBX shares in its inventory to Quintux, which allocates them to all of its clients on a pro-rata basis.
Which of Baldw in’s first-day instructions to Blackwell is consistent with the New Prudent Investor Rule?
- A . Instruction 1.
- B . Instruction 2.
- C . Instruction 3.
C
Explanation:
Instruction 3 is consistent with the new Prudent Investor Rule, because avoidance of excessive trading costs is one of its principles. The other statements are consistent with the old Prudent Man Rule. (Study Session 2, LOS lO.c)
Carol Blackwell, CFA, has been hired to manage trust assets for Blanchard Investments. Blanchard’s trust manager, Thaddeus Baldwin, CFA, has worked in the securities business for more than 50 years. On Blackwell’s first day at the office, Baldwin gives her several instructions.
Instruction 1: Limit risk by avoiding stock options.
Instruction 2: Above all, ensure that our clients’ capital is kept safe.
Instruction 3: We take pride in our low cost structure, so avoid unnecessary transactions.
Instruction 4: Remember that every investment must have the quality to stand on its own.
Baldwin realizes that many of the firm’s practices and policies would benefit from a compliance check. Because Blackwell recently received her CFA charter, Baldwin tells her she is the "perfect person to work with the compliance officer to update the policy on proxy voting and the procedures to comply with Standard VI(B) Priority of Transactions." Baldwin also wants Blackwell to evaluate whether the firm wants to, or can, claim compliance with the soft dollar standards.
Baldwin hands Blackwell a handwritten outline he created, which includes the following statements:
Statement 1: CFA Institute’s soft-dollar rules are not mandatory. In any case, ‘ client brokerage can be used to pay for a portion of mixed-use research.
Statement 2: Investment firms can use client brokerage to purchase research that does not immediately benefit the client. Commissions generated by outside trades are considered soft dollars, but commissions from internal trading desks are not.
During a local society luncheon, Blackwell is seated next to CFA candidate Lucas Walters, who has been assigned the task of creating a compliance manual for Borchard & Sons, a small brokerage firm. Walters asks for her advice.
When Walters returns to work, he is apprised of the following situation: Borchard & Sons purchased 25,000 shares of CBX Corp. for equity manager Quintux Quantitative just minutes before the money manager called back and said it meant to buy 25,000 shares of CDX Corp. Borchard then purchased CDX shares for Quintux, but not before shares of CBX Corp. declined by 1.5%. The broker is holding the CBX shares in its own inventory.
Borchard proposes three methods for dealing with the trading error.
Method 1: Quintux directs additional trades to Borchard worth a dollar value equal to the amount of the trading loss.
Method 2: Borchard receives investment research from Quintux in exchange for Borchard covering the costs of the trading error.
Method 3: Borchard transfers the ordered CBX shares in its inventory to Quintux, which allocates them to all of its clients on a pro-rata basis.
When updating the proxy-voting policy to conform to CFA Institute recommendations, which of the following recommendations is least appropriate for Blanchard to adopt?
- A . Determine the economic impact of non-routine proxy votes.
- B . Follow the same proxy-voting procedures regardless of the nature of the proposal.
- C . If the proxy voter’s preference differs from the preference of a client who has delegated his voting powers, go with the client’s preference.
B
Explanation:
Standard III(A) Loyalty, Prudence, and Care. Unusual proposals, such as hostile takeovers and executive changes, may require more review than routine matters such as renewing stock-repurchase agreements. Money managers should provide a means to review complex proxies. Establishing evaluation criteria and disclosing the firm’s proxy voting policies and procedures to clients are basic elements of a proxy-voting policy. Client wishes regarding proxy voting should always be followed. (Study Session 1, LOS2.a)
Carol Blackwell, CFA, has been hired to manage trust assets for Blanchard Investments. Blanchard’s trust manager, Thaddeus Baldwin, CFA, has worked in the securities business for more than 50 years. On Blackwell’s first day at the office, Baldwin gives her several instructions.
Instruction 1: Limit risk by avoiding stock options.
Instruction 2: Above all, ensure that our clients’ capital is kept safe.
Instruction 3: We take pride in our low cost structure, so avoid unnecessary transactions.
Instruction 4: Remember that every investment must have the quality to stand on its own.
Baldwin realizes that many of the firm’s practices and policies would benefit from a compliance check. Because Blackwell recently received her CFA charter, Baldwin tells her she is the "perfect person to work with the compliance officer to update the policy on proxy voting and the procedures to comply with Standard VI(B) Priority of Transactions." Baldwin also wants Blackwell to evaluate whether the firm wants to, or can, claim compliance with the soft dollar standards.
Baldwin hands Blackwell a handwritten outline he created, which includes the following statements:
Statement 1: CFA Institute’s soft-dollar rules are not mandatory. In any case, ‘ client brokerage can be used to pay for a portion of mixed-use research.
Statement 2: Investment firms can use client brokerage to purchase research that does not immediately benefit the client. Commissions generated by outside trades are considered soft dollars, but commissions from internal trading desks are not.
During a local society luncheon, Blackwell is seated next to CFA candidate Lucas Walters, who has been assigned the task of creating a compliance manual for Borchard & Sons, a small brokerage firm. Walters asks for her advice.
When Walters returns to work, he is apprised of the following situation: Borchard & Sons purchased 25,000 shares of CBX Corp. for equity manager Quintux Quantitative just minutes before the money manager called back and said it meant to buy 25,000 shares of CDX Corp. Borchard then purchased CDX shares for Quintux, but not before shares of CBX Corp. declined by 1.5%. The broker is holding the CBX shares in its own inventory.
Borchard proposes three methods for dealing with the trading error.
Method 1: Quintux directs additional trades to Borchard worth a dollar value equal to the amount of the trading loss.
Method 2: Borchard receives investment research from Quintux in exchange for Borchard covering the costs of the trading error.
Method 3: Borchard transfers the ordered CBX shares in its inventory to Quintux, which allocates them to all of its clients on a pro-rata basis.
A CFA charterholder who wishes to follow Standard VI(B) Priority of Transactions must:
- A . maintain loyalty to pension-plan beneficiaries.
- B . limit IPO investments in client and personal accounts.
- C . give both clients and employers preference over the charterholder’s own accounts.
C
Explanation:
The priority of transaction Standard holds that a financial professional’s personal transactions must wait until both her employer and her clients have had a chance to act. The Standard holds that all client accounts should be treated equally, regardless of whether the client is a family member. Members and candidates should limit personal participation in IPOs in order to give preference to clients who wish to participate. There is no need to limit client participation to satisfy Standard VI(B). It is quite possible to be loyal to pension-plan beneficiaries without following Standard VI(B) (Study Session 1, LOS 2.a)
Carol Blackwell, CFA, has been hired to manage trust assets for Blanchard Investments. Blanchard’s trust manager, Thaddeus Baldwin, CFA, has worked in the securities business for more than 50 years. On Blackwell’s first day at the office, Baldwin gives her several instructions.
Instruction 1: Limit risk by avoiding stock options.
Instruction 2: Above all, ensure that our clients’ capital is kept safe.
Instruction 3: We take pride in our low cost structure, so avoid unnecessary transactions.
Instruction 4: Remember that every investment must have the quality to stand on its own.
Baldwin realizes that many of the firm’s practices and policies would benefit from a compliance check. Because Blackwell recently received her CFA charter, Baldwin tells her she is the "perfect person to work with the compliance officer to update the policy on proxy voting and the procedures to comply with Standard VI(B) Priority of Transactions." Baldwin also wants Blackwell to evaluate whether the firm wants to, or can, claim compliance with the soft dollar standards.
Baldwin hands Blackwell a handwritten outline he created, which includes the following statements:
Statement 1: CFA Institute’s soft-dollar rules are not mandatory. In any case, ‘ client brokerage can be used to pay for a portion of mixed-use research.
Statement 2: Investment firms can use client brokerage to purchase research that does not immediately benefit the client. Commissions generated by outside trades are considered soft dollars, but commissions from internal trading desks are not.
During a local society luncheon, Blackwell is seated next to CFA candidate Lucas Walters, who has been assigned the task of creating a compliance manual for Borchard & Sons, a small brokerage firm. Walters asks for her advice.
When Walters returns to work, he is apprised of the following situation: Borchard & Sons purchased 25,000 shares of CBX Corp. for equity manager Quintux Quantitative just minutes before the money manager called back and said it meant to buy 25,000 shares of CDX Corp. Borchard then purchased CDX shares for Quintux, but not before shares of CBX Corp. declined by 1.5%. The broker is holding the CBX shares in its own inventory.
Borchard proposes three methods for dealing with the trading error.
Method 1: Quintux directs additional trades to Borchard worth a dollar value equal to the amount of the trading loss.
Method 2: Borchard receives investment research from Quintux in exchange for Borchard covering the costs of the trading error.
Method 3: Borchard transfers the ordered CBX shares in its inventory to Quintux, which allocates them to all of its clients on a pro-rata basis.
Are Thaddeus Baldwin’s statements on the soft dollar standards correct?
- A . Both statements are correct.
- B . Only Statement I is correct.
- C . Only Statement 2 is correct.
B
Explanation:
Commissions from both internal and external brokerage operations are considered soft dollars, so Statement 2 is false. Statement 1 is true. CFA Institute Soft Dollar Standards are voluntary, though firms that wish to claim compliance with the Standards must follow them completely. Client brokerage can be used to pay for mixed-use research with the caveat that the research must be reasonable, justifiable, and documcntable, and that the client brokerage is only used to pay for the portion of the research that will be used in the investment decision-making process. While research paid for by client brokerage should directly benefit the client, it does not have to do so immediately. (Study Session 1, LOS 3-b)
Carol Blackwell, CFA, has been hired to manage trust assets for Blanchard Investments. Blanchard’s trust manager, Thaddeus Baldwin, CFA, has worked in the securities business for more than 50 years. On Blackwell’s first day at the office, Baldwin gives her several instructions.
Instruction 1: Limit risk by avoiding stock options.
Instruction 2: Above all, ensure that our clients’ capital is kept safe.
Instruction 3: We take pride in our low cost structure, so avoid unnecessary transactions.
Instruction 4: Remember that every investment must have the quality to stand on its own.
Baldwin realizes that many of the firm’s practices and policies would benefit from a compliance check. Because Blackwell recently received her CFA charter, Baldwin tells her she is the "perfect person to work with the compliance officer to update the policy on proxy voting and the procedures to comply with Standard VI(B) Priority of Transactions." Baldwin also wants Blackwell to evaluate whether the firm wants to, or can, claim compliance with the soft dollar standards.
Baldwin hands Blackwell a handwritten outline he created, which includes the following statements:
Statement 1: CFA Institute’s soft-dollar rules are not mandatory. In any case, ‘ client brokerage can be used to pay for a portion of mixed-use research.
Statement 2: Investment firms can use client brokerage to purchase research that does not immediately benefit the client. Commissions generated by outside trades are considered soft dollars, but commissions from internal trading desks are not.
During a local society luncheon, Blackwell is seated next to CFA candidate Lucas Walters, who has been assigned the task of creating a compliance manual for Borchard & Sons, a small brokerage firm. Walters asks for her advice.
When Walters returns to work, he is apprised of the following situation: Borchard & Sons purchased 25,000 shares of CBX Corp. for equity manager Quintux Quantitative just minutes before the money manager called back and said it meant to buy 25,000 shares of CDX Corp. Borchard then purchased CDX shares for Quintux, but not before shares of CBX Corp. declined by 1.5%. The broker is holding the CBX shares in its own inventory.
Borchard proposes three methods for dealing with the trading error.
Method 1: Quintux directs additional trades to Borchard worth a dollar value equal to the amount of the trading loss.
Method 2: Borchard receives investment research from Quintux in exchange for Borchard covering the costs of the trading error.
Method 3: Borchard transfers the ordered CBX shares in its inventory to Quintux, which allocates them to all of its clients on a pro-rata basis.
It Walters wants the manual to satisfy the requirements and recommendations of the Code and Standards, which of the following instructions is least appropriate to include in the section on fair dealing?
- A . Whenever possible, disseminate investment recommendations to all clients at the same time.
- B . Execute all clients1 requested trades promptly and without comment, regardless of the company’s opinion on the stock being traded.
- C . Members of the investment-policy committee should not discuss possible changes in investment recommendations with anyone else in the firm until after an official decision has been made.
B
Explanation:
Standard III(B) Fair Dealing requires firms to notify clients of changes in investment advice before executing trades that go counter to that advice. While equal dissemination is usually impossible, it is an admirable goal. Firms should establish dissemination guidelines that are fair to all clients. Trading disclosures and confidentiality regarding investment rating changes are sensible precautions that meet the spirit of the fair dealing Standard. Maintaining client lists that detail client holdings will simplify the process of deciding how to best disseminate a change in investment recommendation. (Study Session 1, LOS 2.a)
Carol Blackwell, CFA, has been hired to manage trust assets for Blanchard Investments. Blanchard’s trust manager, Thaddeus Baldwin, CFA, has worked in the securities business for more than 50 years. On Blackwell’s first day at the office, Baldwin gives her several instructions.
Instruction 1: Limit risk by avoiding stock options.
Instruction 2: Above all, ensure that our clients’ capital is kept safe.
Instruction 3: We take pride in our low cost structure, so avoid unnecessary transactions.
Instruction 4: Remember that every investment must have the quality to stand on its own.
Baldwin realizes that many of the firm’s practices and policies would benefit from a compliance check. Because Blackwell recently received her CFA charter, Baldwin tells her she is the "perfect person to work with the compliance officer to update the policy on proxy voting and the procedures to comply with Standard VI(B) Priority of Transactions." Baldwin also wants Blackwell to evaluate whether the firm wants to, or can, claim compliance with the soft dollar standards.
Baldwin hands Blackwell a handwritten outline he created, which includes the following statements:
Statement 1: CFA Institute’s soft-dollar rules are not mandatory. In any case, ‘ client brokerage can be used to pay for a portion of mixed-use research.
Statement 2: Investment firms can use client brokerage to purchase research that does not immediately benefit the client. Commissions generated by outside trades are considered soft dollars, but commissions from internal trading desks are not.
During a local society luncheon, Blackwell is seated next to CFA candidate Lucas Walters, who has been assigned the task of creating a compliance manual for Borchard & Sons, a small brokerage firm. Walters asks for her advice.
When Walters returns to work, he is apprised of the following situation: Borchard & Sons purchased 25,000 shares of CBX Corp. for equity manager Quintux Quantitative just minutes before the money manager called back and said it meant to buy 25,000 shares of CDX Corp. Borchard then purchased CDX shares for Quintux, but not before shares of CBX Corp. declined by 1.5%. The broker is holding the CBX shares in its own inventory.
Borchard proposes three methods for dealing with the trading error.
Method 1: Quintux directs additional trades to Borchard worth a dollar value equal to the amount of the trading loss.
Method 2: Borchard receives investment research from Quintux in exchange for Borchard covering the costs of the trading error.
Method 3: Borchard transfers the ordered CBX shares in its inventory to Quintux, which allocates them to all of its clients on a pro-rata basis.
Method 3: Borchard transfers the ordered CBX shares in its inventory to Quintux, which allocates them to all of its clients on a pro-rata basis.
Which method for dealing with the trading error is most consistent with the Code and Standards?
- A . Method 1.
- B . Method 2.
- C . Method 3.
B
Explanation:
Method 2 is the best answer. Quintux should cover the cost of the trading error, and if Borchard is willing to accept investment research in lieu of cash, that’s all the better for Quintux. If Quintux compensates Borchard with extra trades, its clients are covering the costs of the error, which may violate Standard III (A) Loyalty, Prudence, and Care if directing future trades to Borchard is not in the clients’ best interest. By accepting the CBX shares it did not request and allocating the shares to all client accounts rather than paying for the error, Quintux is violating Standard 111(C) Suitability, since the shares are not likely to be appropriate for all of its client accounts and may not be suitable for any accounts since the shares were obtained as a result of a trading error, not an intentional investment action. Passing on client names is a violation of Standard III(E) Preservation of Confidentiality. (Study Session 1, LOS 2.a)
Charles Connor, CFA, is a portfolio manager at Apple Investments, LLC. Apple is a U.S.-based firm offering a wide spectrum of investment products and services. Connor manages the Biogene Fund, a domestic equity fund specializing in small capitalization growth stocks. The Biogene Fund generally takes significant positions in stocks, commonly owning 4.5-5% of the outstanding shares. The fund’s prospectus limits positions to a maximum of 5% of the shares outstanding. The performance of the Biogene Fund has been superior over the last few years, but for the last two quarters the fund has underperformed its benchmark by a wide margin. Connor is determined to improve his performance numbers going forward.
The Biogene prospectus allows Connor to use derivative instruments in his investment strategy. Connor frequently uses options to hedge his fund’s exposure as he builds or liquidates positions in his portfolio since Biogene’s large positions often take several weeks to acquire. For example, when he identifies a stock to buy, he often buys call options to gain exposure to the stock. As he buys the stock, he sells off the options or allows them to expire. Connor has noticed that the increased volume in the call options often drives the stock price higher for a few days. He has seen a similar negative effect on stock prices when he buys large amounts of put options.
The end of the quarter is just a few days away, and Connor is considering three transactions:
Transaction A: Buying Put Options on Stock A
The Biogene Fund owns 4,9% of the outstanding stock of Company A, but Connor believes the stock is fully valued and plans to sell the entire position. He anticipates that it will take approximately 45 trading days to liquidate the entire Biogene position in Stock A.
The Biogene Fund owns 5% of the outstanding stock of Company B. Connor believes there is significant appreciation potential for Stock B, but the stock price has dropped in recent weeks. Connor is hoping that by taking an option position, there will be a carryover effect on ihe stock price before quarter end.
Transaction C: Selling the Biogene Fund’s Entire Position in .Stock C
Connor believes that Stock C is still attractive, but he is selling the stock with the idea that he will repurchase the position next month. The motivation for the transaction is to capture a capital loss that will reduce the Biogene Fund’s tax expense for the year.
Apple has an investment banking department that is active in initial public offerings (IPOs). George Arnold, CFA, is the senior manager of the IPO department. Arnold approached Connor about Stock D, a new IPO being offered by Apple. Stock D will open trading in two days. Apple had offered the IPO to all of its clients, but approximately 20% of the deal remained unsold. Having read the prospectus, Connor thinks Stock D would be a good fit for his fund, and he expects Stock D to improve his performance in both the short and long term. Connor is not aware of any information related to Stock D beyond that provided in the prospectus. Connor asked to purchase 5% of the IPO, but Arnold limited Biogene’s share to 2%, explaining:
"With Biogene’s reputation, any participation will make the unsold shares highly marketable. Further, we may need Biogene to acquire more Stock D shares at a later date if the price does not hold up."
Connor is disappointed in being limited to 2% of the offering and suggests to Arnold in an e-mail that, given the 2% limitation, Biogene will not participate in the IPO. Arnold responded a few hours later with the following message:
"I have just spoken with Ms. D, the CFO of Stock D. Although it is too late to alter the prospectus, management believes they will receive a large contract from a foreign government that will boost next year’s sales by 20% or more. I urge you to accept the 2%―you won’t be sorry!"
After reviewing Arnold’s e-mail, Connor agrees to the 2% offer.
By executing Transaction A, Connor is:
- A . violating the Standards because his option trading can be reasonably expected to affect the price of Stock A.
- B . violating the Standards because the option position creates a profit opportunity in conflict with Biogene’s clients.
- C . not violating the Standards.
C
Explanation:
There is no violation of the Standards in Transaction A. Connor is basically hedging any potential loss from a decline in the price of Stock A prior to the completion of his sale transaction. There is no apparent attempt to manipulate the market in this transaction.
Charles Connor, CFA, is a portfolio manager at Apple Investments, LLC. Apple is a U.S.-based firm offering a wide spectrum of investment products and services. Connor manages the Biogene Fund, a domestic equity fund specializing in small capitalization growth stocks. The Biogene Fund generally takes significant positions in stocks, commonly owning 4.5-5% of the outstanding shares. The fund’s prospectus limits positions to a maximum of 5% of the shares outstanding. The performance of the Biogene Fund has been superior over the last few years, but for the last two quarters the fund has underperformed its benchmark by a wide margin. Connor is determined to improve his performance numbers going forward.
The Biogene prospectus allows Connor to use derivative instruments in his investment strategy. Connor frequently uses options to hedge his fund’s exposure as he builds or liquidates positions in his portfolio since Biogene’s large positions often take several weeks to acquire. For example, when he identifies a stock to buy, he often buys call options to gain exposure to the stock. As he buys the stock, he sells off the options or allows them to expire. Connor has noticed that the increased volume in the call options often drives the stock price higher for a few days. He has seen a similar negative effect on stock prices when he buys large amounts of put options.
The end of the quarter is just a few days away, and Connor is considering three transactions:
Transaction A: Buying Put Options on Stock A
The Biogene Fund owns 4,9% of the outstanding stock of Company A, but Connor believes the stock is fully valued and plans to sell the entire position. He anticipates that it will take approximately 45 trading days to liquidate the entire Biogene position in Stock A.
The Biogene Fund owns 5% of the outstanding stock of Company B. Connor believes there is significant appreciation potential for Stock B, but the stock price has dropped in recent weeks. Connor is hoping that by taking an option position, there will be a carryover effect on ihe stock price before quarter end.
Transaction C: Selling the Biogene Fund’s Entire Position in .Stock C
Connor believes that Stock C is still attractive, but he is selling the stock with the idea that he will repurchase the position next month. The motivation for the transaction is to capture a capital loss that will reduce the Biogene Fund’s tax expense for the year.
Apple has an investment banking department that is active in initial public offerings (IPOs). George Arnold, CFA, is the senior manager of the IPO department. Arnold approached Connor about Stock D, a new IPO being offered by Apple. Stock D will open trading in two days. Apple had offered the IPO to all of its clients, but approximately 20% of the deal remained unsold. Having read the prospectus, Connor thinks Stock D would be a good fit for his fund, and he expects Stock D to improve his performance in both the short and long term. Connor is not aware of any information related to Stock D beyond that provided in the prospectus. Connor asked to purchase 5% of the IPO, but Arnold limited Biogene’s share to 2%, explaining:
"With Biogene’s reputation, any participation will make the unsold shares highly marketable. Further, we may need Biogene to acquire more Stock D shares at a later date if the price does not hold up."
Connor is disappointed in being limited to 2% of the offering and suggests to Arnold in an e-mail that, given the 2% limitation, Biogene will not participate in the IPO. Arnold responded a few hours later with the following message:
"I have just spoken with Ms. D, the CFO of Stock D. Although it is too late to alter the prospectus, management believes they will receive a large contract from a foreign government that will boost next year’s sales by 20% or more. I urge you to accept the 2%―you won’t be sorry!"
After reviewing Arnold’s e-mail, Connor agrees to the 2% offer.
By executing Transaction B, Connor is:
- A . violating the Standards because his option trading can be reasonably expected to affect his quarterly performance.
- B . not violating the Standards because the option position creates a profit opportunity consistent with Biogene’s clients interests.
- C . not violating the Standards because he believes there is significant appreciation potential in Stock B.
A
Explanation:
A critical factor in assessing any violation of Standard 11(B) Integrity of Capital Markets – Market Manipulation is the intent of the parties involved. In this case, Connor is hoping that his options transaction drives up the price of Stock B, which would improve the reported performance of the Biogene Fund. This type of manipulation would be a violation of the Standard.
Charles Connor, CFA, is a portfolio manager at Apple Investments, LLC. Apple is a U.S.-based firm offering a wide spectrum of investment products and services. Connor manages the Biogene Fund, a domestic equity fund specializing in small capitalization growth stocks. The Biogene Fund generally takes significant positions in stocks, commonly owning 4.5-5% of the outstanding shares. The fund’s prospectus limits positions to a maximum of 5% of the shares outstanding. The performance of the Biogene Fund has been superior over the last few years, but for the last two quarters the fund has underperformed its benchmark by a wide margin. Connor is determined to improve his performance numbers going forward.
The Biogene prospectus allows Connor to use derivative instruments in his investment strategy. Connor frequently uses options to hedge his fund’s exposure as he builds or liquidates positions in his portfolio since Biogene’s large positions often take several weeks to acquire. For example, when he identifies a stock to buy, he often buys call options to gain exposure to the stock. As he buys the stock, he sells off the options or allows them to expire. Connor has noticed that the increased volume in the call options often drives the stock price higher for a few days. He has seen a similar negative effect on stock prices when he buys large amounts of put options.
The end of the quarter is just a few days away, and Connor is considering three transactions:
Transaction A: Buying Put Options on Stock A
The Biogene Fund owns 4,9% of the outstanding stock of Company A, but Connor believes the stock is fully valued and plans to sell the entire position. He anticipates that it will take approximately 45 trading days to liquidate the entire Biogene position in Stock A.
The Biogene Fund owns 5% of the outstanding stock of Company B. Connor believes there is significant appreciation potential for Stock B, but the stock price has dropped in recent weeks. Connor is hoping that by taking an option position, there will be a carryover effect on ihe stock price before quarter end.
Transaction C: Selling the Biogene Fund’s Entire Position in .Stock C
Connor believes that Stock C is still attractive, but he is selling the stock with the idea that he will repurchase the position next month. The motivation for the transaction is to capture a capital loss that will reduce the Biogene Fund’s tax expense for the year.
Apple has an investment banking department that is active in initial public offerings (IPOs). George Arnold, CFA, is the senior manager of the IPO department. Arnold approached Connor about Stock D, a new IPO being offered by Apple. Stock D will open trading in two days. Apple had offered the IPO to all of its clients, but approximately 20% of the deal remained unsold. Having read the prospectus, Connor thinks Stock D would be a good fit for his fund, and he expects Stock D to improve his performance in both the short and long term. Connor is not aware of any information related to Stock D beyond that provided in the prospectus. Connor asked to purchase 5% of the IPO, but Arnold limited Biogene’s share to 2%, explaining:
"With Biogene’s reputation, any participation will make the unsold shares highly marketable. Further, we may need Biogene to acquire more Stock D shares at a later date if the price does not hold up."
Connor is disappointed in being limited to 2% of the offering and suggests to Arnold in an e-mail that, given the 2% limitation, Biogene will not participate in the IPO. Arnold responded a few hours later with the following message:
"I have just spoken with Ms. D, the CFO of Stock D. Although it is too late to alter the prospectus, management believes they will receive a large contract from a foreign government that will boost next year’s sales by 20% or more. I urge you to accept the 2%―you won’t be sorry!"
After reviewing Arnold’s e-mail, Connor agrees to the 2% offer.
By executing Transaction C, Connor is:
- A . violating the Standards by executing a transaction for tax reasons only.
- B . violating the Standards by executing a transaction that provides tax benefits to the Biogene Fund.
- C . not violating the Standards.
C
Explanation:
Transactions meant to minimize tax liabilities are not prohibited by the Standards. If the Biogenc Fund benefits, the investors in the fund will presumably benefit also.
Charles Connor, CFA, is a portfolio manager at Apple Investments, LLC. Apple is a U.S.-based firm offering a wide spectrum of investment products and services. Connor manages the Biogene Fund, a domestic equity fund specializing in small capitalization growth stocks. The Biogene Fund generally takes significant positions in stocks, commonly owning 4.5-5% of the outstanding shares. The fund’s prospectus limits positions to a maximum of 5% of the shares outstanding. The performance of the Biogene Fund has been superior over the last few years, but for the last two quarters the fund has underperformed its benchmark by a wide margin. Connor is determined to improve his performance numbers going forward.
The Biogene prospectus allows Connor to use derivative instruments in his investment strategy. Connor frequently uses options to hedge his fund’s exposure as he builds or liquidates positions in his portfolio since Biogene’s large positions often take several weeks to acquire. For example, when he identifies a stock to buy, he often buys call options to gain exposure to the stock. As he buys the stock, he sells off the options or allows them to expire. Connor has noticed that the increased volume in the call options often drives the stock price higher for a few days. He has seen a similar negative effect on stock prices when he buys large amounts of put options.
The end of the quarter is just a few days away, and Connor is considering three transactions:
Transaction A: Buying Put Options on Stock A
The Biogene Fund owns 4,9% of the outstanding stock of Company A, but Connor believes the stock is fully valued and plans to sell the entire position. He anticipates that it will take approximately 45 trading days to liquidate the entire Biogene position in Stock A.
The Biogene Fund owns 5% of the outstanding stock of Company B. Connor believes there is significant appreciation potential for Stock B, but the stock price has dropped in recent weeks. Connor is hoping that by taking an option position, there will be a carryover effect on ihe stock price before quarter end.
Transaction C: Selling the Biogene Fund’s Entire Position in .Stock C
Connor believes that Stock C is still attractive, but he is selling the stock with the idea that he will repurchase the position next month. The motivation for the transaction is to capture a capital loss that will reduce the Biogene Fund’s tax expense for the year.
Apple has an investment banking department that is active in initial public offerings (IPOs). George Arnold, CFA, is the senior manager of the IPO department. Arnold approached Connor about Stock D, a new IPO being offered by Apple. Stock D will open trading in two days. Apple had offered the IPO to all of its clients, but approximately 20% of the deal remained unsold. Having read the prospectus, Connor thinks Stock D would be a good fit for his fund, and he expects Stock D to improve his performance in both the short and long term. Connor is not aware of any information related to Stock D beyond that provided in the prospectus. Connor asked to purchase 5% of the IPO, but Arnold limited Biogene’s share to 2%, explaining:
"With Biogene’s reputation, any participation will make the unsold shares highly marketable. Further, we may need Biogene to acquire more Stock D shares at a later date if the price does not hold up."
Connor is disappointed in being limited to 2% of the offering and suggests to Arnold in an e-mail that, given the 2% limitation, Biogene will not participate in the IPO. Arnold responded a few hours later with the following message:
"I have just spoken with Ms. D, the CFO of Stock D. Although it is too late to alter the prospectus, management believes they will receive a large contract from a foreign government that will boost next year’s sales by 20% or more. I urge you to accept the 2%―you won’t be sorry!"
After reviewing Arnold’s e-mail, Connor agrees to the 2% offer.
By offering Biogene the opportunity to participate in the IPO of Stock D, Apple Investments has violated CFA Institute Standards relating to:
- A . priority of transactions but not independence and objectivity.
- B . independence and objectivity but not priority of (ransactions.
- C . neither priority of transactions nor independence and objectivity.
C
Explanation:
Connor was not pressured co cake che IPO, and he believed ic was a good investment. Connor received no confidential information. The IPO had been made available to all Apple clients prior to Biogene. There is no evidence of a violation of either of these Standards.
Charles Connor, CFA, is a portfolio manager at Apple Investments, LLC. Apple is a U.S.-based firm offering a wide spectrum of investment products and services. Connor manages the Biogene Fund, a domestic equity fund specializing in small capitalization growth stocks. The Biogene Fund generally takes significant positions in stocks, commonly owning 4.5-5% of the outstanding shares. The fund’s prospectus limits positions to a maximum of 5% of the shares outstanding. The performance of the Biogene Fund has been superior over the last few years, but for the last two quarters the fund has underperformed its benchmark by a wide margin. Connor is determined to improve his performance numbers going forward.
The Biogene prospectus allows Connor to use derivative instruments in his investment strategy. Connor frequently uses options to hedge his fund’s exposure as he builds or liquidates positions in his portfolio since Biogene’s large positions often take several weeks to acquire. For example, when he identifies a stock to buy, he often buys call options to gain exposure to the stock. As he buys the stock, he sells off the options or allows them to expire. Connor has noticed that the increased volume in the call options often drives the stock price higher for a few days. He has seen a similar negative effect on stock prices when he buys large amounts of put options.
The end of the quarter is just a few days away, and Connor is considering three transactions:
Transaction A: Buying Put Options on Stock A
The Biogene Fund owns 4,9% of the outstanding stock of Company A, but Connor believes the stock is fully valued and plans to sell the entire position. He anticipates that it will take approximately 45 trading days to liquidate the entire Biogene position in Stock A.
The Biogene Fund owns 5% of the outstanding stock of Company B. Connor believes there is significant appreciation potential for Stock B, but the stock price has dropped in recent weeks. Connor is hoping that by taking an option position, there will be a carryover effect on ihe stock price before quarter end.
Transaction C: Selling the Biogene Fund’s Entire Position in .Stock C
Connor believes that Stock C is still attractive, but he is selling the stock with the idea that he will repurchase the position next month. The motivation for the transaction is to capture a capital loss that will reduce the Biogene Fund’s tax expense for the year.
Apple has an investment banking department that is active in initial public offerings (IPOs). George Arnold, CFA, is the senior manager of the IPO department. Arnold approached Connor about Stock D, a new IPO being offered by Apple. Stock D will open trading in two days. Apple had offered the IPO to all of its clients, but approximately 20% of the deal remained unsold. Having read the prospectus, Connor thinks Stock D would be a good fit for his fund, and he expects Stock D to improve his performance in both the short and long term. Connor is not aware of any information related to Stock D beyond that provided in the prospectus. Connor asked to purchase 5% of the IPO, but Arnold limited Biogene’s share to 2%, explaining:
"With Biogene’s reputation, any participation will make the unsold shares highly marketable. Further, we may need Biogene to acquire more Stock D shares at a later date if the price does not hold up."
Connor is disappointed in being limited to 2% of the offering and suggests to Arnold in an e-mail that, given the 2% limitation, Biogene will not participate in the IPO. Arnold responded a few hours later with the following message:
"I have just spoken with Ms. D, the CFO of Stock D. Although it is too late to alter the prospectus, management believes they will receive a large contract from a foreign government that will boost next year’s sales by 20% or more. I urge you to accept the 2%―you won’t be sorry!"
After reviewing Arnold’s e-mail, Connor agrees to the 2% offer.
Arnold’s arguments for limiting Biogene’s share to 2% suggest that Apple:
- A . may engage in a liquidity pumping strategy that would be acceptable given that Biogene is a related entity.
- B . may engage in transaction-based manipulation of Stock D in the future, in violation of Standards relating to market manipulation.
- C . is violating Standards related to priority of transactions by ofTering the IPO to Biogene before it is fully subscribed.
B
Explanation:
By suggesting that Biogene might need to acquire more shares to support the price in the future, Arnold is suggesting that Apple would be willing to manipulate the market by creating false trading volume. This is transaction-based manipulation in violation of Standard 11(B) Integrity of Capital Markets – Market Manipulation.
Charles Connor, CFA, is a portfolio manager at Apple Investments, LLC. Apple is a U.S.-based firm offering a wide spectrum of investment products and services. Connor manages the Biogene Fund, a domestic equity fund specializing in small capitalization growth stocks. The Biogene Fund generally takes significant positions in stocks, commonly owning 4.5-5% of the outstanding shares. The fund’s prospectus limits positions to a maximum of 5% of the shares outstanding. The performance of the Biogene Fund has been superior over the last few years, but for the last two quarters the fund has underperformed its benchmark by a wide margin. Connor is determined to improve his performance numbers going forward.
The Biogene prospectus allows Connor to use derivative instruments in his investment strategy. Connor frequently uses options to hedge his fund’s exposure as he builds or liquidates positions in his portfolio since Biogene’s large positions often take several weeks to acquire. For example, when he identifies a stock to buy, he often buys call options to gain exposure to the stock. As he buys the stock, he sells off the options or allows them to expire. Connor has noticed that the increased volume in the call options often drives the stock price higher for a few days. He has seen a similar negative effect on stock prices when he buys large amounts of put options.
The end of the quarter is just a few days away, and Connor is considering three transactions:
Transaction A: Buying Put Options on Stock A
The Biogene Fund owns 4,9% of the outstanding stock of Company A, but Connor believes the stock is fully valued and plans to sell the entire position. He anticipates that it will take approximately 45 trading days to liquidate the entire Biogene position in Stock A.
The Biogene Fund owns 5% of the outstanding stock of Company B. Connor believes there is significant appreciation potential for Stock B, but the stock price has dropped in recent weeks. Connor is hoping that by taking an option position, there will be a carryover effect on ihe stock price before quarter end.
Transaction C: Selling the Biogene Fund’s Entire Position in .Stock C
Connor believes that Stock C is still attractive, but he is selling the stock with the idea that he will repurchase the position next month. The motivation for the transaction is to capture a capital loss that will reduce the Biogene Fund’s tax expense for the year.
Apple has an investment banking department that is active in initial public offerings (IPOs). George Arnold, CFA, is the senior manager of the IPO department. Arnold approached Connor about Stock D, a new IPO being offered by Apple. Stock D will open trading in two days. Apple had offered the IPO to all of its clients, but approximately 20% of the deal remained unsold. Having read the prospectus, Connor thinks Stock D would be a good fit for his fund, and he expects Stock D to improve his performance in both the short and long term. Connor is not aware of any information related to Stock D beyond that provided in the prospectus. Connor asked to purchase 5% of the IPO, but Arnold limited Biogene’s share to 2%, explaining:
"With Biogene’s reputation, any participation will make the unsold shares highly marketable. Further, we may need Biogene to acquire more Stock D shares at a later date if the price does not hold up."
Connor is disappointed in being limited to 2% of the offering and suggests to Arnold in an e-mail that, given the 2% limitation, Biogene will not participate in the IPO. Arnold responded a few hours later with the following message:
"I have just spoken with Ms. D, the CFO of Stock D. Although it is too late to alter the prospectus, management believes they will receive a large contract from a foreign government that will boost next year’s sales by 20% or more. I urge you to accept the 2%―you won’t be sorry!"
After reviewing Arnold’s e-mail, Connor agrees to the 2% offer.
Based upon Connor’s acceptance of the 2% limitation after receiving the e-mail from Arnold:
- A . Connor has violated Standards relating to material nonpublic information, and Arnold has violated Standards relating to preservation of confidentiality.
- B . Connor has not violated Standards relating to material nonpublic information, but Arnold has violated Standards relating to preservation of confidentiality.
- C . Connor has not violated Standards relating to material nonpublic information, but Arnold has violated Standards relating to preservation of confidentiality and material nonpublic information.
A
Explanation:
By changing his previous decision and accepting the 2% based on Arnold s e-mail, Connor has violated the Standards related to material nonpublic information. He has acted based upon the receipt of inside information. Arnold has violated the Standards related to both material nonpublic information and preservation of confidentiality. Arnold violated Standard III(E) – Duties to Clients – Preservation of Confidentiality by revealing information he received based upon a special relationship with Stock D. By passing that information to another area of Apple, Arnold has violated Standard 11(A) Integrity of Capital Markets – Material Nonpublic Information as well.
Pat Wilson, CFA, is the chief compliance officer for Excess Investments, a global asset management and investment banking services company. Wilson is reviewing two investment reports written by Peter Holly, CFA, an analyst and portfolio manager who has worked for Excess for four years. Holly’s first report under compliance review is a strong buy recommendation for BlueNote Inc., a musical instrument manufacturer. The report states that the buy recommendation is applicable for the next 6 to 12 months with an average level of risk and a sustainable price target of $24 for the entire time period. At the bottom of the report, an e-mail address is given for investors who wish to obtain a complete description of the firm’s rating system. Among other reasons supporting the recommendation, Holly’s report states that expected increases in profitability as well as increased supply chain efficiency provide compelling support for purchasing BlueNote.
Holly informs Wilson that he determined his conclusions primarily from an intensive review of BlueNote’s filings with the SEC but also from a call to one of BlueNote’s suppliers who informed Holly that their new inventory processing system would allow for more efficiency in supplying BlueNote with raw materials. Holly explains to Wilson that he is the only analyst covering BlueNote who is aware of this information and that he believes the new inventory processing system will allow BlueNote to reduce costs and increase overall profitability for several years to come.
Wilson must also review Holly’s report on BigTirae Inc., a musical promotions and distribution company. In the report, Holly provides a very optimistic analysis of BigTime’s fundamentals. The analysis supports a buy recommendation for the company. Wilson finds one problem with Holly’s report on BigTime related to Holly’s former business relationship with BigTime Inc. Two years before joining Excess, Holly worked as an investment banker and received 1,000 restricted shares of BigTime as a result of his participation in taking the company public. These facts are not disclosed in the report but are disclosed on Excess Investment’s Web site. Wilson decides, however, that the timeliness of the information in the report warrants overlooking this issue so that the report can be distributed.
Just before the report is issued. Holly mentions to Wilson that BigTime unknowingly disclosed to him and a few other analysts who were wailing for a conference call to begin that the company is planning to restructure both its sales staff and sales strategy and may sell one of its poorly performing business units next year.
Three days after issuing his report on BigTime, which caused a substantial rise in the price of BigTime shares, Holly sells all of the BigTirne shares out of both his performance fee-based accounts and asset-based accounts and then proceeds to sell all of the BigTime shares out of his own account on the following day. Holly obtained approval from Wilson before making the trades.
Just after selling his shares in BigTime, Holly receives a call from the CEO of BlueNote who wants to see if Holly received the desk pen engraved with the BlueNote company logo that he sent last week and also to offer two front row tickets plus limousine service to a sold-out concert for a popular band that uses BlueNote’s instruments. Holly confirms that the desk pen arrived and thanks the CEO for the gift and tells him that before he accepts the concert tickets, he will have to check his calendar to see if he will be able to attend. Holly declines the use of the limousine service should he decide to attend the concert.
After speaking with the CEO of BlucNote, Holly constructs a letter that he plans to send by e-mail to all of his clients and prospects with e-mail addresses and by regular mail to all of his clients and prospects without e-mail addresses. The letter details changes to an equity valuation model that Holly and several other analysts at Excess use to analyze potential investment recommendations. Holly’s letter explains that the new model, which will be put into use next month, will utilize Monte Carlo simulations to create a distribution of stock values, a sharp contrast to the existing model which uses static valuations combined with sensitivity analysis. Relevant details of the new model are included in the letter, but similar details about the existing model are not included. The letter also explains that management at Excess has decided to exclude alcohol and tobacco company securities from the research coverage universe. Holly’s letter concludes by stating that no other significant changes that would affect the investment recommendation process have occurred or are expected to occur in the near future.
According to CFA Institute Research Objectivity Standards (ROS), which of the following statements is most accurate with regard to the rating system used by Holly in his investment report on BlueNote Inc.? The rating system:
- A . has appropriately incorporated the three recommended rating system elements from the ROS.
- B . should not have included a price target as it makes an implicit guarantee of investment performance.
- C . should not have included a time frame, as it misrepresents the level of certainty of the recommendation.
A
Explanation:
CFA Institute Research Objectivity Standards recommend that rating systems include the following three elements: the recommendation or rating category, time horizon categories, and risk categories. Holly’s report on BIueNote provides all three elements (strong-buy, 6-to 12-montb time horizon, average level of risk) and also includes the recommended disclosure on how investors can obtain a complete description of the firms rating system.
Pat Wilson, CFA, is the chief compliance officer for Excess Investments, a global asset management and investment banking services company. Wilson is reviewing two investment reports written by Peter Holly, CFA, an analyst and portfolio manager who has worked for Excess for four years. Holly’s first report under compliance review is a strong buy recommendation for BlueNote Inc., a musical instrument manufacturer. The report states that the buy recommendation is applicable for the next 6 to 12 months with an average level of risk and a sustainable price target of $24 for the entire time period. At the bottom of the report, an e-mail address is given for investors who wish to obtain a complete description of the firm’s rating system. Among other reasons supporting the recommendation, Holly’s report states that expected increases in profitability as well as increased supply chain efficiency provide compelling support for purchasing BlueNote.
Holly informs Wilson that he determined his conclusions primarily from an intensive review of BlueNote’s filings with the SEC but also from a call to one of BlueNote’s suppliers who informed Holly that their new inventory processing system would allow for more efficiency in supplying BlueNote with raw materials. Holly explains to Wilson that he is the only analyst covering BlueNote who is aware of this information and that he believes the new inventory processing system will allow BlueNote to reduce costs and increase overall profitability for several years to come.
Wilson must also review Holly’s report on BigTirae Inc., a musical promotions and distribution company. In the report, Holly provides a very optimistic analysis of BigTime’s fundamentals. The analysis supports a buy recommendation for the company. Wilson finds one problem with Holly’s report on BigTime related to Holly’s former business relationship with BigTime Inc. Two years before joining Excess, Holly worked as an investment banker and received 1,000 restricted shares of BigTime as a result of his participation in taking the company public. These facts are not disclosed in the report but are disclosed on Excess Investment’s Web site. Wilson decides, however, that the timeliness of the information in the report warrants overlooking this issue so that the report can be distributed.
Just before the report is issued. Holly mentions to Wilson that BigTime unknowingly disclosed to him and a few other analysts who were wailing for a conference call to begin that the company is planning to restructure both its sales staff and sales strategy and may sell one of its poorly performing business units next year.
Three days after issuing his report on BigTime, which caused a substantial rise in the price of BigTime shares, Holly sells all of the BigTirne shares out of both his performance fee-based accounts and asset-based accounts and then proceeds to sell all of the BigTime shares out of his own account on the following day. Holly obtained approval from Wilson before making the trades.
Just after selling his shares in BigTime, Holly receives a call from the CEO of BlueNote who wants to see if Holly received the desk pen engraved with the BlueNote company logo that he sent last week and also to offer two front row tickets plus limousine service to a sold-out concert for a popular band that uses BlueNote’s instruments. Holly confirms that the desk pen arrived and thanks the CEO for the gift and tells him that before he accepts the concert tickets, he will have to check his calendar to see if he will be able to attend. Holly declines the use of the limousine service should he decide to attend the concert.
After speaking with the CEO of BlucNote, Holly constructs a letter that he plans to send by e-mail to all of his clients and prospects with e-mail addresses and by regular mail to all of his clients and prospects without e-mail addresses. The letter details changes to an equity valuation model that Holly and several other analysts at Excess use to analyze potential investment recommendations. Holly’s letter explains that the new model, which will be put into use next month, will utilize Monte Carlo simulations to create a distribution of stock values, a sharp contrast to the existing model which uses static valuations combined with sensitivity analysis. Relevant details of the new model are included in the letter, but similar details about the existing model are not included. The letter also explains that management at Excess has decided to exclude alcohol and tobacco company securities from the research coverage universe. Holly’s letter concludes by stating that no other significant changes that would affect the investment recommendation process have occurred or are expected to occur in the near future.
Did Holly violate any CFA Institute Standards of Professional Conduct with respect to his report on BlueNote or BigTime, as it relates to potential use of material nonpublic information?
- A . Holly has violated Standard on material nonpublic information in the case of both reports.
- B . There is a violation regarding the Blue Note report, but no violation with the Big Time report.
- C . There is a violation regarding the Big Time report, but no violation with the Blue Note report.
C
Explanation:
Standard 11(A). Holly has utilized public information to conduct an intensive analysis of BlueNote and has also utilized information obtained from a supplier that, while nonpublic, is not by itself material. When combined with his knowledge of BlueNote s material public information, however, the information from the supplier allows Holly to make a significant and material conclusion that would not be known to the public in general. This situation falls under the Mosaic Theory. Holly is free to make recommendations based on her material nonpublic conclusion on BlueNote since the conclusion was formed using material public information combined with nonmaterial nonpublic information. Thus, the BlueNote report did not violate Standard 11(A) Integrity of Capital Markets – Material Nonpublic Information, and since there appears to be a reasonable and adequate basis, does not appear to violate any other Standards either. Holly’s report on BigTime, however, is based in part on a conversation that he overheard between executives at BigTime. The information he overheard related to the sale of one of BigTimes business units was both material and nonpublic. The fact that several other analysts overheard the conversation as well does not make the information public. Because Holly is in possession of material nonpublic information, he is prohibited by Standard 11(A) from acting or causing others to act on the information. Therefore, his report on BigTime violates the Standard.
Pat Wilson, CFA, is the chief compliance officer for Excess Investments, a global asset management and investment banking services company. Wilson is reviewing two investment reports written by Peter Holly, CFA, an analyst and portfolio manager who has worked for Excess for four years. Holly’s first report under compliance review is a strong buy recommendation for BlueNote Inc., a musical instrument manufacturer. The report states that the buy recommendation is applicable for the next 6 to 12 months with an average level of risk and a sustainable price target of $24 for the entire time period. At the bottom of the report, an e-mail address is given for investors who wish to obtain a complete description of the firm’s rating system. Among other reasons supporting the recommendation, Holly’s report states that expected increases in profitability as well as increased supply chain efficiency provide compelling support for purchasing BlueNote.
Holly informs Wilson that he determined his conclusions primarily from an intensive review of BlueNote’s filings with the SEC but also from a call to one of BlueNote’s suppliers who informed Holly that their new inventory processing system would allow for more efficiency in supplying BlueNote with raw materials. Holly explains to Wilson that he is the only analyst covering BlueNote who is aware of this information and that he believes the new inventory processing system will allow BlueNote to reduce costs and increase overall profitability for several years to come.
Wilson must also review Holly’s report on BigTirae Inc., a musical promotions and distribution company. In the report, Holly provides a very optimistic analysis of BigTime’s fundamentals. The analysis supports a buy recommendation for the company. Wilson finds one problem with Holly’s report on BigTime related to Holly’s former business relationship with BigTime Inc. Two years before joining Excess, Holly worked as an investment banker and received 1,000 restricted shares of BigTime as a result of his participation in taking the company public. These facts are not disclosed in the report but are disclosed on Excess Investment’s Web site. Wilson decides, however, that the timeliness of the information in the report warrants overlooking this issue so that the report can be distributed.
Just before the report is issued. Holly mentions to Wilson that BigTime unknowingly disclosed to him and a few other analysts who were wailing for a conference call to begin that the company is planning to restructure both its sales staff and sales strategy and may sell one of its poorly performing business units next year.
Three days after issuing his report on BigTime, which caused a substantial rise in the price of BigTime shares, Holly sells all of the BigTirne shares out of both his performance fee-based accounts and asset-based accounts and then proceeds to sell all of the BigTime shares out of his own account on the following day. Holly obtained approval from Wilson before making the trades.
Just after selling his shares in BigTime, Holly receives a call from the CEO of BlueNote who wants to see if Holly received the desk pen engraved with the BlueNote company logo that he sent last week and also to offer two front row tickets plus limousine service to a sold-out concert for a popular band that uses BlueNote’s instruments. Holly confirms that the desk pen arrived and thanks the CEO for the gift and tells him that before he accepts the concert tickets, he will have to check his calendar to see if he will be able to attend. Holly declines the use of the limousine service should he decide to attend the concert.
After speaking with the CEO of BlucNote, Holly constructs a letter that he plans to send by e-mail to all of his clients and prospects with e-mail addresses and by regular mail to all of his clients and prospects without e-mail addresses. The letter details changes to an equity valuation model that Holly and several other analysts at Excess use to analyze potential investment recommendations. Holly’s letter explains that the new model, which will be put into use next month, will utilize Monte Carlo simulations to create a distribution of stock values, a sharp contrast to the existing model which uses static valuations combined with sensitivity analysis. Relevant details of the new model are included in the letter, but similar details about the existing model are not included. The letter also explains that management at Excess has decided to exclude alcohol and tobacco company securities from the research coverage universe. Holly’s letter concludes by stating that no other significant changes that would affect the investment recommendation process have occurred or are expected to occur in the near future.
According to CFA Institute Research Objectivity Standards (ROS), which of the following statements is most accurate with regard to Holly’s disclosure of his ownership of BigTime restricted shares and past investment banking relationship with BigTime? The disclosure:
- A . is not required or recommended by the ROS since the shares are restricted.
- B . complies with the ROS recommended procedures for disclosing conflicts of interest.
- C . should have been made in the research report itself and not just on Excess’s Web site.
C
Explanation:
CFA Institute Research Objectivity Standards (ROS) require disclosures of conflicts of interest such as beneficial ownership of securities of a covered firm. The ROS recommend that such disclosure be made either in the supporting documents or on the firms Web site. It is further recommended that the disclosure, or a page reference to the disclosure, be made in the report itself. Holly owns shares of BigTime that may potentially benefit from his recommendation. His best course of action would be to disclose the conflict on both the firms Web site and in the report.
Pat Wilson, CFA, is the chief compliance officer for Excess Investments, a global asset management and investment banking services company. Wilson is reviewing two investment reports written by Peter Holly, CFA, an analyst and portfolio manager who has worked for Excess for four years. Holly’s first report under compliance review is a strong buy recommendation for BlueNote Inc., a musical instrument manufacturer. The report states that the buy recommendation is applicable for the next 6 to 12 months with an average level of risk and a sustainable price target of $24 for the entire time period. At the bottom of the report, an e-mail address is given for investors who wish to obtain a complete description of the firm’s rating system. Among other reasons supporting the recommendation, Holly’s report states that expected increases in profitability as well as increased supply chain efficiency provide compelling support for purchasing BlueNote.
Holly informs Wilson that he determined his conclusions primarily from an intensive review of BlueNote’s filings with the SEC but also from a call to one of BlueNote’s suppliers who informed Holly that their new inventory processing system would allow for more efficiency in supplying BlueNote with raw materials. Holly explains to Wilson that he is the only analyst covering BlueNote who is aware of this information and that he believes the new inventory processing system will allow BlueNote to reduce costs and increase overall profitability for several years to come.
Wilson must also review Holly’s report on BigTirae Inc., a musical promotions and distribution company. In the report, Holly provides a very optimistic analysis of BigTime’s fundamentals. The analysis supports a buy recommendation for the company. Wilson finds one problem with Holly’s report on BigTime related to Holly’s former business relationship with BigTime Inc. Two years before joining Excess, Holly worked as an investment banker and received 1,000 restricted shares of BigTime as a result of his participation in taking the company public. These facts are not disclosed in the report but are disclosed on Excess Investment’s Web site. Wilson decides, however, that the timeliness of the information in the report warrants overlooking this issue so that the report can be distributed.
Just before the report is issued. Holly mentions to Wilson that BigTime unknowingly disclosed to him and a few other analysts who were wailing for a conference call to begin that the company is planning to restructure both its sales staff and sales strategy and may sell one of its poorly performing business units next year.
Three days after issuing his report on BigTime, which caused a substantial rise in the price of BigTime shares, Holly sells all of the BigTirne shares out of both his performance fee-based accounts and asset-based accounts and then proceeds to sell all of the BigTime shares out of his own account on the following day. Holly obtained approval from Wilson before making the trades.
Just after selling his shares in BigTime, Holly receives a call from the CEO of BlueNote who wants to see if Holly received the desk pen engraved with the BlueNote company logo that he sent last week and also to offer two front row tickets plus limousine service to a sold-out concert for a popular band that uses BlueNote’s instruments. Holly confirms that the desk pen arrived and thanks the CEO for the gift and tells him that before he accepts the concert tickets, he will have to check his calendar to see if he will be able to attend. Holly declines the use of the limousine service should he decide to attend the concert.
After speaking with the CEO of BlucNote, Holly constructs a letter that he plans to send by e-mail to all of his clients and prospects with e-mail addresses and by regular mail to all of his clients and prospects without e-mail addresses. The letter details changes to an equity valuation model that Holly and several other analysts at Excess use to analyze potential investment recommendations. Holly’s letter explains that the new model, which will be put into use next month, will utilize Monte Carlo simulations to create a distribution of stock values, a sharp contrast to the existing model which uses static valuations combined with sensitivity analysis. Relevant details of the new model are included in the letter, but similar details about the existing model are not included. The letter also explains that management at Excess has decided to exclude alcohol and tobacco company securities from the research coverage universe. Holly’s letter concludes by stating that no other significant changes that would affect the investment recommendation process have occurred or are expected to occur in the near future.
According to CFA Institute Standards of Professional Conduct, which of the following statements is most likely correct with regard to Holly’s report and subsequent sale of his and his clients’ shares of BigTime common stock? Holly has: A. violated the Standard by attempting to manipulate the market price of BigTime stock.
B. not violated the Standard since he first obtained approval to make the trades from his compliance officer.
C. not violated the Standard since he acted in the best interest of his clients by realizing gains on BigTime stock.
Explanation:
Standard 11(B) ― Market Manipulation. Holly has issued a buy recommendation on BigTime stock. The analysis is based on a very optimistic analysis of the company’s fundamentals. Yet, three days after issuing the report, Holly decides to sell all of his clients’ holdings as well as his own holdings of BigTime stock after observing a rise in the price of the stock. Holly’s report, which caused an increase in the price of BigTime stock, was intended to deceive market participants into believing the company was a good investment when, as indicated by his subsequent sale of the shares, Holly believed otherwise. The combination of actions indicates that Holly is likely attempting to manipulate the price of the stock for his clients’, and his own, benefit. Thus, he has likely violated Standard 11(B) – Integrity of Capital Markets Market Manipulation.
Pat Wilson, CFA, is the chief compliance officer for Excess Investments, a global asset management and investment banking services company. Wilson is reviewing two investment reports written by Peter Holly, CFA, an analyst and portfolio manager who has worked for Excess for four years. Holly’s first report under compliance review is a strong buy recommendation for BlueNote Inc., a musical instrument manufacturer. The report states that the buy recommendation is applicable for the next 6 to 12 months with an average level of risk and a sustainable price target of $24 for the entire time period. At the bottom of the report, an e-mail address is given for investors who wish to obtain a complete description of the firm’s rating system. Among other reasons supporting the recommendation, Holly’s report states that expected increases in profitability as well as increased supply chain efficiency provide compelling support for purchasing BlueNote.
Holly informs Wilson that he determined his conclusions primarily from an intensive review of BlueNote’s filings with the SEC but also from a call to one of BlueNote’s suppliers who informed Holly that their new inventory processing system would allow for more efficiency in supplying BlueNote with raw materials. Holly explains to Wilson that he is the only analyst covering BlueNote who is aware of this information and that he believes the new inventory processing system will allow BlueNote to reduce costs and increase overall profitability for several years to come.
Wilson must also review Holly’s report on BigTirae Inc., a musical promotions and distribution company. In the report, Holly provides a very optimistic analysis of BigTime’s fundamentals. The analysis supports a buy recommendation for the company. Wilson finds one problem with Holly’s report on BigTime related to Holly’s former business relationship with BigTime Inc. Two years before joining Excess, Holly worked as an investment banker and received 1,000 restricted shares of BigTime as a result of his participation in taking the company public. These facts are not disclosed in the report but are disclosed on Excess Investment’s Web site. Wilson decides, however, that the timeliness of the information in the report warrants overlooking this issue so that the report can be distributed.
Just before the report is issued. Holly mentions to Wilson that BigTime unknowingly disclosed to him and a few other analysts who were wailing for a conference call to begin that the company is planning to restructure both its sales staff and sales strategy and may sell one of its poorly performing business units next year.
Three days after issuing his report on BigTime, which caused a substantial rise in the price of BigTime shares, Holly sells all of the BigTirne shares out of both his performance fee-based accounts and asset-based accounts and then proceeds to sell all of the BigTime shares out of his own account on the following day. Holly obtained approval from Wilson before making the trades.
Just after selling his shares in BigTime, Holly receives a call from the CEO of BlueNote who wants to see if Holly received the desk pen engraved with the BlueNote company logo that he sent last week and also to offer two front row tickets plus limousine service to a sold-out concert for a popular band that uses BlueNote’s instruments. Holly confirms that the desk pen arrived and thanks the CEO for the gift and tells him that before he accepts the concert tickets, he will have to check his calendar to see if he will be able to attend. Holly declines the use of the limousine service should he decide to attend the concert.
After speaking with the CEO of BlucNote, Holly constructs a letter that he plans to send by e-mail to all of his clients and prospects with e-mail addresses and by regular mail to all of his clients and prospects without e-mail addresses. The letter details changes to an equity valuation model that Holly and several other analysts at Excess use to analyze potential investment recommendations. Holly’s letter explains that the new model, which will be put into use next month, will utilize Monte Carlo simulations to create a distribution of stock values, a sharp contrast to the existing model which uses static valuations combined with sensitivity analysis. Relevant details of the new model are included in the letter, but similar details about the existing model are not included. The letter also explains that management at Excess has decided to exclude alcohol and tobacco company securities from the research coverage universe. Holly’s letter concludes by stating that no other significant changes that would affect the investment recommendation process have occurred or are expected to occur in the near future.
According to CFA Institute Standards of Professional Conduct, which of the following best describes the actions Holly should take with regard to the desk pen and the concert tickets offered to him by the CEO of BlucNote? Holly:
- A . must not accept the desk pen or the concert tickets.
- B . may accept both the desk pen and the concert tickets.
- C . may accept the desk pen but should not accept the concert tickets.
C
Explanation:
Standard 1(B) – Professionalism: Independence and Objectivity. Members and candidates are prohibited from accepting any gift that could reasonably be expected to interfere with their independence and objectivity. The desk pen is a token item with little material value and can be accepted without violating the Standard.
However, the concert tickets are likely to have a very substantial amount of material value since the concert is sold out and involves a popular musical act. Best practice dictates that Holly should not accept the concert tickers since they could reasonably be expected to compromise Holly’s independence and objectivity.
Pat Wilson, CFA, is the chief compliance officer for Excess Investments, a global asset management and investment banking services company. Wilson is reviewing two investment reports written by Peter Holly, CFA, an analyst and portfolio manager who has worked for Excess for four years. Holly’s first report under compliance review is a strong buy recommendation for BlueNote Inc., a musical instrument manufacturer. The report states that the buy recommendation is applicable for the next 6 to 12 months with an average level of risk and a sustainable price target of $24 for the entire time period. At the bottom of the report, an e-mail address is given for investors who wish to obtain a complete description of the firm’s rating system. Among other reasons supporting the recommendation, Holly’s report states that expected increases in profitability as well as increased supply chain efficiency provide compelling support for purchasing BlueNote.
Holly informs Wilson that he determined his conclusions primarily from an intensive review of BlueNote’s filings with the SEC but also from a call to one of BlueNote’s suppliers who informed Holly that their new inventory processing system would allow for more efficiency in supplying BlueNote with raw materials. Holly explains to Wilson that he is the only analyst covering BlueNote who is aware of this information and that he believes the new inventory processing system will allow BlueNote to reduce costs and increase overall profitability for several years to come.
Wilson must also review Holly’s report on BigTirae Inc., a musical promotions and distribution company. In the report, Holly provides a very optimistic analysis of BigTime’s fundamentals. The analysis supports a buy recommendation for the company. Wilson finds one problem with Holly’s report on BigTime related to Holly’s former business relationship with BigTime Inc. Two years before joining Excess, Holly worked as an investment banker and received 1,000 restricted shares of BigTime as a result of his participation in taking the company public. These facts are not disclosed in the report but are disclosed on Excess Investment’s Web site. Wilson decides, however, that the timeliness of the information in the report warrants overlooking this issue so that the report can be distributed.
Just before the report is issued. Holly mentions to Wilson that BigTime unknowingly disclosed to him and a few other analysts who were wailing for a conference call to begin that the company is planning to restructure both its sales staff and sales strategy and may sell one of its poorly performing business units next year.
Three days after issuing his report on BigTime, which caused a substantial rise in the price of BigTime shares, Holly sells all of the BigTirne shares out of both his performance fee-based accounts and asset-based accounts and then proceeds to sell all of the BigTime shares out of his own account on the following day. Holly obtained approval from Wilson before making the trades.
Just after selling his shares in BigTime, Holly receives a call from the CEO of BlueNote who wants to see if Holly received the desk pen engraved with the BlueNote company logo that he sent last week and also to offer two front row tickets plus limousine service to a sold-out concert for a popular band that uses BlueNote’s instruments. Holly confirms that the desk pen arrived and thanks the CEO for the gift and tells him that before he accepts the concert tickets, he will have to check his calendar to see if he will be able to attend. Holly declines the use of the limousine service should he decide to attend the concert.
After speaking with the CEO of BlucNote, Holly constructs a letter that he plans to send by e-mail to all of his clients and prospects with e-mail addresses and by regular mail to all of his clients and prospects without e-mail addresses. The letter details changes to an equity valuation model that Holly and several other analysts at Excess use to analyze potential investment recommendations. Holly’s letter explains that the new model, which will be put into use next month, will utilize Monte Carlo simulations to create a distribution of stock values, a sharp contrast to the existing model which uses static valuations combined with sensitivity analysis. Relevant details of the new model are included in the letter, but similar details about the existing model are not included. The letter also explains that management at Excess has decided to exclude alcohol and tobacco company securities from the research coverage universe. Holly’s letter concludes by stating that no other significant changes that would affect the investment recommendation process have occurred or are expected to occur in the near future.
In his letter to clients explaining the change in the valuation model, did Holly violate anv CFA Institute Standards of Professional Conduct?
- A . No.
- B . Yes, since he did not treat all clients fairly in his dissemination of the letter.
- C . Yes, since he failed to include details of the current valuation model to contrast with the new model.
C
Explanation:
Standard V(B) – Communication with Clients and Prospective Clients. Standard V(B) requires members and candidates to promptly disclose any changes that materially affect investment processes. Holly has provided a detailed description of the new valuation model that will be used to generate investment recommendations and has disclosed the new limitations on the investment universe (i.e., no alcohol or tobacco stocks) Therefore, it does not appear that he has violated Standard V(BJ. Holly also has not violated any other standards. It is acceptable for him to e-mail those clients with e-mail addresses and send his letter by regular mail to those who do nor. Standard 111(B) – Fair Dealing does not require that all clients receive investment recommendations or other communications at exactly the same time, only that the system treats clients fairly.
For the past 15 years, Susan Luna, CFA, Kyle Lawson, CFA, and Matt Miller. CFA, have worked together as equity analysts and then equity portfolio managers in the investment management division (BIMCO) of the Broadway Life Insurance Company. For the past five years, the three associates have worked together managing the BIMCO Aggressive Growth Fund (BAGF). During their management tenure the BAGF had excellent performance and was well recognized in the financial press.
Just over one year ago, Broadway Life was acquired by a larger company, Gobble Insurance, and as part of the consolidation process BIMCO was closed. The closure allowed Luna, Lawson and Miller to start their own investment management firm, Trio Investment Management LLC (TIM). TIM focuses on the small capitalization growth equities area. This is the same investment focus as the BAGF, but TIM will have individually managed accounts. Several cases have arisen calling for interpretation as to consistency with CFA Institute Standards of Professional Conduct.
Case 1
TIM markets its investment management services by contracting with small, local bank trust departments. One of the newest bank trust clients for TIM is Shadow Mountain Bank and Trust. Judy Sampson, CFA, the trust officer for Shadow Mountain, has scheduled a meeting with a potential client. When Lawson arrives for the client meeting, he finds that all of the TIM marketing material, including biographies of TIM portfolio managers, has been relabeled by Sampson as the Shadow Mountain Wealth Management Team. Sampson has also added the performance of BAGF into the current TIM Equity Composite Index portfolio and relabeled the resultant combined graph, the Shadow Mountain Equity Composite Index. Sampson states that making such changes would probably please clients and improve the chances of acquiring additional trust management accounts for Shadow Mountain and TIM. Lawson goes along and makes the presentation to the potential client using the Shadow Mountain marketing material and the relabeled BAGF/TIM equity performance record.
Case 2
Susan Luna of TIM is meeting with Sol Wurtzel, an institutional salesman for Turn Byer, a large national brokerage firm. Luna complains that TIM*s technology costs are too high, especially their outside software services costs. TIM currently subscribes to two investment-related software services. The first software vendor is StockCal Software Services (StockCal), which provides valuation and stock charting capabilities TIM uses in their equity research and selection process. The other vendor is Add-Invest Software (Add-Invest), a software program providing account management and performance evaluation reporting which TIM uses in developing monthly reports for all clients. In response to Luna, Wurtzel suggests that Turn Byer has an excellent soft dollar trading desk and would be willing to offer to cover TIM’s StockCal and Add-Invest expenses through soft dollar commissions. Luna then reviews TIM’s projected commission dollars for the year and decides there are more than enough soft dollars to pay the StockCal, AGF and Add-Invest Software bills combined. Luna believes she can be assured of excellent trade execution from Turn Byer and improved profitability for TIM because of the increased use of soft dollars. Luna then directs that the StockCal and Add-Invest software services be paid for with soft dollar or client brokerage dollars.
Case 3
Sol Wurtzel, the equity salesman for Turn Byer, has referred several clients to TIM over the past year. In fact, Wurtzel referrals currently account for almost 20% of the assets managed by TIM. The principals of TIM decide to reward Wurtzel, either by doubling the commissions paid on trades executed through Turn Byer on Wurtzel’s referral accounts, or by paying Wurtzel a cash referral fee for each additional TIM account opened by a Wurtzel referral. The principals agree that any cash referral fee would need to be disclosed to clients in advance.
Case 4
Luna notes that her clients have become increasingly aware of the directed client brokerage / soft dollar commissions issue. At a recent meeting with one of her large pension clients. Service Workers Union Local #1418, the subject of directed commissions came up. Upon learning of the commission dollars available to their account, the Union trustees directed Luna to use their client brokerage of approximately $25,000 to donate to a think lank called the Hoover Study Center of Unions at Samford University. Service Workers trustees believed the Hoover study will increase the public awareness of the benefits unions offer to their members and increase union membership. Luna concurs with the trustee’s judgment on increasing union enrollment as a great goal, and follows the client’s instructions and makes the $25,000 contribution to the Hoover Study Center. Another client, Rosa Lutz, has asked Luna to credit the soft dollar client brokerage proceeds from her personal retirement accounts to Roswell Academy, to update their computer lab. Luna agrees that a new computer lab for Roswell Academy is greatly needed and she allocates 510,000 of Lutz’s commission dollars to Roswell Academy.
Did Sampson and/or Lawson violate the CFA Institute Standards of Professional Conduct with respect to presenting the TIM biographies to the client?
- A . Yes, both Sampson and Lawson violated the Standards.
- B . Yes, Sampson violated the Standards, while Lawson did not.
- C . Neither Sampson nor Lawson violated the Standards, since such outsourcing is permitted.
A
Explanation:
Standard 1(C). Both Sampson and Lawson have violated Standard 1(C) – Professionalism Misrepresentation. When Sampson prepared biographies with Shadow Mountain Wealth Management Team on them, she was obviously trying to convey the image that TIM personnel are employees of the bank trust department. This does not portray the correct business relationship between Shadow Mountain and TIM. TIM is an otitsourcer to Shadow Mountain and a contract investment management provider, not an employee. Sampson is attempting to create a misleading view of the service level and investment expertise that clients could rightly expect. While Lawson was not a party to preparing such misleading business cards and marketing materials, he participated in the misrepresentation by agreeing to go ahead with the client presentation. (Study Session 1, LOS2.a)
For the past 15 years, Susan Luna, CFA, Kyle Lawson, CFA, and Matt Miller. CFA, have worked together as equity analysts and then equity portfolio managers in the investment management division (BIMCO) of the Broadway Life Insurance Company. For the past five years, the three associates have worked together managing the BIMCO Aggressive Growth Fund (BAGF). During their management tenure the BAGF had excellent performance and was well recognized in the financial press.
Just over one year ago, Broadway Life was acquired by a larger company, Gobble Insurance, and as part of the consolidation process BIMCO was closed. The closure allowed Luna, Lawson and Miller to start their own investment management firm, Trio Investment Management LLC (TIM). TIM focuses on the small capitalization growth equities area. This is the same investment focus as the BAGF, but TIM will have individually managed accounts. Several cases have arisen calling for interpretation as to consistency with CFA Institute Standards of Professional Conduct.
Case 1
TIM markets its investment management services by contracting with small, local bank trust departments. One of the newest bank trust clients for TIM is Shadow Mountain Bank and Trust. Judy Sampson, CFA, the trust officer for Shadow Mountain, has scheduled a meeting with a potential client. When Lawson arrives for the client meeting, he finds that all of the TIM marketing material, including biographies of TIM portfolio managers, has been relabeled by Sampson as the Shadow Mountain Wealth Management Team. Sampson has also added the performance of BAGF into the current TIM Equity Composite Index portfolio and relabeled the resultant combined graph, the Shadow Mountain Equity Composite Index. Sampson states that making such changes would probably please clients and improve the chances of acquiring additional trust management accounts for Shadow Mountain and TIM. Lawson goes along and makes the presentation to the potential client using the Shadow Mountain marketing material and the relabeled BAGF/TIM equity performance record.
Case 2
Susan Luna of TIM is meeting with Sol Wurtzel, an institutional salesman for Turn Byer, a large national brokerage firm. Luna complains that TIM*s technology costs are too high, especially their outside software services costs. TIM currently subscribes to two investment-related software services. The first software vendor is StockCal Software Services (StockCal), which provides valuation and stock charting capabilities TIM uses in their equity research and selection process. The other vendor is Add-Invest Software (Add-Invest), a software program providing account management and performance evaluation reporting which TIM uses in developing monthly reports for all clients. In response to Luna, Wurtzel suggests that Turn Byer has an excellent soft dollar trading desk and would be willing to offer to cover TIM’s StockCal and Add-Invest expenses through soft dollar commissions. Luna then reviews TIM’s projected commission dollars for the year and decides there are more than enough soft dollars to pay the StockCal, AGF and Add-Invest Software bills combined. Luna believes she can be assured of excellent trade execution from Turn Byer and improved profitability for TIM because of the increased use of soft dollars. Luna then directs that the StockCal and Add-Invest software services be paid for with soft dollar or client brokerage dollars.
Case 3
Sol Wurtzel, the equity salesman for Turn Byer, has referred several clients to TIM over the past year. In fact, Wurtzel referrals currently account for almost 20% of the assets managed by TIM. The principals of TIM decide to reward Wurtzel, either by doubling the commissions paid on trades executed through Turn Byer on Wurtzel’s referral accounts, or by paying Wurtzel a cash referral fee for each additional TIM account opened by a Wurtzel referral. The principals agree that any cash referral fee would need to be disclosed to clients in advance.
Case 4
Luna notes that her clients have become increasingly aware of the directed client brokerage / soft dollar commissions issue. At a recent meeting with one of her large pension clients. Service Workers Union Local #1418, the subject of directed commissions came up. Upon learning of the commission dollars available to their account, the Union trustees directed Luna to use their client brokerage of approximately $25,000 to donate to a think lank called the Hoover Study Center of Unions at Samford University. Service Workers trustees believed the Hoover study will increase the public awareness of the benefits unions offer to their members and increase union membership. Luna concurs with the trustee’s judgment on increasing union enrollment as a great goal, and follows the client’s instructions and makes the $25,000 contribution to the Hoover Study Center. Another client, Rosa Lutz, has asked Luna to credit the soft dollar client brokerage proceeds from her personal retirement accounts to Roswell Academy, to update their computer lab. Luna agrees that a new computer lab for Roswell Academy is greatly needed and she allocates 510,000 of Lutz’s commission dollars to Roswell Academy.
Sampson’s use of the relabeled BAGF investment performance record is in violation of CFA Institute Standards:
- A . only if Sampson fails to include written disclosures as to the true source and nature of the performance record.
- B . only if Sampson does not have written permission from Gobble Insurance to use the performance data.
- C . unless Sampson includes written disclosures as to the true source and nature of the performance record, and has written permission from Gobble Insurance to use the performance data.
C
Explanation:
Standards 1(C) and III(D). Including the BAGF performance is a violation of Standatd 1(C) Professionalism – Misrepresentation and Standard III(D) – Duties to Clients -Performance Presentation. When Sampson combines the BAGF performance record with the TIM Composite Equity Composite, this gives potential clients a misleading impression of TIM s long-term equity management performance. The record of BAGF belonged first to Broadway Life, and then it was purchased as an asset by Gobble when it purchased Broadway. The use of this performance data might be acceptable if full disclosure was made as to the source and nature of the data, and if Sampson had permission from Gobble.
However, by re-labeling the performance as Shadow Mountain Equity, there is a clear attempt to misrepresent reality. (Study Session 1, LOS 2.a)
For the past 15 years, Susan Luna, CFA, Kyle Lawson, CFA, and Matt Miller. CFA, have worked together as equity analysts and then equity portfolio managers in the investment management division (BIMCO) of the Broadway Life Insurance Company. For the past five years, the three associates have worked together managing the BIMCO Aggressive Growth Fund (BAGF). During their management tenure the BAGF had excellent performance and was well recognized in the financial press.
Just over one year ago, Broadway Life was acquired by a larger company, Gobble Insurance, and as part of the consolidation process BIMCO was closed. The closure allowed Luna, Lawson and Miller to start their own investment management firm, Trio Investment Management LLC (TIM). TIM focuses on the small capitalization growth equities area. This is the same investment focus as the BAGF, but TIM will have individually managed accounts. Several cases have arisen calling for interpretation as to consistency with CFA Institute Standards of Professional Conduct.
Case 1
TIM markets its investment management services by contracting with small, local bank trust departments. One of the newest bank trust clients for TIM is Shadow Mountain Bank and Trust. Judy Sampson, CFA, the trust officer for Shadow Mountain, has scheduled a meeting with a potential client. When Lawson arrives for the client meeting, he finds that all of the TIM marketing material, including biographies of TIM portfolio managers, has been relabeled by Sampson as the Shadow Mountain Wealth Management Team. Sampson has also added the performance of BAGF into the current TIM Equity Composite Index portfolio and relabeled the resultant combined graph, the Shadow Mountain Equity Composite Index. Sampson states that making such changes would probably please clients and improve the chances of acquiring additional trust management accounts for Shadow Mountain and TIM. Lawson goes along and makes the presentation to the potential client using the Shadow Mountain marketing material and the relabeled BAGF/TIM equity performance record.
Case 2
Susan Luna of TIM is meeting with Sol Wurtzel, an institutional salesman for Turn Byer, a large national brokerage firm. Luna complains that TIM*s technology costs are too high, especially their outside software services costs. TIM currently subscribes to two investment-related software services. The first software vendor is StockCal Software Services (StockCal), which provides valuation and stock charting capabilities TIM uses in their equity research and selection process. The other vendor is Add-Invest Software (Add-Invest), a software program providing account management and performance evaluation reporting which TIM uses in developing monthly reports for all clients. In response to Luna, Wurtzel suggests that Turn Byer has an excellent soft dollar trading desk and would be willing to offer to cover TIM’s StockCal and Add-Invest expenses through soft dollar commissions. Luna then reviews TIM’s projected commission dollars for the year and decides there are more than enough soft dollars to pay the StockCal, AGF and Add-Invest Software bills combined. Luna believes she can be assured of excellent trade execution from Turn Byer and improved profitability for TIM because of the increased use of soft dollars. Luna then directs that the StockCal and Add-Invest software services be paid for with soft dollar or client brokerage dollars.
Case 3
Sol Wurtzel, the equity salesman for Turn Byer, has referred several clients to TIM over the past year. In fact, Wurtzel referrals currently account for almost 20% of the assets managed by TIM. The principals of TIM decide to reward Wurtzel, either by doubling the commissions paid on trades executed through Turn Byer on Wurtzel’s referral accounts, or by paying Wurtzel a cash referral fee for each additional TIM account opened by a Wurtzel referral. The principals agree that any cash referral fee would need to be disclosed to clients in advance.
Case 4
Luna notes that her clients have become increasingly aware of the directed client brokerage / soft dollar commissions issue. At a recent meeting with one of her large pension clients. Service Workers Union Local #1418, the subject of directed commissions came up. Upon learning of the commission dollars available to their account, the Union trustees directed Luna to use their client brokerage of approximately $25,000 to donate to a think lank called the Hoover Study Center of Unions at Samford University. Service Workers trustees believed the Hoover study will increase the public awareness of the benefits unions offer to their members and increase union membership. Luna concurs with the trustee’s judgment on increasing union enrollment as a great goal, and follows the client’s instructions and makes the $25,000 contribution to the Hoover Study Center. Another client, Rosa Lutz, has asked Luna to credit the soft dollar client brokerage proceeds from her personal retirement accounts to Roswell Academy, to update their computer lab. Luna agrees that a new computer lab for Roswell Academy is greatly needed and she allocates 510,000 of Lutz’s commission dollars to Roswell Academy.
Did Luna violate the CFA Institute Standards of Professional Conduct and the CFA Institute Soft Dollar Standards by using soft dollar commissions to pay TIM’s software subscription costs to StockCal and/or Add-Invcst?
- A . Both StockCal and Add-Invest software services may be paid for with soft dollars.
- B . Neither StockCal nor Add-Invest software may be paid for with soft dollars.
- C . It is acceptable to use soft dollars to pay for the StockCal software, but not the Add-Invest software.
C
Explanation:
Standard III (A). Luna has violated the CFA Institute Standards of Professional Conduct – Standard III (A) Duties to Clients – Loyalty, Prudence, and Care. Client brokerage is the property or asset of the client and not TIM. In accordance with CFA Institute Soft Dollar Standards, client brokerage should be used only for research products or services that are directly related to the investment decision making process and not the management costs of the firm. In this case, Luna should disclose to TIM’s clients that their brokerage may be used to purchase research. In addition, Luna should seek to ensure that Turn Byer is providing best execution to TIM’s clients. StockCal is clearly equity research products/services that aid TIM in the investment decision-making process and not the general operation or management costs of the firm. StockCal may therefore be properly paid for with client brokerage soft dollars and is not a violation of the Standards or Code, or the CFA Institute Soft Dollar Standards.
However, Add-Invest Software provides TIM’s clients with portfolio accounting and performance measurement services and is not related to the investment decision-making process. Therefore, Luna is misusing clienr resources when she uses client brokerage to purchase Add-lnvest Software. Add-Invest is clearly a business expense of TIM and should rightly be paid for by the firm and not clients. Per the CFA Institute Soft Dollar Standards, the product or service received must provide proper assistance to the investment manager in following through with his investment decision-making responsibilities. (Study Session 1, LOS 2.a and 3a,b,c)
For the past 15 years, Susan Luna, CFA, Kyle Lawson, CFA, and Matt Miller. CFA, have worked together as equity analysts and then equity portfolio managers in the investment management division (BIMCO) of the Broadway Life Insurance Company. For the past five years, the three associates have worked together managing the BIMCO Aggressive Growth Fund (BAGF). During their management tenure the BAGF had excellent performance and was well recognized in the financial press.
Just over one year ago, Broadway Life was acquired by a larger company, Gobble Insurance, and as part of the consolidation process BIMCO was closed. The closure allowed Luna, Lawson and Miller to start their own investment management firm, Trio Investment Management LLC (TIM). TIM focuses on the small capitalization growth equities area. This is the same investment focus as the BAGF, but TIM will have individually managed accounts. Several cases have arisen calling for interpretation as to consistency with CFA Institute Standards of Professional Conduct.
Case 1
TIM markets its investment management services by contracting with small, local bank trust departments. One of the newest bank trust clients for TIM is Shadow Mountain Bank and Trust. Judy Sampson, CFA, the trust officer for Shadow Mountain, has scheduled a meeting with a potential client. When Lawson arrives for the client meeting, he finds that all of the TIM marketing material, including biographies of TIM portfolio managers, has been relabeled by Sampson as the Shadow Mountain Wealth Management Team. Sampson has also added the performance of BAGF into the current TIM Equity Composite Index portfolio and relabeled the resultant combined graph, the Shadow Mountain Equity Composite Index. Sampson states that making such changes would probably please clients and improve the chances of acquiring additional trust management accounts for Shadow Mountain and TIM. Lawson goes along and makes the presentation to the potential client using the Shadow Mountain marketing material and the relabeled BAGF/TIM equity performance record.
Case 2
Susan Luna of TIM is meeting with Sol Wurtzel, an institutional salesman for Turn Byer, a large national brokerage firm. Luna complains that TIM*s technology costs are too high, especially their outside software services costs. TIM currently subscribes to two investment-related software services. The first software vendor is StockCal Software Services (StockCal), which provides valuation and stock charting capabilities TIM uses in their equity research and selection process. The other vendor is Add-Invest Software (Add-Invest), a software program providing account management and performance evaluation reporting which TIM uses in developing monthly reports for all clients. In response to Luna, Wurtzel suggests that Turn Byer has an excellent soft dollar trading desk and would be willing to offer to cover TIM’s StockCal and Add-Invest expenses through soft dollar commissions. Luna then reviews TIM’s projected commission dollars for the year and decides there are more than enough soft dollars to pay the StockCal, AGF and Add-Invest Software bills combined. Luna believes she can be assured of excellent trade execution from Turn Byer and improved profitability for TIM because of the increased use of soft dollars. Luna then directs that the StockCal and Add-Invest software services be paid for with soft dollar or client brokerage dollars.
Case 3
Sol Wurtzel, the equity salesman for Turn Byer, has referred several clients to TIM over the past year. In fact, Wurtzel referrals currently account for almost 20% of the assets managed by TIM. The principals of TIM decide to reward Wurtzel, either by doubling the commissions paid on trades executed through Turn Byer on Wurtzel’s referral accounts, or by paying Wurtzel a cash referral fee for each additional TIM account opened by a Wurtzel referral. The principals agree that any cash referral fee would need to be disclosed to clients in advance.
Case 4
Luna notes that her clients have become increasingly aware of the directed client brokerage / soft dollar commissions issue. At a recent meeting with one of her large pension clients. Service Workers Union Local #1418, the subject of directed commissions came up. Upon learning of the commission dollars available to their account, the Union trustees directed Luna to use their client brokerage of approximately $25,000 to donate to a think lank called the Hoover Study Center of Unions at Samford University. Service Workers trustees believed the Hoover study will increase the public awareness of the benefits unions offer to their members and increase union membership. Luna concurs with the trustee’s judgment on increasing union enrollment as a great goal, and follows the client’s instructions and makes the $25,000 contribution to the Hoover Study Center. Another client, Rosa Lutz, has asked Luna to credit the soft dollar client brokerage proceeds from her personal retirement accounts to Roswell Academy, to update their computer lab. Luna agrees that a new computer lab for Roswell Academy is greatly needed and she allocates 510,000 of Lutz’s commission dollars to Roswell Academy.
Would either of the compensation arrangements to reward Wurtzel for client referrals be in violation of the CFA Institute Standards of Professional Conduct?
- A . Both compensation arrangements would be violations, regardless of any disclosures to clients.
- B . The increased commissions plan would be a violation, while the cash referral fees would not be a violation.
- C . Doth compensation arrangements are allowed, as long as they are fully disclosed, in advance, to all clients and prospective clients.
B
Explanation:
Standard III(A). The increased commission would be a violation, but the cash referral fee would nor. Doubling the commission paid to Wurtzcl would be a violation of Standard Iil(A) Duties to Clients – Loyalty, Prudence, and Care. Client brokerage is strictly an asset of the client, and must be used for the benefit of clients in research that will assist the investment manager in the investment decision-making process. Client brokerage cannot be used as a reward for bringing clients to TIM and to do so is a misappropriation of client assets. Cash referral fees are acceptable, so long as the referral arrangement is fully disclosed to the clients in advance of opening their accounts. The case mentions that this disclosure will be made. This disclosure allows the client to evaluate any potential conflict(s) of interest in the referral process. (Study Session 1, LOS 2.a)
For the past 15 years, Susan Luna, CFA, Kyle Lawson, CFA, and Matt Miller. CFA, have worked together as equity analysts and then equity portfolio managers in the investment management division (BIMCO) of the Broadway Life Insurance Company. For the past five years, the three associates have worked together managing the BIMCO Aggressive Growth Fund (BAGF). During their management tenure the BAGF had excellent performance and was well recognized in the financial press.
Just over one year ago, Broadway Life was acquired by a larger company, Gobble Insurance, and as part of the consolidation process BIMCO was closed. The closure allowed Luna, Lawson and Miller to start their own investment management firm, Trio Investment Management LLC (TIM). TIM focuses on the small capitalization growth equities area. This is the same investment focus as the BAGF, but TIM will have individually managed accounts. Several cases have arisen calling for interpretation as to consistency with CFA Institute Standards of Professional Conduct.
Case 1
TIM markets its investment management services by contracting with small, local bank trust departments. One of the newest bank trust clients for TIM is Shadow Mountain Bank and Trust. Judy Sampson, CFA, the trust officer for Shadow Mountain, has scheduled a meeting with a potential client. When Lawson arrives for the client meeting, he finds that all of the TIM marketing material, including biographies of TIM portfolio managers, has been relabeled by Sampson as the Shadow Mountain Wealth Management Team. Sampson has also added the performance of BAGF into the current TIM Equity Composite Index portfolio and relabeled the resultant combined graph, the Shadow Mountain Equity Composite Index. Sampson states that making such changes would probably please clients and improve the chances of acquiring additional trust management accounts for Shadow Mountain and TIM. Lawson goes along and makes the presentation to the potential client using the Shadow Mountain marketing material and the relabeled BAGF/TIM equity performance record.
Case 2
Susan Luna of TIM is meeting with Sol Wurtzel, an institutional salesman for Turn Byer, a large national brokerage firm. Luna complains that TIM*s technology costs are too high, especially their outside software services costs. TIM currently subscribes to two investment-related software services. The first software vendor is StockCal Software Services (StockCal), which provides valuation and stock charting capabilities TIM uses in their equity research and selection process. The other vendor is Add-Invest Software (Add-Invest), a software program providing account management and performance evaluation reporting which TIM uses in developing monthly reports for all clients. In response to Luna, Wurtzel suggests that Turn Byer has an excellent soft dollar trading desk and would be willing to offer to cover TIM’s StockCal and Add-Invest expenses through soft dollar commissions. Luna then reviews TIM’s projected commission dollars for the year and decides there are more than enough soft dollars to pay the StockCal, AGF and Add-Invest Software bills combined. Luna believes she can be assured of excellent trade execution from Turn Byer and improved profitability for TIM because of the increased use of soft dollars. Luna then directs that the StockCal and Add-Invest software services be paid for with soft dollar or client brokerage dollars.
Case 3
Sol Wurtzel, the equity salesman for Turn Byer, has referred several clients to TIM over the past year. In fact, Wurtzel referrals currently account for almost 20% of the assets managed by TIM. The principals of TIM decide to reward Wurtzel, either by doubling the commissions paid on trades executed through Turn Byer on Wurtzel’s referral accounts, or by paying Wurtzel a cash referral fee for each additional TIM account opened by a Wurtzel referral. The principals agree that any cash referral fee would need to be disclosed to clients in advance.
Case 4
Luna notes that her clients have become increasingly aware of the directed client brokerage / soft dollar commissions issue. At a recent meeting with one of her large pension clients. Service Workers Union Local #1418, the subject of directed commissions came up. Upon learning of the commission dollars available to their account, the Union trustees directed Luna to use their client brokerage of approximately $25,000 to donate to a think lank called the Hoover Study Center of Unions at Samford University. Service Workers trustees believed the Hoover study will increase the public awareness of the benefits unions offer to their members and increase union membership. Luna concurs with the trustee’s judgment on increasing union enrollment as a great goal, and follows the client’s instructions and makes the $25,000 contribution to the Hoover Study Center. Another client, Rosa Lutz, has asked Luna to credit the soft dollar client brokerage proceeds from her personal retirement accounts to Roswell Academy, to update their computer lab. Luna agrees that a new computer lab for Roswell Academy is greatly needed and she allocates 510,000 of Lutz’s commission dollars to Roswell Academy.
Is the use of client brokerage to make the $25,000 educational contribution to the Hoover Study Center of Unions a violation of the CFA Institute Standards of Professional Conduct?
- A . Yes, because TIM must assure that client brokerage fees are directed to the benefit of the client.
- B . Yes, because client brokerage must only be used to pay for goods and services directly related to the investment decision making process.
- C . No, because the client brokerage has been spent at the specific direction of the client.
A
Explanation:
Standard 111(A). In making a $25,000 contribution to the Hoover Study Center of Unions, Luna has violated Standard 111(A) Duties to Cliencs – Loyalty, Prudence, and Care, which states that Members and Candidates must act for the benefit cf their clients and place their clients’ interest before their employer’s or their own interest. In relationship with clients, Members and Candidates must determine applicable fiduciary duty and must comply with such duty to persons and interests to whom it is owed. The contribution to the Hoover Study Center of Unions, authorized by the trustees of the union, brings into question acting for the benefit of the client. Despite providing guidance and governance for the union, trustees are not the client of the union fund; rather, the members of the union and their beneficiaries are the clients of the fund. By making a $25,000 contribution from the client brokerage, Luna and the trustees have used funds that rightly belongs to the members of the union and they have done so without direct compensation to the Union members. Luna should not have authorized the pension account to make the contribution and having done so violated her duty to loyally guard the assets of her clients as a fiduciary. Luna has an obligation to follow not only the Code and Standards, but also adhere to the CFA Institute Soft Dollar Standards, which stress that the client brokerage is property of the client, not the trustee or fiduciary representing the client. (Study Session 1, LOS 2.a)
For the past 15 years, Susan Luna, CFA, Kyle Lawson, CFA, and Matt Miller. CFA, have worked together as equity analysts and then equity portfolio managers in the investment management division (BIMCO) of the Broadway Life Insurance Company. For the past five years, the three associates have worked together managing the BIMCO Aggressive Growth Fund (BAGF). During their management tenure the BAGF had excellent performance and was well recognized in the financial press.
Just over one year ago, Broadway Life was acquired by a larger company, Gobble Insurance, and as part of the consolidation process BIMCO was closed. The closure allowed Luna, Lawson and Miller to start their own investment management firm, Trio Investment Management LLC (TIM). TIM focuses on the small capitalization growth equities area. This is the same investment focus as the BAGF, but TIM will have individually managed accounts. Several cases have arisen calling for interpretation as to consistency with CFA Institute Standards of Professional Conduct.
Case 1
TIM markets its investment management services by contracting with small, local bank trust departments. One of the newest bank trust clients for TIM is Shadow Mountain Bank and Trust. Judy Sampson, CFA, the trust officer for Shadow Mountain, has scheduled a meeting with a potential client. When Lawson arrives for the client meeting, he finds that all of the TIM marketing material, including biographies of TIM portfolio managers, has been relabeled by Sampson as the Shadow Mountain Wealth Management Team. Sampson has also added the performance of BAGF into the current TIM Equity Composite Index portfolio and relabeled the resultant combined graph, the Shadow Mountain Equity Composite Index. Sampson states that making such changes would probably please clients and improve the chances of acquiring additional trust management accounts for Shadow Mountain and TIM. Lawson goes along and makes the presentation to the potential client using the Shadow Mountain marketing material and the relabeled BAGF/TIM equity performance record.
Case 2
Susan Luna of TIM is meeting with Sol Wurtzel, an institutional salesman for Turn Byer, a large national brokerage firm. Luna complains that TIM*s technology costs are too high, especially their outside software services costs. TIM currently subscribes to two investment-related software services. The first software vendor is StockCal Software Services (StockCal), which provides valuation and stock charting capabilities TIM uses in their equity research and selection process. The other vendor is Add-Invest Software (Add-Invest), a software program providing account management and performance evaluation reporting which TIM uses in developing monthly reports for all clients. In response to Luna, Wurtzel suggests that Turn Byer has an excellent soft dollar trading desk and would be willing to offer to cover TIM’s StockCal and Add-Invest expenses through soft dollar commissions. Luna then reviews TIM’s projected commission dollars for the year and decides there are more than enough soft dollars to pay the StockCal, AGF and Add-Invest Software bills combined. Luna believes she can be assured of excellent trade execution from Turn Byer and improved profitability for TIM because of the increased use of soft dollars. Luna then directs that the StockCal and Add-Invest software services be paid for with soft dollar or client brokerage dollars.
Case 3
Sol Wurtzel, the equity salesman for Turn Byer, has referred several clients to TIM over the past year. In fact, Wurtzel referrals currently account for almost 20% of the assets managed by TIM. The principals of TIM decide to reward Wurtzel, either by doubling the commissions paid on trades executed through Turn Byer on Wurtzel’s referral accounts, or by paying Wurtzel a cash referral fee for each additional TIM account opened by a Wurtzel referral. The principals agree that any cash referral fee would need to be disclosed to clients in advance.
Case 4
Luna notes that her clients have become increasingly aware of the directed client brokerage / soft dollar commissions issue. At a recent meeting with one of her large pension clients. Service Workers Union Local #1418, the subject of directed commissions came up. Upon learning of the commission dollars available to their account, the Union trustees directed Luna to use their client brokerage of approximately $25,000 to donate to a think lank called the Hoover Study Center of Unions at Samford University. Service Workers trustees believed the Hoover study will increase the public awareness of the benefits unions offer to their members and increase union membership. Luna concurs with the trustee’s judgment on increasing union enrollment as a great goal, and follows the client’s instructions and makes the $25,000 contribution to the Hoover Study Center. Another client, Rosa Lutz, has asked Luna to credit the soft dollar client brokerage proceeds from her personal retirement accounts to Roswell Academy, to update their computer lab. Luna agrees that a new computer lab for Roswell Academy is greatly needed and she allocates 510,000 of Lutz’s commission dollars to Roswell Academy.
Is the use of client brokerage to make the $ 10,000 contribution to the Roswell Academy a violation of the CFA Institute Standards of Professional Conduct?
- A . Yes, because client brokerage must only be used to pay for goods and services directly related to the investment decision making process.
- B . Yes, because client brokerage of tax-deferred accounts can not be used to make charitable contributions.
- C . No, because the client brokerage has been spent at the specific direction of the client.
C
Explanation:
Standard III(A). In this case, Lutz is the client and therefore the direct owner of the client brokerage. If Lutz’s desire is to give the soft dollar client brokerage asset to the Roswell Academy, she is free to do so as it is her asset. She is sole owner of her own retirement account. Luna, by following the wishes of the client, is complying with her duty of loyalty. Thus, there is no violation of Standard III(A) Duties to Clients Loyalty, Prudence, and Care, in the case of the $10,000 contribution to Roswell Academy. (Study Session 1, LOS 2.a)
Chester Brothers, LLC, is an investment management firm with $200 million in assets under management. Chester’s equity style is described to clients as a "large cap core" strategy. One year ago, Chester instituted a new compensation plan for its equity portfolio managers. Under this new plan, each portfolio manager receives an annual bonus based upon that manager’s quarterly performance relative to the S&P 500 index. For each quarter of aut-performance, the manager receives a bonus in the amount of 20% of his regular annual compensation. Chester has not disclosed this new plan to clients. Portfolio managers at Chester are not bound by non-compete agreements.
Fames Rogers, CFA, and Karen Pierce, CFA, are both portfolio managers affected by the new policy. Rogers out-performed the S&P 500 index in each of the last three quarters, largely because he began investing his clients1 funds in small cap securities. Chester has recently been citing Rogers’s performance in local media advertising, including claims that "Chester’s star manager, James Rogers, has outperformed the S&P 500 index in each of the last three quarters." The print advertising associated with the media campaign includes a photograph of Rogers, identifying him as James Rogers, CFA. Below his name is a quote apparently attributable to Rogers saying "as a CFA chartcrholdcr I am committed to the highest ethical standards."
A few weeks after the advertising campaign began, Rogers was approached by the Grumpp Foundation, a local charitable endowment with $3 billion in assets, about serving on their investment advisory committee. The committee meets weekly to review the portfolio and make adjustments as needed. The Grumpp trustees were impressed by the favorable mention of Rogers in the marketing campaign. In making their offer, they even suggested that Rogers could mention his position on the advisory committee in future Chester marketing material. Rogers has not informed Chester about the Grumpp offer, but he has not yet accepted the position.
Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a computer model she developed while working al Chester, as well as the most recent list of her buy recommendations, which was created from the output of her computer valuation model. Pierce soon accepted a position at a competing firm, Cheeri Group. On her first day at Cheeri, she contacted each of her five largest former clients, informing them of her new employment and asking that they consider moving their accounts from Chester to Cheeri. During both telephone conversations and e-mails with her former clients, Pierce mentioned that Chester had a new compensation program that created incentives for managers to shift into smaller cap securities.
Cheeri has posted Pierce’s investment performance for the past five years on its Web site, excluding the three most recent quarters.
The footnotes to the performance information include the following two statements:
Statement 1: Includes large capitalization portfolios only.
Statement 2: Results reflect manager’s performance at previous employer.
Chester’s new compensation plan for awarding bonuses to individual portfolio managers:
- A . is consistent with CFA Institute Standards and does not require disclosure.
- B . is consistent with CFA Institute Standards only if fully disclosed to clients.
- C . is consistent with CFA Institute Standards, but any bonuses awarded under the plan must be fully disclosed to clients.
B
Explanation:
Standard VI (A). The compensation plan is acceptable under Standard VI(A) Conflicts of Interest Disclosure of Conflicts, but Chester must disclose the plan to clients. The firm’s equity strategy is described as "large cap core." The S&P 500 Index is an appropriate benchmark for such a strategy, but rhe incentive for portfolio managers is to invest outside the index in order to achieve excess returns. Managers may be motivated to invest in securities that would not be consistent with client objectives or risk profiles. (Study Session 1, LOS 2.a)
Chester Brothers, LLC, is an investment management firm with $200 million in assets under management. Chester’s equity style is described to clients as a "large cap core" strategy. One year ago, Chester instituted a new compensation plan for its equity portfolio managers. Under this new plan, each portfolio manager receives an annual bonus based upon that manager’s quarterly performance relative to the S&P 500 index. For each quarter of aut-performance, the manager receives a bonus in the amount of 20% of his regular annual compensation. Chester has not disclosed this new plan to clients. Portfolio managers at Chester are not bound by non-compete agreements.
Fames Rogers, CFA, and Karen Pierce, CFA, are both portfolio managers affected by the new policy. Rogers out-performed the S&P 500 index in each of the last three quarters, largely because he began investing his clients1 funds in small cap securities. Chester has recently been citing Rogers’s performance in local media advertising, including claims that "Chester’s star manager, James Rogers, has outperformed the S&P 500 index in each of the last three quarters." The print advertising associated with the media campaign includes a photograph of Rogers, identifying him as James Rogers, CFA. Below his name is a quote apparently attributable to Rogers saying "as a CFA chartcrholdcr I am committed to the highest ethical standards."
A few weeks after the advertising campaign began, Rogers was approached by the Grumpp Foundation, a local charitable endowment with $3 billion in assets, about serving on their investment advisory committee. The committee meets weekly to review the portfolio and make adjustments as needed. The Grumpp trustees were impressed by the favorable mention of Rogers in the marketing campaign. In making their offer, they even suggested that Rogers could mention his position on the advisory committee in future Chester marketing material. Rogers has not informed Chester about the Grumpp offer, but he has not yet accepted the position.
Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a computer model she developed while working al Chester, as well as the most recent list of her buy recommendations, which was created from the output of her computer valuation model. Pierce soon accepted a position at a competing firm, Cheeri Group. On her first day at Cheeri, she contacted each of her five largest former clients, informing them of her new employment and asking that they consider moving their accounts from Chester to Cheeri. During both telephone conversations and e-mails with her former clients, Pierce mentioned that Chester had a new compensation program that created incentives for managers to shift into smaller cap securities.
Cheeri has posted Pierce’s investment performance for the past five years on its Web site, excluding the three most recent quarters.
The footnotes to the performance information include the following two statements:
Statement 1: Includes large capitalization portfolios only.
Statement 2: Results reflect manager’s performance at previous employer.
Assuming Rogers would like to accept the offer to serve on the Grumpp investment advisory committee, Rogers’s obligations under the CFA Institute Standards require that he:
- A . refuse to serve on the Grumpp committee.
- B . accept the Grumpp committee position only after disclosing the offer to his supervisor.
- C . accept the Grumpp committee position and disclose his acceptance as soon as possible to his supervisor.
B
Explanation:
Standard VI(A). Rogers must discuss the offer with supervisory personnel at Chester before accepting the offer. His employer then has the opportunity to evaluate the effect of the offer on Rogers’s ability to continue to perform his duties for Chester. The foundation is very large, and the position appears likely to consume much of Rogers’s time and effort. If compensation is involved, Rogers would have to decline the offer unless Chester consented to the arrangement. (Study Session I, LOS 2.a)
Chester Brothers, LLC, is an investment management firm with $200 million in assets under management. Chester’s equity style is described to clients as a "large cap core" strategy. One year ago, Chester instituted a new compensation plan for its equity portfolio managers. Under this new plan, each portfolio manager receives an annual bonus based upon that manager’s quarterly performance relative to the S&P 500 index. For each quarter of aut-performance, the manager receives a bonus in the amount of 20% of his regular annual compensation. Chester has not disclosed this new plan to clients. Portfolio managers at Chester are not bound by non-compete agreements.
Fames Rogers, CFA, and Karen Pierce, CFA, are both portfolio managers affected by the new policy. Rogers out-performed the S&P 500 index in each of the last three quarters, largely because he began investing his clients1 funds in small cap securities. Chester has recently been citing Rogers’s performance in local media advertising, including claims that "Chester’s star manager, James Rogers, has outperformed the S&P 500 index in each of the last three quarters." The print advertising associated with the media campaign includes a photograph of Rogers, identifying him as James Rogers, CFA. Below his name is a quote apparently attributable to Rogers saying "as a CFA chartcrholdcr I am committed to the highest ethical standards."
A few weeks after the advertising campaign began, Rogers was approached by the Grumpp Foundation, a local charitable endowment with $3 billion in assets, about serving on their investment advisory committee. The committee meets weekly to review the portfolio and make adjustments as needed. The Grumpp trustees were impressed by the favorable mention of Rogers in the marketing campaign. In making their offer, they even suggested that Rogers could mention his position on the advisory committee in future Chester marketing material. Rogers has not informed Chester about the Grumpp offer, but he has not yet accepted the position.
Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a computer model she developed while working al Chester, as well as the most recent list of her buy recommendations, which was created from the output of her computer valuation model. Pierce soon accepted a position at a competing firm, Cheeri Group. On her first day at Cheeri, she contacted each of her five largest former clients, informing them of her new employment and asking that they consider moving their accounts from Chester to Cheeri. During both telephone conversations and e-mails with her former clients, Pierce mentioned that Chester had a new compensation program that created incentives for managers to shift into smaller cap securities.
Cheeri has posted Pierce’s investment performance for the past five years on its Web site, excluding the three most recent quarters.
The footnotes to the performance information include the following two statements:
Statement 1: Includes large capitalization portfolios only.
Statement 2: Results reflect manager’s performance at previous employer.
Chester’s advertising campaign includes claims about Rogers’s investment performance, as well as Rogers’s use and reference to the CFA charter. Is Chester’s advertising campaign consistent with the CFA Institute Standards?
- A . Chester’s performance claims are inconsistent with CFA Institute Standards, but his use and reference to the CFA designation is appropriate.
- B . Both the performance claim and the reference to the CFA charter are violations.
- C . Neither the performance claims nor the use and reference to the CFA designation are violations.
A
Explanation:
Standard III(D). Chester has violated Standard III(D) Duties to Clients -Performance Presentation. The claim in itself is acceptable. Rogers’s superior performance has lasted only a short time, and the advertising does not suggest otherwise.
However, the superior performance has been achieved by investing in small cap securities, which is inconsistent with the stated style of Chester’s equity management. Unless Chester discloses this change in style, the performance claims do not accurately reflect the firm’s performance. Chester has not violated the Standards regarding use of and reference to the CFA designation. Rogers’s use or the CFA designation is acceptable, and the quote stating that a CFA charterholder is committed to high ethical standards is acceptable as well. (Study Session 1, LOS 2.a)
Chester Brothers, LLC, is an investment management firm with $200 million in assets under management. Chester’s equity style is described to clients as a "large cap core" strategy. One year ago, Chester instituted a new compensation plan for its equity portfolio managers. Under this new plan, each portfolio manager receives an annual bonus based upon that manager’s quarterly performance relative to the S&P 500 index. For each quarter of aut-performance, the manager receives a bonus in the amount of 20% of his regular annual compensation. Chester has not disclosed this new plan to clients. Portfolio managers at Chester are not bound by non-compete agreements.
Fames Rogers, CFA, and Karen Pierce, CFA, are both portfolio managers affected by the new policy. Rogers out-performed the S&P 500 index in each of the last three quarters, largely because he began investing his clients1 funds in small cap securities. Chester has recently been citing Rogers’s performance in local media advertising, including claims that "Chester’s star manager, James Rogers, has outperformed the S&P 500 index in each of the last three quarters." The print advertising associated with the media campaign includes a photograph of Rogers, identifying him as James Rogers, CFA. Below his name is a quote apparently attributable to Rogers saying "as a CFA chartcrholdcr I am committed to the highest ethical standards."
A few weeks after the advertising campaign began, Rogers was approached by the Grumpp Foundation, a local charitable endowment with $3 billion in assets, about serving on their investment advisory committee. The committee meets weekly to review the portfolio and make adjustments as needed. The Grumpp trustees were impressed by the favorable mention of Rogers in the marketing campaign. In making their offer, they even suggested that Rogers could mention his position on the advisory committee in future Chester marketing material. Rogers has not informed Chester about the Grumpp offer, but he has not yet accepted the position.
Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a computer model she developed while working al Chester, as well as the most recent list of her buy recommendations, which was created from the output of her computer valuation model. Pierce soon accepted a position at a competing firm, Cheeri Group. On her first day at Cheeri, she contacted each of her five largest former clients, informing them of her new employment and asking that they consider moving their accounts from Chester to Cheeri. During both telephone conversations and e-mails with her former clients, Pierce mentioned that Chester had a new compensation program that created incentives for managers to shift into smaller cap securities.
Cheeri has posted Pierce’s investment performance for the past five years on its Web site, excluding the three most recent quarters.
The footnotes to the performance information include the following two statements:
Statement 1: Includes large capitalization portfolios only.
Statement 2: Results reflect manager’s performance at previous employer.
When Pierce left her position at Chester, her behavior was inconsistent with the CFA Institute Standards in that:
- A . taking the computer model was a violation, but taking the recommended list was not a violation.
- B . taking the list of her recommendations was a violation, but taking the computer model was not a violation.
- C . both the computer model and the recommended list were Chester property that Pierce should not have taken.
C
Explanation:
Standard IV(A). Pierce should not have taken any employer records, and the computer model was Chester’s property, regardless of Pierce’s role in developing the model. Pierce has violated Standard IV(A) Duties to Employers – Loyalty hy taking both items without Chester’s consent. (Study Session 1, LOS 2.a)
Chester Brothers, LLC, is an investment management firm with $200 million in assets under management. Chester’s equity style is described to clients as a "large cap core" strategy. One year ago, Chester instituted a new compensation plan for its equity portfolio managers. Under this new plan, each portfolio manager receives an annual bonus based upon that manager’s quarterly performance relative to the S&P 500 index. For each quarter of aut-performance, the manager receives a bonus in the amount of 20% of his regular annual compensation. Chester has not disclosed this new plan to clients. Portfolio managers at Chester are not bound by non-compete agreements.
Fames Rogers, CFA, and Karen Pierce, CFA, are both portfolio managers affected by the new policy. Rogers out-performed the S&P 500 index in each of the last three quarters, largely because he began investing his clients1 funds in small cap securities. Chester has recently been citing Rogers’s performance in local media advertising, including claims that "Chester’s star manager, James Rogers, has outperformed the S&P 500 index in each of the last three quarters." The print advertising associated with the media campaign includes a photograph of Rogers, identifying him as James Rogers, CFA. Below his name is a quote apparently attributable to Rogers saying "as a CFA chartcrholdcr I am committed to the highest ethical standards."
A few weeks after the advertising campaign began, Rogers was approached by the Grumpp Foundation, a local charitable endowment with $3 billion in assets, about serving on their investment advisory committee. The committee meets weekly to review the portfolio and make adjustments as needed. The Grumpp trustees were impressed by the favorable mention of Rogers in the marketing campaign. In making their offer, they even suggested that Rogers could mention his position on the advisory committee in future Chester marketing material. Rogers has not informed Chester about the Grumpp offer, but he has not yet accepted the position.
Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a computer model she developed while working al Chester, as well as the most recent list of her buy recommendations, which was created from the output of her computer valuation model. Pierce soon accepted a position at a competing firm, Cheeri Group. On her first day at Cheeri, she contacted each of her five largest former clients, informing them of her new employment and asking that they consider moving their accounts from Chester to Cheeri. During both telephone conversations and e-mails with her former clients, Pierce mentioned that Chester had a new compensation program that created incentives for managers to shift into smaller cap securities.
Cheeri has posted Pierce’s investment performance for the past five years on its Web site, excluding the three most recent quarters.
The footnotes to the performance information include the following two statements:
Statement 1: Includes large capitalization portfolios only.
Statement 2: Results reflect manager’s performance at previous employer.
Pierce’s behavior upon assuming her new position at Cheeri can best be described as violating CFA Institute Standards because she:
- A . encouraged her former clients to leave Chester.
- B . should not have contacted her former clients at all.
- C . disclosed Chester’s new compensation program.
C
Explanation:
Standard IV(A). Pierce took no client records with her from Chester. It is reasonable to assume that she is using publicly available information to contact her former clients. So long as Pierce did not have a noncompete agreement, the standards do not preclude her from contacting former clients or encouraging them to move their accounts. The violation in this case was disclosing the new compensation plan. This plan should be disclosed to Chester’s clients by Chester. Pierce does not have whistleblower status in this case because she stands to receive a personal gain by bringing her former clients to Cheen. By disclosing the plan. Pierce has violated Standard IV(A) Duties to Employers – Loyalty by attempting to injure her former employer. Note that the compensation plan is not illegal; it is only a policy that should be disclosed. Had there been an illegal activity, Pierce may have had more justification as a whistleblower. (Study Session 1, LOS 2.a)
Chester Brothers, LLC, is an investment management firm with $200 million in assets under management. Chester’s equity style is described to clients as a "large cap core" strategy. One year ago, Chester instituted a new compensation plan for its equity portfolio managers. Under this new plan, each portfolio manager receives an annual bonus based upon that manager’s quarterly performance relative to the S&P 500 index. For each quarter of aut-performance, the manager receives a bonus in the amount of 20% of his regular annual compensation. Chester has not disclosed this new plan to clients. Portfolio managers at Chester are not bound by non-compete agreements.
Fames Rogers, CFA, and Karen Pierce, CFA, are both portfolio managers affected by the new policy. Rogers out-performed the S&P 500 index in each of the last three quarters, largely because he began investing his clients1 funds in small cap securities. Chester has recently been citing Rogers’s performance in local media advertising, including claims that "Chester’s star manager, James Rogers, has outperformed the S&P 500 index in each of the last three quarters." The print advertising associated with the media campaign includes a photograph of Rogers, identifying him as James Rogers, CFA. Below his name is a quote apparently attributable to Rogers saying "as a CFA chartcrholdcr I am committed to the highest ethical standards."
A few weeks after the advertising campaign began, Rogers was approached by the Grumpp Foundation, a local charitable endowment with $3 billion in assets, about serving on their investment advisory committee. The committee meets weekly to review the portfolio and make adjustments as needed. The Grumpp trustees were impressed by the favorable mention of Rogers in the marketing campaign. In making their offer, they even suggested that Rogers could mention his position on the advisory committee in future Chester marketing material. Rogers has not informed Chester about the Grumpp offer, but he has not yet accepted the position.
Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a Pierce has not fared as well as Rogers. She also shifted into smaller cap securities, but due to two extremely poor performing large cap stocks, her performance lagged the S&P 500 index for the first three quarters. After an angry confrontation with her supervisor, Pierce resigned. Pierce did not take any client information with her, but when she left she did take a copy of a computer model she developed while working al Chester, as well as the most recent list of her buy recommendations, which was created from the output of her computer valuation model. Pierce soon accepted a position at a competing firm, Cheeri Group. On her first day at Cheeri, she contacted each of her five largest former clients, informing them of her new employment and asking that they consider moving their accounts from Chester to Cheeri. During both telephone conversations and e-mails with her former clients, Pierce mentioned that Chester had a new compensation program that created incentives for managers to shift into smaller cap securities.
Cheeri has posted Pierce’s investment performance for the past five years on its Web site, excluding the three most recent quarters.
The footnotes to the performance information include the following two statements:
Statement 1: Includes large capitalization portfolios only.
Statement 2: Results reflect manager’s performance at previous employer.
Cheeri’s presentation of Pierce’s investment performance is inconsistent with CFA Institute Standards because:
- A . the results were not calculated under GIPS.
- B . performance from a previous employer should not be included.
- C . the results misrepresent Pierce’s large cap performance.
C
Explanation:
Standard III (D). The problem is that Pierces performance over the last three quarters arose from large cap securities, not small cap securities. Excluding these results misrepresents her ability as a large cap manager. The Standards do not require compliance with GIPS, nor do they require that previous employer results be excluded. Stating results of a specific style, such as large cap, is acceptable if it is accurate. (Study Session l, LOS2.a)
Susan Foley, CFA, is Chief Investment Officer of Federated Investment Management Co. (FIMCO), a large investment management firm that includes a family of mutual funds as well as individually managed accounts. The individually managed accounts include individuals, personal trusts, and employee benefit plans. In the past few months, Foley has encountered a couple of problems.
The Tasty IPO
Most portfolio managers of FIMCO have not participated in the initial public offering (IPO) market in recent years. However, recent changes to the compensation calculation at FIMCO have tied manager bonuses to portfolio performance. The changes were outlined in a letter that was sent out to clients and prospects shortly before the new bonus structure took effect. Carl Lee, CFA, is one portfolio manager who believes that investing in IPOs may add to his client’s equity performance and, in turn, increase his bonus. While Lee’s individual clients have done quite well this year, his employee benefit plans have suffered as a result of limited exposure to the strongest performing sector of the market. Lee has placed an order for all employee benefit plans to receive an allocation of the Tasty Doughnut IPO. Tasty is an over-subscribed IPO that Lee knew would make money for his clients. When he placed the order, Lee’s assistant reminded him that one pension plan. Ultra Airlines, was explicitly prohibited from investing in IPOs in its investment policy statement, due to the under-funded status of the pension plan. Lee responded that the Tasty IPO would never actually be owned in Ultra’s account, because he would sell the IPO stock before the end of the day and realize a profit before the position ever hit the books.
Another manager, Franz Mason, CFA, who manages accounts for about 150 individuals, is also interested in the Tasty IPO. Mason visits Lee’s portfolio assistant and quizzes him about Lee’s participation in the Tasty deal. Mason is sure that Lee would not have bought into Tasty unless he had done his homework. Mason places an order for 10,000 shares of the IPO. Mason returns to his desk and begins to allocate the IPO shares among his clients. Mason divides his client base into two groups: clients who are income-oriented and clients who arc capital gains-oriented. Mason believes those clients that are income-oriented are fairly risk averse and could not replace lost capital if the Tasty Doughnut deal lost money. Mason believes the capital gains-oriented accounts arc better able to withstand the potential loss associated with the Tasty IPO. Accordingly, Mason allocates his 10,000 share order of the Tasty IPO strictly to his capital appreciation clients using a pro rata allocation based on the size of the assets under management in each account.
FIMCO Income Fund (FIF)
Over the past three years, the FIF, with $5 billion in assets, has been the company’s best performing mutual fund. Jane Ryan, CFA, managed the FIF for seven years, but resigned one year ago to start her own hedge fund. Under Ryan, the FIF invested in large cap stocks with reliable dividends. The fund’s prospectus specifies that FIF will invest only in stocks that have paid a dividend for at least two quarters, and have a market capitalization in excess of $2.5 billion. Foley appointed FIMCO’s next best manager (based on 5-year performance numbers) Steve Parsons, CFA, to replace Ryan. Parsons had been a very successful manager of the FIMCO Opportunity Fund, which specialized in small capitalization stocks. Six months after Parsons took over the helm at FIF. the portfolio had changed. The average market capitalization of FIF’s holdings was $12.8 billion, as opposed to $21 billion a year ago. Over the same period, the average dividend yield on the portfolio had fallen from 3.8% to 3.1%. The performance of the FIF lagged its peer group for the first time in three years. In response to the lagging performance, Parsons purchased five stocks six months ago. Parsons bought all five stocks, none of which paid a dividend at the time of purchase, in anticipation that each company was likely to initiate dividends in the near future. So far, four of the stocks have initiated dividend payments, and their performance has benefited as a result. The fifth stock did not initiate a dividend, and Parsons sold the position last week. Largely due to the addition of the five new stocks, the FIF’s performance has led its peer group over the past six months.
Before leaving FIMCO, Ryan had told Foley that above-average returns from both the management and client side could be gained from entering into the risk-arbitrage hedge fund market. Ryan had tried to convince FIMCO management to enter the risk-arbitrage market, but the firm determined that no one had the experience or research capability to run a risk-arbitrage operation. As a result, Ryan started the Plasma Fund LLC one month after leaving FIMCO. Foley remembers seeing Ryan at the annual FIMCO client dinner parly (before she left the firm) discussing the profits to be made from risk-arbitrage investing with several large FIF shareholders. Ryan mentioned that she would be opening the Plasma Fund to these FIMCO clients, several of whom made substantial investments in the first months of Plasma Fund’s life. After Ryan resigned and left her office, Foley performed an inventory of firm assets signed out to Ryan. One of the copies of the proprietary stock selection software packages, FIMCO-SelectStock, assigned to Ryan was missing along with several of the SelectStock operating manuals. When Foley contacts Ryan about the missing software and manuals, Ryan states that the reason she took the SelectStock software was that it was an out of date version that FIMCO’s information technology staff had urged all managers to discard.
Regarding Lee’s order for employee benefit plans to receive an allocation of the Tasty Doughnut IPO, and his purchase of the Tasty Doughnut IPO for the Ultra Airlines Pension account, which of the following statements is most accurate?
- A . Lee’s order for all employee benefit plans to receive an allocation of the Tasty Doughnuts IPO is acceptable, but Lee has violated CFA Institute Standards by placing the IPO order in the Ultra Airlines pension account.
- B . Lee’s order for all employee benefit plans to receive an allocation of the Tasty Doughnuts IPO is acceptable, since it is appropriate for his clients’ employee benefit plans, and Lee has followed the CFA Institute Standards by notifying clients about recent compensation calculation changes, but Lee has violated CFA Institute Standards by placing the IPO order in the Ultra Airlines pension account.
- C . By allocating the Tasty Doughnuts IPO to employee benefit accounts only, Lee is discriminating against other accounts who may have also wanted to participate in the Tasty IPO. Purchasing shares in the Tasty Doughnuts IPO for the Ultra Airlines account is a violation of CFA Institute Standards, since it violates the investment policy statement (IPS).
C
Explanation:
Standards III (A), III (B), and III (C). Under CFA Institute Standards of Professional Conduct, Lee must adopt a trade allocation procedure that allocates assets in an equitable manner. By allocating the Tasty IPO to only employee benefit accounts, Lee is discriminating against other accounts that could also benefit from participating in the IPO. Lee has violated Standard III(B) Duties to Clients – Fair Dealing, which states that members must deal fairly and objectively with all clients. Purchasing Tasty Doughnuts for Ultra Airlines’s underfunded pension fund without their knowledge and consent is a clear violation of Standard III
(A) Duties to Clients -Loyalty, Prudence, and Care. Lee placed his own interest in potentially increasing his bonus ahead of his client’s interests. Lee is required to comply with Ultra Airlines’s investment constraint of not investing in IPOs. Lee should have also considered Standard III(C) C Duties to Clients – Suitability, which requires CFA Institute members to ensure that an investment is suitable, and consistent with the client’s written objectives, mandates and constraints prior to taking such investment action. By violating this express prohibition from investing in IPOs in the Ultra Airlines pension account, Lee has violated Standard III(C). (Study Session 1, LOS 2.a)
Susan Foley, CFA, is Chief Investment Officer of Federated Investment Management Co. (FIMCO), a large investment management firm that includes a family of mutual funds as well as individually managed accounts. The individually managed accounts include individuals, personal trusts, and employee benefit plans. In the past few months, Foley has encountered a couple of problems.
The Tasty IPO
Most portfolio managers of FIMCO have not participated in the initial public offering (IPO) market in recent years. However, recent changes to the compensation calculation at FIMCO have tied manager bonuses to portfolio performance. The changes were outlined in a letter that was sent out to clients and prospects shortly before the new bonus structure took effect. Carl Lee, CFA, is one portfolio manager who believes that investing in IPOs may add to his client’s equity performance and, in turn, increase his bonus. While Lee’s individual clients have done quite well this year, his employee benefit plans have suffered as a result of limited exposure to the strongest performing sector of the market. Lee has placed an order for all employee benefit plans to receive an allocation of the Tasty Doughnut IPO. Tasty is an over-subscribed IPO that Lee knew would make money for his clients. When he placed the order, Lee’s assistant reminded him that one pension plan. Ultra Airlines, was explicitly prohibited from investing in IPOs in its investment policy statement, due to the under-funded status of the pension plan. Lee responded that the Tasty IPO would never actually be owned in Ultra’s account, because he would sell the IPO stock before the end of the day and realize a profit before the position ever hit the books.
Another manager, Franz Mason, CFA, who manages accounts for about 150 individuals, is also interested in the Tasty IPO. Mason visits Lee’s portfolio assistant and quizzes him about Lee’s participation in the Tasty deal. Mason is sure that Lee would not have bought into Tasty unless he had done his homework. Mason places an order for 10,000 shares of the IPO. Mason returns to his desk and begins to allocate the IPO shares among his clients. Mason divides his client base into two groups: clients who are income-oriented and clients who arc capital gains-oriented. Mason believes those clients that are income-oriented are fairly risk averse and could not replace lost capital if the Tasty Doughnut deal lost money. Mason believes the capital gains-oriented accounts arc better able to withstand the potential loss associated with the Tasty IPO. Accordingly, Mason allocates his 10,000 share order of the Tasty IPO strictly to his capital appreciation clients using a pro rata allocation based on the size of the assets under management in each account.
FIMCO Income Fund (FIF)
Over the past three years, the FIF, with $5 billion in assets, has been the company’s best performing mutual fund. Jane Ryan, CFA, managed the FIF for seven years, but resigned one year ago to start her own hedge fund. Under Ryan, the FIF invested in large cap stocks with reliable dividends. The fund’s prospectus specifies that FIF will invest only in stocks that have paid a dividend for at least two quarters, and have a market capitalization in excess of $2.5 billion. Foley appointed FIMCO’s next best manager (based on 5-year performance numbers) Steve Parsons, CFA, to replace Ryan. Parsons had been a very successful manager of the FIMCO Opportunity Fund, which specialized in small capitalization stocks. Six months after Parsons took over the helm at FIF. the portfolio had changed. The average market capitalization of FIF’s holdings was $12.8 billion, as opposed to $21 billion a year ago. Over the same period, the average dividend yield on the portfolio had fallen from 3.8% to 3.1%. The performance of the FIF lagged its peer group for the first time in three years. In response to the lagging performance, Parsons purchased five stocks six months ago. Parsons bought all five stocks, none of which paid a dividend at the time of purchase, in anticipation that each company was likely to initiate dividends in the near future. So far, four of the stocks have initiated dividend payments, and their performance has benefited as a result. The fifth stock did not initiate a dividend, and Parsons sold the position last week. Largely due to the addition of the five new stocks, the FIF’s performance has led its peer group over the past six months.
Before leaving FIMCO, Ryan had told Foley that above-average returns from both the management and client side could be gained from entering into the risk-arbitrage hedge fund market. Ryan had tried to convince FIMCO management to enter the risk-arbitrage market, but the firm determined that no one had the experience or research capability to run a risk-arbitrage operation. As a result, Ryan started the Plasma Fund LLC one month after leaving FIMCO. Foley remembers seeing Ryan at the annual FIMCO client dinner parly (before she left the firm) discussing the profits to be made from risk-arbitrage investing with several large FIF shareholders. Ryan mentioned that she would be opening the Plasma Fund to these FIMCO clients, several of whom made substantial investments in the first months of Plasma Fund’s life. After Ryan resigned and left her office, Foley performed an inventory of firm assets signed out to Ryan. One of the copies of the proprietary stock selection software packages, FIMCO-SelectStock, assigned to Ryan was missing along with several of the SelectStock operating manuals. When Foley contacts Ryan about the missing software and manuals, Ryan states that the reason she took the SelectStock software was that it was an out of date version that FIMCO’s information technology staff had urged all managers to discard.
Mason used two allocation plans for the Tasty IPO: the first decision was based on the orientation of the account (income vs. capital gains), and the second decision was based on the relative size of each account. Did Mason violate CFA Institute Standards of Professional Conduct with respect to either allocation decision?
- A . Both Mason’s allocation screens, based on orientation of the account, and on relative size of account, violate CFA Institute Standards.
- B . Both of Mason’s allocation screens appear to fully conform with CFA Institute Standards.
- C . Mason’s pro rata allocation system is acceptable, but he should have allocated some IPO shares to his income-oriented accounts.
B
Explanation:
Standard III(B). Standard III(B) – Duties to Clients – Fair Dealing requires that all clients be dealt with fairly and objectively. Note that Standard III(B) does not state "equally". In this case, Mason had a reasonable basis to include and exclude clients based on their perceived risk level. Lower risk clients were excluded and higher risk clients were included. Further, Mason has a reasonable basis of allocating the stock he receives; i.e. assets under management. Since both measures seem objective and reasonable, it appears that Mason dealt fairly with his clients. (Study Session 1, LOS 2.a)
Susan Foley, CFA, is Chief Investment Officer of Federated Investment Management Co. (FIMCO), a large investment management firm that includes a family of mutual funds as well as individually managed accounts. The individually managed accounts include individuals, personal trusts, and employee benefit plans. In the past few months, Foley has encountered a couple of problems.
The Tasty IPO
Most portfolio managers of FIMCO have not participated in the initial public offering (IPO) market in recent years. However, recent changes to the compensation calculation at FIMCO have tied manager bonuses to portfolio performance. The changes were outlined in a letter that was sent out to clients and prospects shortly before the new bonus structure took effect. Carl Lee, CFA, is one portfolio manager who believes that investing in IPOs may add to his client’s equity performance and, in turn, increase his bonus. While Lee’s individual clients have done quite well this year, his employee benefit plans have suffered as a result of limited exposure to the strongest performing sector of the market. Lee has placed an order for all employee benefit plans to receive an allocation of the Tasty Doughnut IPO. Tasty is an over-subscribed IPO that Lee knew would make money for his clients. When he placed the order, Lee’s assistant reminded him that one pension plan. Ultra Airlines, was explicitly prohibited from investing in IPOs in its investment policy statement, due to the under-funded status of the pension plan. Lee responded that the Tasty IPO would never actually be owned in Ultra’s account, because he would sell the IPO stock before the end of the day and realize a profit before the position ever hit the books.
Another manager, Franz Mason, CFA, who manages accounts for about 150 individuals, is also interested in the Tasty IPO. Mason visits Lee’s portfolio assistant and quizzes him about Lee’s participation in the Tasty deal. Mason is sure that Lee would not have bought into Tasty unless he had done his homework. Mason places an order for 10,000 shares of the IPO. Mason returns to his desk and begins to allocate the IPO shares among his clients. Mason divides his client base into two groups: clients who are income-oriented and clients who arc capital gains-oriented. Mason believes those clients that are income-oriented are fairly risk averse and could not replace lost capital if the Tasty Doughnut deal lost money. Mason believes the capital gains-oriented accounts arc better able to withstand the potential loss associated with the Tasty IPO. Accordingly, Mason allocates his 10,000 share order of the Tasty IPO strictly to his capital appreciation clients using a pro rata allocation based on the size of the assets under management in each account.
FIMCO Income Fund (FIF)
Over the past three years, the FIF, with $5 billion in assets, has been the company’s best performing mutual fund. Jane Ryan, CFA, managed the FIF for seven years, but resigned one year ago to start her own hedge fund. Under Ryan, the FIF invested in large cap stocks with reliable dividends. The fund’s prospectus specifies that FIF will invest only in stocks that have paid a dividend for at least two quarters, and have a market capitalization in excess of $2.5 billion. Foley appointed FIMCO’s next best manager (based on 5-year performance numbers) Steve Parsons, CFA, to replace Ryan. Parsons had been a very successful manager of the FIMCO Opportunity Fund, which specialized in small capitalization stocks. Six months after Parsons took over the helm at FIF. the portfolio had changed. The average market capitalization of FIF’s holdings was $12.8 billion, as opposed to $21 billion a year ago. Over the same period, the average dividend yield on the portfolio had fallen from 3.8% to 3.1%. The performance of the FIF lagged its peer group for the first time in three years. In response to the lagging performance, Parsons purchased five stocks six months ago. Parsons bought all five stocks, none of which paid a dividend at the time of purchase, in anticipation that each company was likely to initiate dividends in the near future. So far, four of the stocks have initiated dividend payments, and their performance has benefited as a result. The fifth stock did not initiate a dividend, and Parsons sold the position last week. Largely due to the addition of the five new stocks, the FIF’s performance has led its peer group over the past six months.
Before leaving FIMCO, Ryan had told Foley that above-average returns from both the management and client side could be gained from entering into the risk-arbitrage hedge fund market. Ryan had tried to convince FIMCO management to enter the risk-arbitrage market, but the firm determined that no one had the experience or research capability to run a risk-arbitrage operation. As a result, Ryan started the Plasma Fund LLC one month after leaving FIMCO. Foley remembers seeing Ryan at the annual FIMCO client dinner parly (before she left the firm) discussing the profits to be made from risk-arbitrage investing with several large FIF shareholders. Ryan mentioned that she would be opening the Plasma Fund to these FIMCO clients, several of whom made substantial investments in the first months of Plasma Fund’s life. After Ryan resigned and left her office, Foley performed an inventory of firm assets signed out to Ryan. One of the copies of the proprietary stock selection software packages, FIMCO-SelectStock, assigned to Ryan was missing along with several of the SelectStock operating manuals. When Foley contacts Ryan about the missing software and manuals, Ryan states that the reason she took the SelectStock software was that it was an out of date version that FIMCO’s information technology staff had urged all managers to discard.
Which of the following is most likely consistent with CFA Institute Standards of Professional Conduct?
- A . Lee assumed that Ultra’s Tasty IPO position was acceptable as an intraday transaction.
- B . Improved performance in Lee’s employee benefit plan accounts increases his bonus.
- C . Mason relied on Lee’s investment decision as adequate rationale to buy into the Tasty IPO.
B
Explanation:
Standard V1(A). There is no violation inherent in tying a manager’s compensation to the performance of his accounts. There is, of course, a risk is that managers will take inappropriate actions in an attempt to boost their performance, as Lee has in this case. But, there is no violation of Standard V1(A ) Conflicts of Interest – Disclosure of Conflicts. Whether Ultra owned a stock at the end of any particular day is not relevant so long as they did own the stock at some time. Thus Lee has violated Standard III (C) Duties to Clients – Suitability. Mason did not have a reasonable basis to buy into the IPO solely because Lee had placed an order. Thus Mason has violated standard V(A) Investment Analysis, Recommendations, and Action – Diligence and Reasonable Basis. (Study Session 1, LOS 2.a)
Susan Foley, CFA, is Chief Investment Officer of Federated Investment Management Co. (FIMCO), a large investment management firm that includes a family of mutual funds as well as individually managed accounts. The individually managed accounts include individuals, personal trusts, and employee benefit plans. In the past few months, Foley has encountered a couple of problems.
The Tasty IPO
Most portfolio managers of FIMCO have not participated in the initial public offering (IPO) market in recent years. However, recent changes to the compensation calculation at FIMCO have tied manager bonuses to portfolio performance. The changes were outlined in a letter that was sent out to clients and prospects shortly before the new bonus structure took effect. Carl Lee, CFA, is one portfolio manager who believes that investing in IPOs may add to his client’s equity performance and, in turn, increase his bonus. While Lee’s individual clients have done quite well this year, his employee benefit plans have suffered as a result of limited exposure to the strongest performing sector of the market. Lee has placed an order for all employee benefit plans to receive an allocation of the Tasty Doughnut IPO. Tasty is an over-subscribed IPO that Lee knew would make money for his clients. When he placed the order, Lee’s assistant reminded him that one pension plan. Ultra Airlines, was explicitly prohibited from investing in IPOs in its investment policy statement, due to the under-funded status of the pension plan. Lee responded that the Tasty IPO would never actually be owned in Ultra’s account, because he would sell the IPO stock before the end of the day and realize a profit before the position ever hit the books.
Another manager, Franz Mason, CFA, who manages accounts for about 150 individuals, is also interested in the Tasty IPO. Mason visits Lee’s portfolio assistant and quizzes him about Lee’s participation in the Tasty deal. Mason is sure that Lee would not have bought into Tasty unless he had done his homework. Mason places an order for 10,000 shares of the IPO. Mason returns to his desk and begins to allocate the IPO shares among his clients. Mason divides his client base into two groups: clients who are income-oriented and clients who arc capital gains-oriented. Mason believes those clients that are income-oriented are fairly risk averse and could not replace lost capital if the Tasty Doughnut deal lost money. Mason believes the capital gains-oriented accounts arc better able to withstand the potential loss associated with the Tasty IPO. Accordingly, Mason allocates his 10,000 share order of the Tasty IPO strictly to his capital appreciation clients using a pro rata allocation based on the size of the assets under management in each account.
FIMCO Income Fund (FIF)
Over the past three years, the FIF, with $5 billion in assets, has been the company’s best performing mutual fund. Jane Ryan, CFA, managed the FIF for seven years, but resigned one year ago to start her own hedge fund. Under Ryan, the FIF invested in large cap stocks with reliable dividends. The fund’s prospectus specifies that FIF will invest only in stocks that have paid a dividend for at least two quarters, and have a market capitalization in excess of $2.5 billion. Foley appointed FIMCO’s next best manager (based on 5-year performance numbers) Steve Parsons, CFA, to replace Ryan. Parsons had been a very successful manager of the FIMCO Opportunity Fund, which specialized in small capitalization stocks. Six months after Parsons took over the helm at FIF. the portfolio had changed. The average market capitalization of FIF’s holdings was $12.8 billion, as opposed to $21 billion a year ago. Over the same period, the average dividend yield on the portfolio had fallen from 3.8% to 3.1%. The performance of the FIF lagged its peer group for the first time in three years. In response to the lagging performance, Parsons purchased five stocks six months ago. Parsons bought all five stocks, none of which paid a dividend at the time of purchase, in anticipation that each company was likely to initiate dividends in the near future. So far, four of the stocks have initiated dividend payments, and their performance has benefited as a result. The fifth stock did not initiate a dividend, and Parsons sold the position last week. Largely due to the addition of the five new stocks, the FIF’s performance has led its peer group over the past six months.
Before leaving FIMCO, Ryan had told Foley that above-average returns from both the management and client side could be gained from entering into the risk-arbitrage hedge fund market. Ryan had tried to convince FIMCO management to enter the risk-arbitrage market, but the firm determined that no one had the experience or research capability to run a risk-arbitrage operation. As a result, Ryan started the Plasma Fund LLC one month after leaving FIMCO. Foley remembers seeing Ryan at the annual FIMCO client dinner parly (before she left the firm) discussing the profits to be made from risk-arbitrage investing with several large FIF shareholders. Ryan mentioned that she would be opening the Plasma Fund to these FIMCO clients, several of whom made substantial investments in the first months of Plasma Fund’s life. After Ryan resigned and left her office, Foley performed an inventory of firm assets signed out to Ryan. One of the copies of the proprietary stock selection software packages, FIMCO-SelectStock, assigned to Ryan was missing along with several of the SelectStock operating manuals. When Foley contacts Ryan about the missing software and manuals, Ryan states that the reason she took the SelectStock software was that it was an out of date version that FIMCO’s information technology staff had urged all managers to discard.
Has there been any violation of CFA Institute Standards of Professional Conduct relating to either the change in the average holdings of the FIF during the first six months of Parsons’s leadership, or in Parsons’s subsequent investment in the non-dividend paying stocks?
- A . Both actions. The change in average holdings, and the purchase of non-dividend paying stocks, are violations of CFA Institute Standards.
- B . The change in average holdings would not have been a violation of CFA Institute Standards if client notification had occurred before the change was initiated.
- C . There is no violation regarding the change in average holdings, but the purchase of non-dividend paying stocks is a violation.
C
Explanation:
Standard 111(C). The prospectus requires that he hold stocks that are greater than $2.5 billion in market cap and have paid a dividend for two quarters. Parsons has remained in compliance with the market cap requirement. Parsons decision to include non-dividend paying stocks is a clear violation of the FIF mandate. The fact that four of the five stocks initiated dividends, and that these stocks apparently outperformed, is irrelevant. This is a violation of Standard III(C ) Duties to Clients – Suitability. (Study Session 1, LOS 2.a)
Susan Foley, CFA, is Chief Investment Officer of Federated Investment Management Co. (FIMCO), a large investment management firm that includes a family of mutual funds as well as individually managed accounts. The individually managed accounts include individuals, personal trusts, and employee benefit plans. In the past few months, Foley has encountered a couple of problems.
The Tasty IPO
Most portfolio managers of FIMCO have not participated in the initial public offering (IPO) market in recent years. However, recent changes to the compensation calculation at FIMCO have tied manager bonuses to portfolio performance. The changes were outlined in a letter that was sent out to clients and prospects shortly before the new bonus structure took effect. Carl Lee, CFA, is one portfolio manager who believes that investing in IPOs may add to his client’s equity performance and, in turn, increase his bonus. While Lee’s individual clients have done quite well this year, his employee benefit plans have suffered as a result of limited exposure to the strongest performing sector of the market. Lee has placed an order for all employee benefit plans to receive an allocation of the Tasty Doughnut IPO. Tasty is an over-subscribed IPO that Lee knew would make money for his clients. When he placed the order, Lee’s assistant reminded him that one pension plan. Ultra Airlines, was explicitly prohibited from investing in IPOs in its investment policy statement, due to the under-funded status of the pension plan. Lee responded that the Tasty IPO would never actually be owned in Ultra’s account, because he would sell the IPO stock before the end of the day and realize a profit before the position ever hit the books.
Another manager, Franz Mason, CFA, who manages accounts for about 150 individuals, is also interested in the Tasty IPO. Mason visits Lee’s portfolio assistant and quizzes him about Lee’s participation in the Tasty deal. Mason is sure that Lee would not have bought into Tasty unless he had done his homework. Mason places an order for 10,000 shares of the IPO. Mason returns to his desk and begins to allocate the IPO shares among his clients. Mason divides his client base into two groups: clients who are income-oriented and clients who arc capital gains-oriented. Mason believes those clients that are income-oriented are fairly risk averse and could not replace lost capital if the Tasty Doughnut deal lost money. Mason believes the capital gains-oriented accounts arc better able to withstand the potential loss associated with the Tasty IPO. Accordingly, Mason allocates his 10,000 share order of the Tasty IPO strictly to his capital appreciation clients using a pro rata allocation based on the size of the assets under management in each account.
FIMCO Income Fund (FIF)
Over the past three years, the FIF, with $5 billion in assets, has been the company’s best performing mutual fund. Jane Ryan, CFA, managed the FIF for seven years, but resigned one year ago to start her own hedge fund. Under Ryan, the FIF invested in large cap stocks with reliable dividends. The fund’s prospectus specifies that FIF will invest only in stocks that have paid a dividend for at least two quarters, and have a market capitalization in excess of $2.5 billion. Foley appointed FIMCO’s next best manager (based on 5-year performance numbers) Steve Parsons, CFA, to replace Ryan. Parsons had been a very successful manager of the FIMCO Opportunity Fund, which specialized in small capitalization stocks. Six months after Parsons took over the helm at FIF. the portfolio had changed. The average market capitalization of FIF’s holdings was $12.8 billion, as opposed to $21 billion a year ago. Over the same period, the average dividend yield on the portfolio had fallen from 3.8% to 3.1%. The performance of the FIF lagged its peer group for the first time in three years. In response to the lagging performance, Parsons purchased five stocks six months ago. Parsons bought all five stocks, none of which paid a dividend at the time of purchase, in anticipation that each company was likely to initiate dividends in the near future. So far, four of the stocks have initiated dividend payments, and their performance has benefited as a result. The fifth stock did not initiate a dividend, and Parsons sold the position last week. Largely due to the addition of the five new stocks, the FIF’s performance has led its peer group over the past six months.
Before leaving FIMCO, Ryan had told Foley that above-average returns from both the management and client side could be gained from entering into the risk-arbitrage hedge fund market. Ryan had tried to convince FIMCO management to enter the risk-arbitrage market, but the firm determined that no one had the experience or research capability to run a risk-arbitrage operation. As a result, Ryan started the Plasma Fund LLC one month after leaving FIMCO. Foley remembers seeing Ryan at the annual FIMCO client dinner parly (before she left the firm) discussing the profits to be made from risk-arbitrage investing with several large FIF shareholders. Ryan mentioned that she would be opening the Plasma Fund to these FIMCO clients, several of whom made substantial investments in the first months of Plasma Fund’s life. After Ryan resigned and left her office, Foley performed an inventory of firm assets signed out to Ryan. One of the copies of the proprietary stock selection software packages, FIMCO-SelectStock, assigned to Ryan was missing along with several of the SelectStock operating manuals. When Foley contacts Ryan about the missing software and manuals, Ryan states that the reason she took the SelectStock software was that it was an out of date version that FIMCO’s information technology staff had urged all managers to discard.
Which of the following statements is most accurate with regard to Ryan’s discussion of the new Plasma Fund with FIMCO clients?
- A . Ryan is within the CFA Institute Standards because the Plasma Fund was only in the planning stages at the time of her discussion.
- B . Ryan is within the CFA Institute Standards by discussing Plasma with the clients, since the product she was discussing did not compete with her present employer (FIMCO) in any way.
- C . Ryan has violated CFA Institute Standard IV(A) – Duties to Employers – Loyalty. In the meeting with potential clients, even though FIMCO had no experience or research capability to enter the risk arbitrage market, Ryan is offering an asset management service that is directing funds away from FIMCO.
C
Explanation:
Standard IV(A). By soliciting potential clients while still being an employee of FIMCO, Ryan has violated Standard IV(A) Duties to Employers – Loyalty, which states (hat in matters related to their employment, members and candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer. The standard applies regardless of whether Ryan is on her own time. Even though FIMCO does not have a risk arbitrage product and FIMCO had actually decided against going into the risk arbitrage business, Ryan is offering a service (asset management) that is in competition with her employers
business and will direct funds away from FIMCO. (Study Session 1, LOS 2.a)
Susan Foley, CFA, is Chief Investment Officer of Federated Investment Management Co. (FIMCO), a large investment management firm that includes a family of mutual funds as well as individually managed accounts. The individually managed accounts include individuals, personal trusts, and employee benefit plans. In the past few months, Foley has encountered a couple of problems.
The Tasty IPO
Most portfolio managers of FIMCO have not participated in the initial public offering (IPO) market in recent years. However, recent changes to the compensation calculation at FIMCO have tied manager bonuses to portfolio performance. The changes were outlined in a letter that was sent out to clients and prospects shortly before the new bonus structure took effect. Carl Lee, CFA, is one portfolio manager who believes that investing in IPOs may add to his client’s equity performance and, in turn, increase his bonus. While Lee’s individual clients have done quite well this year, his employee benefit plans have suffered as a result of limited exposure to the strongest performing sector of the market. Lee has placed an order for all employee benefit plans to receive an allocation of the Tasty Doughnut IPO. Tasty is an over-subscribed IPO that Lee knew would make money for his clients. When he placed the order, Lee’s assistant reminded him that one pension plan. Ultra Airlines, was explicitly prohibited from investing in IPOs in its investment policy statement, due to the under-funded status of the pension plan. Lee responded that the Tasty IPO would never actually be owned in Ultra’s account, because he would sell the IPO stock before the end of the day and realize a profit before the position ever hit the books.
Another manager, Franz Mason, CFA, who manages accounts for about 150 individuals, is also interested in the Tasty IPO. Mason visits Lee’s portfolio assistant and quizzes him about Lee’s participation in the Tasty deal. Mason is sure that Lee would not have bought into Tasty unless he had done his homework. Mason places an order for 10,000 shares of the IPO. Mason returns to his desk and begins to allocate the IPO shares among his clients. Mason divides his client base into two groups: clients who are income-oriented and clients who arc capital gains-oriented. Mason believes those clients that are income-oriented are fairly risk averse and could not replace lost capital if the Tasty Doughnut deal lost money. Mason believes the capital gains-oriented accounts arc better able to withstand the potential loss associated with the Tasty IPO. Accordingly, Mason allocates his 10,000 share order of the Tasty IPO strictly to his capital appreciation clients using a pro rata allocation based on the size of the assets under management in each account.
FIMCO Income Fund (FIF)
Over the past three years, the FIF, with $5 billion in assets, has been the company’s best performing mutual fund. Jane Ryan, CFA, managed the FIF for seven years, but resigned one year ago to start her own hedge fund. Under Ryan, the FIF invested in large cap stocks with reliable dividends. The fund’s prospectus specifies that FIF will invest only in stocks that have paid a dividend for at least two quarters, and have a market capitalization in excess of $2.5 billion. Foley appointed FIMCO’s next best manager (based on 5-year performance numbers) Steve Parsons, CFA, to replace Ryan. Parsons had been a very successful manager of the FIMCO Opportunity Fund, which specialized in small capitalization stocks. Six months after Parsons took over the helm at FIF. the portfolio had changed. The average market capitalization of FIF’s holdings was $12.8 billion, as opposed to $21 billion a year ago. Over the same period, the average dividend yield on the portfolio had fallen from 3.8% to 3.1%. The performance of the FIF lagged its peer group for the first time in three years. In response to the lagging performance, Parsons purchased five stocks six months ago. Parsons bought all five stocks, none of which paid a dividend at the time of purchase, in anticipation that each company was likely to initiate dividends in the near future. So far, four of the stocks have initiated dividend payments, and their performance has benefited as a result. The fifth stock did not initiate a dividend, and Parsons sold the position last week. Largely due to the addition of the five new stocks, the FIF’s performance has led its peer group over the past six months.
Before leaving FIMCO, Ryan had told Foley that above-average returns from both the management and client side could be gained from entering into the risk-arbitrage hedge fund market. Ryan had tried to convince FIMCO management to enter the risk-arbitrage market, but the firm determined that no one had the experience or research capability to run a risk-arbitrage operation. As a result, Ryan started the Plasma Fund LLC one month after leaving FIMCO. Foley remembers seeing Ryan at the annual FIMCO client dinner parly (before she left the firm) discussing the profits to be made from risk-arbitrage investing with several large FIF shareholders. Ryan mentioned that she would be opening the Plasma Fund to these FIMCO clients, several of whom made substantial investments in the first months of Plasma Fund’s life. After Ryan resigned and left her office, Foley performed an inventory of firm assets signed out to Ryan. One of the copies of the proprietary stock selection software packages, FIMCO-SelectStock, assigned to Ryan was missing along with several of the SelectStock operating manuals. When Foley contacts Ryan about the missing software and manuals, Ryan states that the reason she took the SelectStock software was that it was an out of date version that FIMCO’s information technology staff had urged all managers to discard.
Which of the following statements is most accurate with regard to Ryan’s taking the out of date version of the SelectStock software?
- A . The inappropriate misappropriation of the software and manuals is a violation of CFA Institute Standard IV(A) – Duties to Employers – Loyalty, regardless of the circumstances. Written permission from the employer (FIMCO) should have been requested and received.
- B . Ryan’s possession of the out of date software is perfectly acceptable, since her IT staff had made it clear that is was no longer needed by FIMCO.
- C . Ryan’s possession of the out of date software is perfectly acceptable, since the software is of no use to FIMCO, and the fact that it was an outdated version indicates that it had no economic value.
A
Explanation:
Standard IV(A). Ryan violated Standard IV(A) Duties to Employers – Loyalty by misappropriating employer property. Ryan should not have taken the SelectStock software or manuals off the firm’s property, as they are owned by the firm until disposed of by the firm. It does not matter if the SelectStock software and manuals are out of date or even just about to be thrown away, they are not Ryan’s property. Ryan should have asked for written permission to take the software and manuals. (Study Session 1, LOS 2.a)
Martha Gillis, CFA, trades currencies for Trent, LLC. Trent is one of the largest investment firms in the world, and its foreign currency department trades more currency on a daily basis than any other firm. Gillis specializes in currencies of emerging nations.
Gillis received an invitation from the new Finance Minister of Binaria, one of the emerging nations included in Gillis’s portfolio. The minister has proposed a number of fiscal reforms that he hopes will help support Binaria’s weakening currency. He is asking currency specialists from several of the largest foreign exchange banks to visit Binaria for a conference on the planned reforms. Because of its remote location, Binaria will pay all travel expenses of the attendees, as well as lodging in government-owned facilities in the capital city. As a further inducement, attendees will also receive small bags of uncut emeralds (as emeralds are a principal export of Binaria), with an estimated market value of $500.
Gillis has approximately 25 clients that she deals with regularly, most of whom are large financial institutions interested in trading currencies. One of the services Gillis provides to these clients is a weekly summary of important trends in the emerging market currencies she follows. Gillis talks to local government officials and reads research reports prepared by local analysts, which are paid for by Trent. These inputs, along with Gillis’s interpretation, form the basis of most of Gillis’s weekly reports.
Gillis decided to attend the conference in Binaria. In anticipation of a favorable reception for the proposed reforms, Gillis purchased a long Binaria currency position in her personal account before leaving on the trip. After hearing the finance minister’s proposals in person, however, she decides that the reforms are poorly timed and likely to cause the currency to depreciate. She issues a negative recommendation upon her return. Before issuing the recommendation, she liquidates the long position in her personal account but does not take a short position.
Gillis’s supervisor, Steve Howlett, CFA, has been reviewing Gillis’s personal trading. Howlett has not seen any details of the Binaria currency trade but has found two other instances in the past year where he believes Gillis has violated Trent’s written policies regarding trading in personal accounts.
One of the currency trading strategies employed by Trent is based on interest rate parity. Trent monitors spot exchange rates, forward rates, and short-term government interest rates. On the rare occasions when the forward rates do not accurately reflect the interest differential between two countries, Trent places trades to take advantage of the riskless arbitrage opportunity. Because Trent is such a large player in the exchange markets, its transactions costs are very low, and Trent is often able to take advantage of mispricings that are too small for others to capitalize on. In describing these trading opportunities to clients, Trent suggests that "clients willing to participate in this type of arbitrage strategy are guaranteed riskless profits until the market pricing returns to equilibrium."
According to CFA Institute Standards of Professional Conduct, Gillis may accept the invitation to attend the conference in Binaria without violating the Standards:
- A . so long as she pays her own travel expenses and refuses the gift of emeralds.
- B . so long as she refuses the gift of emeralds.
- C . since she would be the guest of a sovereign government.
B
Explanation:
Standard 1(B). Attending the conference would be appropriate, but Gillis must avoid any situation that would affect her independence, in order to properly comply with Standard 1(B) Professionalism Independence and Objectivity. Since Gingeria is remotely located, it is reasonable for the government to pay her travel expenses.
However, the gift of emeralds must be refused. The fact that the host is a sovereign government does not matter―the obvious objective is to give the analysts a favorable bias toward the currency and the proposed reforms. (Study Session 1, LOS 2.a)
Martha Gillis, CFA, trades currencies for Trent, LLC. Trent is one of the largest investment firms in the world, and its foreign currency department trades more currency on a daily basis than any other firm. Gillis specializes in currencies of emerging nations.
Gillis received an invitation from the new Finance Minister of Binaria, one of the emerging nations included in Gillis’s portfolio. The minister has proposed a number of fiscal reforms that he hopes will help support Binaria’s weakening currency. He is asking currency specialists from several of the largest foreign exchange banks to visit Binaria for a conference on the planned reforms. Because of its remote location, Binaria will pay all travel expenses of the attendees, as well as lodging in government-owned facilities in the capital city. As a further inducement, attendees will also receive small bags of uncut emeralds (as emeralds are a principal export of Binaria), with an estimated market value of $500.
Gillis has approximately 25 clients that she deals with regularly, most of whom are large financial institutions interested in trading currencies. One of the services Gillis provides to these clients is a weekly summary of important trends in the emerging market currencies she follows. Gillis talks to local government officials and reads research reports prepared by local analysts, which are paid for by Trent. These inputs, along with Gillis’s interpretation, form the basis of most of Gillis’s weekly reports.
Gillis decided to attend the conference in Binaria. In anticipation of a favorable reception for the proposed reforms, Gillis purchased a long Binaria currency position in her personal account before leaving on the trip. After hearing the finance minister’s proposals in person, however, she decides that the reforms are poorly timed and likely to cause the currency to depreciate. She issues a negative recommendation upon her return. Before issuing the recommendation, she liquidates the long position in her personal account but does not take a short position.
Gillis’s supervisor, Steve Howlett, CFA, has been reviewing Gillis’s personal trading. Howlett has not seen any details of the Binaria currency trade but has found two other instances in the past year where he believes Gillis has violated Trent’s written policies regarding trading in personal accounts.
One of the currency trading strategies employed by Trent is based on interest rate parity. Trent monitors spot exchange rates, forward rates, and short-term government interest rates. On the rare occasions when the forward rates do not accurately reflect the interest differential between two countries, Trent places trades to take advantage of the riskless arbitrage opportunity. Because Trent is such a large player in the exchange markets, its transactions costs are very low, and Trent is often able to take advantage of mispricings that are too small for others to capitalize on. In describing these trading opportunities to clients, Trent suggests that "clients willing to participate in this type of arbitrage strategy are guaranteed riskless profits until the market pricing returns to equilibrium."
Given that Gillis’s weekly reports to clients are market summaries rather than specific investment recommendations, what are her record-keeping obligations according to CFA Institute Standards of Professional Conduct? Gillis must:
- A . maintain records of her conversations with local government officials and also keep copies of the research reports prepared by local analysts.
- B . only maintain records of her conversations with local government officials and her own summaries of the research reports prepared by local analysts.
- C . keep her own summaries of the research reports prepared by local analysts, but she has no obligation to maintain records of her conversations with local government officials.
A
Explanation:
Standard V(C). Gilfis’s reports may not be specific investment recommendations, but as they are client communications she should keep either electronic or hard copy records of her conversations with the government officials and copies of the research reports she used in developing her weekly summary reports, in order to comply with Standard V(C ) Investment Analysis, Recommendations, and Actions Record Retention, (Study Session 1, LOS 2.a)
Martha Gillis, CFA, trades currencies for Trent, LLC. Trent is one of the largest investment firms in the world, and its foreign currency department trades more currency on a daily basis than any other firm. Gillis specializes in currencies of emerging nations.
Gillis received an invitation from the new Finance Minister of Binaria, one of the emerging nations included in Gillis’s portfolio. The minister has proposed a number of fiscal reforms that he hopes will help support Binaria’s weakening currency. He is asking currency specialists from several of the largest foreign exchange banks to visit Binaria for a conference on the planned reforms. Because of its remote location, Binaria will pay all travel expenses of the attendees, as well as lodging in government-owned facilities in the capital city. As a further inducement, attendees will also receive small bags of uncut emeralds (as emeralds are a principal export of Binaria), with an estimated market value of $500.
Gillis has approximately 25 clients that she deals with regularly, most of whom are large financial institutions interested in trading currencies. One of the services Gillis provides to these clients is a weekly summary of important trends in the emerging market currencies she follows. Gillis talks to local government officials and reads research reports prepared by local analysts, which are paid for by Trent. These inputs, along with Gillis’s interpretation, form the basis of most of Gillis’s weekly reports.
Gillis decided to attend the conference in Binaria. In anticipation of a favorable reception for the proposed reforms, Gillis purchased a long Binaria currency position in her personal account before leaving on the trip. After hearing the finance minister’s proposals in person, however, she decides that the reforms are poorly timed and likely to cause the currency to depreciate. She issues a negative recommendation upon her return. Before issuing the recommendation, she liquidates the long position in her personal account but does not take a short position.
Gillis’s supervisor, Steve Howlett, CFA, has been reviewing Gillis’s personal trading. Howlett has not seen any details of the Binaria currency trade but has found two other instances in the past year where he believes Gillis has violated Trent’s written policies regarding trading in personal accounts.
One of the currency trading strategies employed by Trent is based on interest rate parity. Trent monitors spot exchange rates, forward rates, and short-term government interest rates. On the rare occasions when the forward rates do not accurately reflect the interest differential between two countries, Trent places trades to take advantage of the riskless arbitrage opportunity. Because Trent is such a large player in the exchange markets, its transactions costs are very low, and Trent is often able to take advantage of mispricings that are too small for others to capitalize on. In describing these trading opportunities to clients, Trent suggests that "clients willing to participate in this type of arbitrage strategy are guaranteed riskless profits until the market pricing returns to equilibrium."
Regarding Gillis’s transactions in the Binaria currency, the Standards have been violated by:
- A . taking the long position and by selling the position before issuing a recommendation to clients.
- B . selling the position before issuing the recommendation to clients, although taking the long position was not a violation.
- C . not disclosing the trades in her report since the trades are acceptable so long as they are disclosed.
A
Explanation:
Standard V1(B). Gillis is attempting to trade ahead of her employer and her clients in violation of the Standards. She was wrong to take the long position in anticipation of a positive recommendation and wrong to sell the position before issuing her negative recommendation. These trades were wrong regardless of whether they were disclosed. In accordance with Standard VI(B) Conflicts of Interest – Priority of Transactions, client interests must take precedence over personal interests. (Study Session 1, LOS 2.a)
Martha Gillis, CFA, trades currencies for Trent, LLC. Trent is one of the largest investment firms in the world, and its foreign currency department trades more currency on a daily basis than any other firm. Gillis specializes in currencies of emerging nations.
Gillis received an invitation from the new Finance Minister of Binaria, one of the emerging nations included in Gillis’s portfolio. The minister has proposed a number of fiscal reforms that he hopes will help support Binaria’s weakening currency. He is asking currency specialists from several of the largest foreign exchange banks to visit Binaria for a conference on the planned reforms. Because of its remote location, Binaria will pay all travel expenses of the attendees, as well as lodging in government-owned facilities in the capital city. As a further inducement, attendees will also receive small bags of uncut emeralds (as emeralds are a principal export of Binaria), with an estimated market value of $500.
Gillis has approximately 25 clients that she deals with regularly, most of whom are large financial institutions interested in trading currencies. One of the services Gillis provides to these clients is a weekly summary of important trends in the emerging market currencies she follows. Gillis talks to local government officials and reads research reports prepared by local analysts, which are paid for by Trent. These inputs, along with Gillis’s interpretation, form the basis of most of Gillis’s weekly reports.
Gillis decided to attend the conference in Binaria. In anticipation of a favorable reception for the proposed reforms, Gillis purchased a long Binaria currency position in her personal account before leaving on the trip. After hearing the finance minister’s proposals in person, however, she decides that the reforms are poorly timed and likely to cause the currency to depreciate. She issues a negative recommendation upon her return. Before issuing the recommendation, she liquidates the long position in her personal account but does not take a short position.
Gillis’s supervisor, Steve Howlett, CFA, has been reviewing Gillis’s personal trading. Howlett has not seen any details of the Binaria currency trade but has found two other instances in the past year where he believes Gillis has violated Trent’s written policies regarding trading in personal accounts.
One of the currency trading strategies employed by Trent is based on interest rate parity. Trent monitors spot exchange rates, forward rates, and short-term government interest rates. On the rare occasions when the forward rates do not accurately reflect the interest differential between two countries, Trent places trades to take advantage of the riskless arbitrage opportunity. Because Trent is such a large player in the exchange markets, its transactions costs are very low, and Trent is often able to take advantage of mispricings that are too small for others to capitalize on. In describing these trading opportunities to clients, Trent suggests that "clients willing to participate in this type of arbitrage strategy are guaranteed riskless profits until the market pricing returns to equilibrium."
According to CFA Institute Standards of Professional Conduct, Howlett’s best course of action with regard to the suspected violations by Gillis would be to:
- A . meet with Gillis in person, explain the nature of the violations, and seek assurances that such violations will not recur.
- B . warn Gillis to cease the trading activities and report the violation to Howlett’s supervisor immediately.
- C . place limits on Gillis’s personal trading and increase monitoring of Gillis’s personal trades.
C
Explanation:
Standard 1(A). Warning Gillis and/or reporting the violation up Trout’s management structure are inadequate solutions. Limiting the trading activity and increased monitoring to prevent future violations are more appropriate initial responses, in accordance with Standard 1(A) Professionalism – Knowledge of the Law. (Study Session l,LOS2.a)
Martha Gillis, CFA, trades currencies for Trent, LLC. Trent is one of the largest investment firms in the world, and its foreign currency department trades more currency on a daily basis than any other firm. Gillis specializes in currencies of emerging nations.
Gillis received an invitation from the new Finance Minister of Binaria, one of the emerging nations included in Gillis’s portfolio. The minister has proposed a number of fiscal reforms that he hopes will help support Binaria’s weakening currency. He is asking currency specialists from several of the largest foreign exchange banks to visit Binaria for a conference on the planned reforms. Because of its remote location, Binaria will pay all travel expenses of the attendees, as well as lodging in government-owned facilities in the capital city. As a further inducement, attendees will also receive small bags of uncut emeralds (as emeralds are a principal export of Binaria), with an estimated market value of $500.
Gillis has approximately 25 clients that she deals with regularly, most of whom are large financial institutions interested in trading currencies. One of the services Gillis provides to these clients is a weekly summary of important trends in the emerging market currencies she follows. Gillis talks to local government officials and reads research reports prepared by local analysts, which are paid for by Trent. These inputs, along with Gillis’s interpretation, form the basis of most of Gillis’s weekly reports.
Gillis decided to attend the conference in Binaria. In anticipation of a favorable reception for the proposed reforms, Gillis purchased a long Binaria currency position in her personal account before leaving on the trip. After hearing the finance minister’s proposals in person, however, she decides that the reforms are poorly timed and likely to cause the currency to depreciate. She issues a negative recommendation upon her return. Before issuing the recommendation, she liquidates the long position in her personal account but does not take a short position.
Gillis’s supervisor, Steve Howlett, CFA, has been reviewing Gillis’s personal trading. Howlett has not seen any details of the Binaria currency trade but has found two other instances in the past year where he believes Gillis has violated Trent’s written policies regarding trading in personal accounts.
One of the currency trading strategies employed by Trent is based on interest rate parity. Trent monitors spot exchange rates, forward rates, and short-term government interest rates. On the rare occasions when the forward rates do not accurately reflect the interest differential between two countries, Trent places trades to take advantage of the riskless arbitrage opportunity. Because Trent is such a large player in the exchange markets, its transactions costs are very low, and Trent is often able to take advantage of mispricings that are too small for others to capitalize on. In describing these trading opportunities to clients, Trent suggests that "clients willing to participate in this type of arbitrage strategy are guaranteed riskless profits until the market pricing returns to equilibrium."
Based on the information given, and according to CFA Institute Standards, which of the following statements best describes Trent’s compliance procedures relating to personal trading in foreign currencies? The compliance procedures:
- A . appear adequate since Howlett was able to identify potential violations.
- B . appear adequate, but Howlett’s monitoring of Gillis’s trades indicates poor supervisory responsibility.
- C . should include both duplicate confirmations of transactions and preclearance procedures for personal trades.
C
Explanation:
Standard VI(B). The main problem in this case appears to be that there is no system to identify potential front-running violations before they occur. Standard VI(B) Conflicts of Interest – Priority of Transactions, recommends both preclearance of trades and duplicate trade confirmations as procedures for compliance. (Study Session 1, LOS 2.a)
Martha Gillis, CFA, trades currencies for Trent, LLC. Trent is one of the largest investment firms in the world, and its foreign currency department trades more currency on a daily basis than any other firm. Gillis specializes in currencies of emerging nations.
Gillis received an invitation from the new Finance Minister of Binaria, one of the emerging nations included in Gillis’s portfolio. The minister has proposed a number of fiscal reforms that he hopes will help support Binaria’s weakening currency. He is asking currency specialists from several of the largest foreign exchange banks to visit Binaria for a conference on the planned reforms. Because of its remote location, Binaria will pay all travel expenses of the attendees, as well as lodging in government-owned facilities in the capital city. As a further inducement, attendees will also receive small bags of uncut emeralds (as emeralds are a principal export of Binaria), with an estimated market value of $500.
Gillis has approximately 25 clients that she deals with regularly, most of whom are large financial institutions interested in trading currencies. One of the services Gillis provides to these clients is a weekly summary of important trends in the emerging market currencies she follows. Gillis talks to local government officials and reads research reports prepared by local analysts, which are paid for by Trent. These inputs, along with Gillis’s interpretation, form the basis of most of Gillis’s weekly reports.
Gillis decided to attend the conference in Binaria. In anticipation of a favorable reception for the proposed reforms, Gillis purchased a long Binaria currency position in her personal account before leaving on the trip. After hearing the finance minister’s proposals in person, however, she decides that the reforms are poorly timed and likely to cause the currency to depreciate. She issues a negative recommendation upon her return. Before issuing the recommendation, she liquidates the long position in her personal account but does not take a short position.
Gillis’s supervisor, Steve Howlett, CFA, has been reviewing Gillis’s personal trading. Howlett has not seen any details of the Binaria currency trade but has found two other instances in the past year where he believes Gillis has violated Trent’s written policies regarding trading in personal accounts.
One of the currency trading strategies employed by Trent is based on interest rate parity. Trent monitors spot exchange rates, forward rates, and short-term government interest rates. On the rare occasions when the forward rates do not accurately reflect the interest differential between two countries, Trent places trades to take advantage of the riskless arbitrage opportunity. Because Trent is such a large player in the exchange markets, its transactions costs are very low, and Trent is often able to take advantage of mispricings that are too small for others to capitalize on. In describing these trading opportunities to clients, Trent suggests that "clients willing to participate in this type of arbitrage strategy are guaranteed riskless profits until the market pricing returns to equilibrium."
Trent’s arbitrage trading based on interest rate parity is successful mostly due to Trent’s large size, which provides it with an advantage relative to smaller, competing currency trading firms. Has Trent violated CFA Institute Standards of Professional Conduct with respect to its trading strategy or its guarantee of results?
- A . The trading strategy and guarantee of results arc both violations cf CFA Institute Standards.
- B . The trading strategy is legitimate and does not violate CFA Institute Standards, but the guarantee of investment return is a violation of Standards.
- C . Both the trading strategy and guarantee statement comply with CFA Institute Standards.
C
Explanation:
Standards 11(B) and V(B). The strategy based on inierest rate parity would provide tisklcss profits until the prices moved into equilibrium and the forward rates accurately reflected the interest rate differentials. Trout’s guarantee is therefore accurate. The low transaction costs available to Trout ate a competitive advantage that can be exploited without violating Standard H(B). (Study Session I, LOS 2.a)
Martha Gillis, CFA, trades currencies for Trent, LLC. Trent is one of the largest investment firms in the world, and its foreign currency department trades more currency on a daily basis than any other firm. Gillis specializes in currencies of emerging nations.
Gillis received an invitation from the new Finance Minister of Binaria, one of the emerging nations included in Gillis’s portfolio. The minister has proposed a number of fiscal reforms that he hopes will help support Binaria’s weakening currency. He is asking currency specialists from several of the largest foreign exchange banks to visit Binaria for a conference on the planned reforms. Because of its remote location, Binaria will pay all travel expenses of the attendees, as well as lodging in government-owned facilities in the capital city. As a further inducement, attendees will also receive small bags of uncut emeralds (as emeralds are a principal export of Binaria), with an estimated market value of $500.
Gillis has approximately 25 clients that she deals with regularly, most of whom are large financial institutions interested in trading currencies. One of the services Gillis provides to these clients is a weekly summary of important trends in the emerging market currencies she follows. Gillis talks to local government officials and reads research reports prepared by local analysts, which are paid for by Trent. These inputs, along with Gillis’s interpretation, form the basis of most of Gillis’s weekly reports.
Gillis decided to attend the conference in Binaria. In anticipation of a favorable reception for the proposed reforms, Gillis purchased a long Binaria currency position in her personal account before leaving on the trip. After hearing the finance minister’s proposals in person, however, she decides that the reforms are poorly timed and likely to cause the currency to depreciate. She issues a negative recommendation upon her return. Before issuing the recommendation, she liquidates the long position in her personal account but does not take a short position.
Gillis’s supervisor, Steve Howlett, CFA, has been reviewing Gillis’s personal trading. Howlett has not seen any details of the Binaria currency trade but has found two other instances in the past year where he believes Gillis has violated Trent’s written policies regarding trading in personal accounts.
One of the currency trading strategies employed by Trent is based on interest rate parity. Trent monitors spot exchange rates, forward rates, and short-term government interest rates. On the rare occasions when the forward rates do not accurately reflect the interest differential between two countries, Trent places trades to take advantage of the riskless arbitrage opportunity. Because Trent is such a large player in the exchange markets, its transactions costs are very low, and Trent is often able to take advantage of mispricings that are too small for others to capitalize on. In describing these trading opportunities to clients, Trent suggests that "clients willing to participate in this type of arbitrage strategy are guaranteed riskless profits until the market pricing returns to equilibrium."
Trent’s arbitrage trading based on interest rate parity is successful mostly due to Trent’s large size, which provides it with an advantage relative to smaller, competing currency trading firms. Has Trent violated CFA Institute Standards of Professional Conduct with respect to its trading strategy or its guarantee of results?
- A . The trading strategy and guarantee of results arc both violations cf CFA Institute Standards.
- B . The trading strategy is legitimate and does not violate CFA Institute Standards, but the guarantee of investment return is a violation of Standards.
- C . Both the trading strategy and guarantee statement comply with CFA Institute Standards.
C
Explanation:
Standards 11(B) and V(B). The strategy based on inierest rate parity would provide tisklcss profits until the prices moved into equilibrium and the forward rates accurately reflected the interest rate differentials. Trout’s guarantee is therefore accurate. The low transaction costs available to Trout ate a competitive advantage that can be exploited without violating Standard H(B). (Study Session I, LOS 2.a)
SIMULATION
Ota L’Abbe, a supervisor at an investment research firm, has asked one of the junior analysts, Andreas Hally, to draft a research report dealing with various accounting issues.
Excerpts from the request are as follows:
• “There’s an exciting company that we’re starting to follow these days. It’s called Snowboards and Skateboards, Inc. They are a multinational company with operations and a head office based in the resort town of Whistler in western Canada. However, they also have a significant subsidiary located in the United States."
• "Look at the subsidiary and deal with some foreign currency issues including the specific differences between the temporal and all-current methods of translation, as well as the effect on financial ratios."
• "The attached file contains the September 30, 2008, financial statements of the U.S. subsidiary. Translate the financial statements into Canadian dollars in a manner consistent with U.S. GAAP."
The following are statements from the research report subsequently written by Hally:
Statement 1: Subsidiaries whose operations are well integrated with the parent will use the all-current method of translation.
Statement 2: Self-contained, independent subsidiaries whose operating, investing, and financing activities are primarily located in the local market will use the temporal method of translation.
Other information to be considered
• Exchange rates (CAD/USD)
• Beginning inventory for fiscal 2008 had been purchased evenly throughout fiscal 2007. The company uses the FIFO inventory value method.
• Dividends of USD 25,000 were paid to the shareholders on June 30, 2008.
• All of the remaining inventory at the end of fiscal 2008 was purchased evenly throughout fiscal 2008.
• All of the PP&E was purchased, and all of the common equity was issued at the inception of the company on October 1, 2004. No new PP&E has been acquired, and no additional common stock has been issued since then. However, they plan to purchase new PP&E starting in fiscal 2009.
• The beginning retained earnings balance for fiscal 2008 was CAD 1,550,000.
• The accounts payable on the fiscal 2008 balance sheet were all incurred on June 30, 2008.
• The U.S. subsidiary’s operations are highly integrated with the main operations in Canada.
• The remeasured inventory for 2008 using the temporal method is CAD 810,000.
• All monetary asset and liability balances are the same as they were at the end of the 2007 fiscal year, except that long-term debt was USD 467,700.
• Costs of goods sold under the temporal method in 2008 is CAD 1,667,250.
Which of the following best describes the effect on the parent’s fiscal 2008 sales when translated to Canadian dollars? Sales, relative to what it would have been if the CAD/USD exchange rate had not changed, will be:
- A . lower because the U.S. dollar depreciated during fiscal 2008.
- B . higher because the average value of the Canadian dollar depreciated during fiscal 2008.
- C . lower because the U.S. dollar appreciated during fiscal 2008.
A
Explanation:
Sales will be lower after translation because of the depreciating U.S. dollar. (Study Session 6, LOS 23.d)
SIMULATION
Ota L’Abbe, a supervisor at an investment research firm, has asked one of the junior analysts, Andreas Hally, to draft a research report dealing with various accounting issues.
Excerpts from the request are as follows:
• “There’s an exciting company that we’re starting to follow these days. It’s called Snowboards and Skateboards, Inc. They are a multinational company with operations and a head office based in the resort town of Whistler in western Canada. However, they also have a significant subsidiary located in the United States."
• "Look at the subsidiary and deal with some foreign currency issues including the specific differences between the temporal and all-current methods of translation, as well as the effect on financial ratios."
• "The attached file contains the September 30, 2008, financial statements of the U.S. subsidiary. Translate the financial statements into Canadian dollars in a manner consistent with U.S. GAAP."
The following are statements from the research report subsequently written by Hally:
Statement 1: Subsidiaries whose operations are well integrated with the parent will use the all-current method of translation.
Statement 2: Self-contained, independent subsidiaries whose operating, investing, and financing activities are primarily located in the local market will use the temporal method of translation.
Other information to be considered
• Exchange rates (CAD/USD)
• Beginning inventory for fiscal 2008 had been purchased evenly throughout fiscal 2007. The company uses the FIFO inventory value method.
• Dividends of USD 25,000 were paid to the shareholders on June 30, 2008.
• All of the remaining inventory at the end of fiscal 2008 was purchased evenly throughout fiscal 2008.
• All of the PP&E was purchased, and all of the common equity was issued at the inception of the company on October 1, 2004. No new PP&E has been acquired, and no additional common stock has been issued since then. However, they plan to purchase new PP&E starting in fiscal 2009.
• The beginning retained earnings balance for fiscal 2008 was CAD 1,550,000.
• The accounts payable on the fiscal 2008 balance sheet were all incurred on June 30, 2008.
• The U.S. subsidiary’s operations are highly integrated with the main operations in Canada.
• The remeasured inventory for 2008 using the temporal method is CAD 810,000.
• All monetary asset and liability balances are the same as they were at the end of the 2007 fiscal year, except that long-term debt was USD 467,700.
• Costs of goods sold under the temporal method in 2008 is CAD 1,667,250.
As compared to the temporal method, which of the following financial statement elements of the parent are lower under the all-current method?
- A . Cash and accounts receivable.
- B . Depreciation expense and cost of goods sold.
- C . Common stock and dividends paid.
B
Explanation:
Depreciation expense and COGS are remeasured at the historical rate under the temporal method. Under the all-current method, depreciation and COGS are translai at the average rate. Since the U.S. dollar is depreciating, depreciation expense and COGS are lower under the all-current method. (Study Session 6, LOS 23.d)
SIMULATION
Ota L’Abbe, a supervisor at an investment research firm, has asked one of the junior analysts, Andreas Hally, to draft a research report dealing with various accounting issues.
Excerpts from the request are as follows:
• “There’s an exciting company that we’re starting to follow these days. It’s called Snowboards and Skateboards, Inc. They are a multinational company with operations and a head office based in the resort town of Whistler in western Canada. However, they also have a significant subsidiary located in the United States."
• "Look at the subsidiary and deal with some foreign currency issues including the specific differences between the temporal and all-current methods of translation, as well as the effect on financial ratios."
• "The attached file contains the September 30, 2008, financial statements of the U.S. subsidiary. Translate the financial statements into Canadian dollars in a manner consistent with U.S. GAAP."
The following are statements from the research report subsequently written by Hally:
Statement 1: Subsidiaries whose operations are well integrated with the parent will use the all-current method of translation.
Statement 2: Self-contained, independent subsidiaries whose operating, investing, and financing activities are primarily located in the local market will use the temporal method of translation.
Other information to be considered
• Exchange rates (CAD/USD)
• Beginning inventory for fiscal 2008 had been purchased evenly throughout fiscal 2007. The company uses the FIFO inventory value method.
• Dividends of USD 25,000 were paid to the shareholders on June 30, 2008.
• All of the remaining inventory at the end of fiscal 2008 was purchased evenly throughout fiscal 2008.
• All of the PP&E was purchased, and all of the common equity was issued at the inception of the company on October 1, 2004. No new PP&E has been acquired, and no additional common stock has been issued since then. However, they plan to purchase new PP&E starting in fiscal 2009.
• The beginning retained earnings balance for fiscal 2008 was CAD 1,550,000.
• The accounts payable on the fiscal 2008 balance sheet were all incurred on June 30, 2008.
• The U.S. subsidiary’s operations are highly integrated with the main operations in Canada.
• The remeasured inventory for 2008 using the temporal method is CAD 810,000.
• All monetary asset and liability balances are the same as they were at the end of the 2007 fiscal year, except that long-term debt was USD 467,700.
• Costs of goods sold under the temporal method in 2008 is CAD 1,667,250.
Using the appropriate translation method, which of the following best describes the effect of changing exchange rates on the parent’s fiscal 2008 financial statements?
- A . An accumulated loss of CAD 242,100 is reported in the shareholders’ equity.
- B . A loss of CAD 31,200 is recognized in the income statement.
- C . A gain of CAD 27,400 is recognized in the income statement.
B
Explanation:
Use the following to answer this question.
The Canadian dollar is the functional currency because the subsidiary is highly integrated with the parent. Therefore, the temporal method applies.
Since the subsidiary’s operations are highly integrated with the parent, the temporal method is used. Accordingly, a loss of CAD 31,200 is recognized in the parent’s income statement (see balance sheet and income statement worksheet).
However, no calculations are actually necessary to answer this question. The parent has a net monetary asset position in the subsidiary (monetary assets > monetary liabilities). Holding net monetary assets when the foreign currency is depreciating will result in a loss. Under the temporal method, the loss is reported in the income statement. Only choice B satisfies this logic. (Study Session 6, LOS 23.d)
SIMULATION
Ota L’Abbe, a supervisor at an investment research firm, has asked one of the junior analysts, Andreas Hally, to draft a research report dealing with various accounting issues.
Excerpts from the request are as follows:
• “There’s an exciting company that we’re starting to follow these days. It’s called Snowboards and Skateboards, Inc. They are a multinational company with operations and a head office based in the resort town of Whistler in western Canada. However, they also have a significant subsidiary located in the United States."
• "Look at the subsidiary and deal with some foreign currency issues including the specific differences between the temporal and all-current methods of translation, as well as the effect on financial ratios."
• "The attached file contains the September 30, 2008, financial statements of the U.S. subsidiary. Translate the financial statements into Canadian dollars in a manner consistent with U.S. GAAP."
The following are statements from the research report subsequently written by Hally:
Statement 1: Subsidiaries whose operations are well integrated with the parent will use the all-current method of translation.
Statement 2: Self-contained, independent subsidiaries whose operating, investing, and financing activities are primarily located in the local market will use the temporal method of translation.
Other information to be considered
• Exchange rates (CAD/USD)
• Beginning inventory for fiscal 2008 had been purchased evenly throughout fiscal 2007. The company uses the FIFO inventory value method.
• Dividends of USD 25,000 were paid to the shareholders on June 30, 2008.
• All of the remaining inventory at the end of fiscal 2008 was purchased evenly throughout fiscal 2008.
• All of the PP&E was purchased, and all of the common equity was issued at the inception of the company on October 1, 2004. No new PP&E has been acquired, and no additional common stock has been issued since then. However, they plan to purchase new PP&E starting in fiscal 2009.
• The beginning retained earnings balance for fiscal 2008 was CAD 1,550,000.
• The accounts payable on the fiscal 2008 balance sheet were all incurred on June 30, 2008.
• The U.S. subsidiary’s operations are highly integrated with the main operations in Canada.
• The remeasured inventory for 2008 using the temporal method is CAD 810,000.
• All monetary asset and liability balances are the same as they were at the end of the 2007 fiscal year, except that long-term debt was USD 467,700.
• Costs of goods sold under the temporal method in 2008 is CAD 1,667,250.
As compared to the temporal method, the parent’s fixed asset turnover for fiscal 2008 using the all-current method is:
- A . higher.
- B . lower.
- C . the same.
A
Explanation:
The local currency (the USD) is depreciating, so the historical rate will be higher than the current rate. Fixed asset turnover (sales divided by net PP&E) will be higher under the all-current method. Net PP&E will be translated at the lower current rate, and because sales are the same under both methods, the ratio will be higher. If you want to do the calculations, net PP&E under the all-current method is USD730.00O x 1.32CAD/USD = CAD 963,600. and fixed asset turnover is CAD 1,825,200/CAD 963,600 = 1.9 times. Fixed asset turnover under the temporal method is CAD 1,825,200/CAD 1,095,000 = 1.7 times. (Study Session 6, LOS 23.d)
SIMULATION
Ota L’Abbe, a supervisor at an investment research firm, has asked one of the junior analysts, Andreas Hally, to draft a research report dealing with various accounting issues.
Excerpts from the request are as follows:
• “There’s an exciting company that we’re starting to follow these days. It’s called Snowboards and Skateboards, Inc. They are a multinational company with operations and a head office based in the resort town of Whistler in western Canada. However, they also have a significant subsidiary located in the United States."
• "Look at the subsidiary and deal with some foreign currency issues including the specific differences between the temporal and all-current methods of translation, as well as the effect on financial ratios."
• "The attached file contains the September 30, 2008, financial statements of the U.S. subsidiary. Translate the financial statements into Canadian dollars in a manner consistent with U.S. GAAP."
The following are statements from the research report subsequently written by Hally:
Statement 1: Subsidiaries whose operations are well integrated with the parent will use the all-current method of translation.
Statement 2: Self-contained, independent subsidiaries whose operating, investing, and financing activities are primarily located in the local market will use the temporal method of translation.
Other information to be considered
• Exchange rates (CAD/USD)
• Beginning inventory for fiscal 2008 had been purchased evenly throughout fiscal 2007. The company uses the FIFO inventory value method.
• Dividends of USD 25,000 were paid to the shareholders on June 30, 2008.
• All of the remaining inventory at the end of fiscal 2008 was purchased evenly throughout fiscal 2008.
• All of the PP&E was purchased, and all of the common equity was issued at the inception of the company on October 1, 2004. No new PP&E has been acquired, and no additional common stock has been issued since then. However, they plan to purchase new PP&E starting in fiscal 2009.
• The beginning retained earnings balance for fiscal 2008 was CAD 1,550,000.
• The accounts payable on the fiscal 2008 balance sheet were all incurred on June 30, 2008.
• The U.S. subsidiary’s operations are highly integrated with the main operations in Canada.
• The remeasured inventory for 2008 using the temporal method is CAD 810,000.
• All monetary asset and liability balances are the same as they were at the end of the 2007 fiscal year, except that long-term debt was USD 467,700.
• Costs of goods sold under the temporal method in 2008 is CAD 1,667,250.
Suppose the parent uses the all-current method to translate the subsidiary for fiscal 2008. Will return on assets and net profit margin in U.S. dollars before translation be the same as, or different than, the translated Canadian dollar ratios?
Net profit margin will be the same because both the numerator (net income) and the denominator (sales) are translated at the average rate using the all-current method. (Study Session 6, LOS 23-d)
Bryan Stephenson is an equity analyst and is developing a research report on Iberia Corporation at the request of his supervisor. Iberia is a conglomerate entity with significant corporate holdings in various industries. Specifically, Stephenson is interested in the effects of Iberia’s investments on its financial performance and has decided to focus on two investments: Midland Incorporated and Odessa Company.
Midland Incorporated
On December 31, 2007, Iberia purchased 5 million common shares of Midland Incorporated for 80 million. Midland has a total of 12.5 million common shares outstanding. The market value of Iberia’s investment in Midland was 89 million at the end of 2008 and 85 million at the end of 2009. For the year ended 2008, Midland reported net income of 30 million and paid dividends of 10 million. For the year ended 2009, Midland reported a loss of 5 million and paid dividends of 4 million.
During 2010, Midland sold goods to Iberia and reported 20% gross profit from the sale. Iberia sold all of the goods to a third party in 2010.
Odessa Company
On January 2, 2009, Iberia purchased 1 million common shares of Odessa Company as a long-term investment. The purchase price was 20 per share and on December 31, 2009, the market price of Odessa was 17 per share. The decline in value was considered temporary. For the year ended 2009, Odessa reported net income of 750 million and paid a dividend of 3 per share. Iberia considers its investment in Odessa as an investment in financial assets.
In addition, Iberia has a number of foreign investments, so Stephenson’s supervisor has asked him to draft a report on accounting methods and ratio analysis. The following are statements from Stephenson’s research report.
Statement 1: Under U.S. GAAP, firms are required to use proportionate consolidation to account for joint ventures.
Statement 2: In general, if the parent’s consolidated net income is positive, the equity method reports a higher net profit margin than the acquisition method.
Which of the following is the most appropriate classification of Iberia’s investment in Odessa Corporation?
- A . Held-to-maturity.
- B . Held-for-trading.
- C . Available-for-sale.
C
Explanation:
Investments in financial assets are classified as held-to-maturity, hetd-fbr-trading, fair value, and availablcfor-sale. Held-to-maturity applies to debt securities only. Held-for-trading securities are debt or equity securities that are expected to be sold in the near term. Since the investment in Odessa is long-term, the securities are classified as available-for-sale. (Study Session 5, LOS 21.a)
Bryan Stephenson is an equity analyst and is developing a research report on Iberia Corporation at the request of his supervisor. Iberia is a conglomerate entity with significant corporate holdings in various industries. Specifically, Stephenson is interested in the effects of Iberia’s investments on its financial performance and has decided to focus on two investments: Midland Incorporated and Odessa Company.
Midland Incorporated
On December 31, 2007, Iberia purchased 5 million common shares of Midland Incorporated for 80 million. Midland has a total of 12.5 million common shares outstanding. The market value of Iberia’s investment in Midland was 89 million at the end of 2008 and 85 million at the end of 2009. For the year ended 2008, Midland reported net income of 30 million and paid dividends of 10 million. For the year ended 2009, Midland reported a loss of 5 million and paid dividends of 4 million.
During 2010, Midland sold goods to Iberia and reported 20% gross profit from the sale. Iberia sold all of the goods to a third party in 2010.
Odessa Company
On January 2, 2009, Iberia purchased 1 million common shares of Odessa Company as a long-term investment. The purchase price was 20 per share and on December 31, 2009, the market price of Odessa was 17 per share. The decline in value was considered temporary. For the year ended 2009, Odessa reported net income of 750 million and paid a dividend of 3 per share. Iberia considers its investment in Odessa as an investment in financial assets.
In addition, Iberia has a number of foreign investments, so Stephenson’s supervisor has asked him to draft a report on accounting methods and ratio analysis. The following are statements from Stephenson’s research report.
Statement 1: Under U.S. GAAP, firms are required to use proportionate consolidation to account for joint ventures.
Statement 2: In general, if the parent’s consolidated net income is positive, the equity method reports a higher net profit margin than the acquisition method.
What amount should Iberia recognize in its 2009 income statement as a result of its investments in Midland and Odessa?
- A . 1 million profit.
- B . 2 million profit.
- C . 3 million loss.
A
Explanation:
Since Iberia owns 40% of Midland (5 million shares owned / 12.5 million total shares outstanding), the equity method is used. Under the equity method, Iberia reports its pro-rata share of Midland’s net income (5 million loss x 40% = 2 million loss). Changes in market value are ignored under the equity method.
Iberia’s investment in Odessa is classified as available-for-sale since the investment is considered long-term. Dividend income from available-for-sale securities is recognized in the income statement (3 dividend x 1 million shares = 3 million). The changes in market value are reported in shareholders’ equity.
Investment income from Midland and Odessa is 1 million (3 million dividend income from Odessa – 2 million pro-rata loss from Midland). (Study Session 5, LOS 21.a)
Bryan Stephenson is an equity analyst and is developing a research report on Iberia Corporation at the request of his supervisor. Iberia is a conglomerate entity with significant corporate holdings in various industries. Specifically, Stephenson is interested in the effects of Iberia’s investments on its financial performance and has decided to focus on two investments: Midland Incorporated and Odessa Company.
Midland Incorporated
On December 31, 2007, Iberia purchased 5 million common shares of Midland Incorporated for 80 million. Midland has a total of 12.5 million common shares outstanding. The market value of Iberia’s investment in Midland was 89 million at the end of 2008 and 85 million at the end of 2009. For the year ended 2008, Midland reported net income of 30 million and paid dividends of 10 million. For the year ended 2009, Midland reported a loss of 5 million and paid dividends of 4 million.
During 2010, Midland sold goods to Iberia and reported 20% gross profit from the sale. Iberia sold all of the goods to a third party in 2010.
Odessa Company
On January 2, 2009, Iberia purchased 1 million common shares of Odessa Company as a long-term investment. The purchase price was 20 per share and on December 31, 2009, the market price of Odessa was 17 per share. The decline in value was considered temporary. For the year ended 2009, Odessa reported net income of 750 million and paid a dividend of 3 per share. Iberia considers its investment in Odessa as an investment in financial assets.
In addition, Iberia has a number of foreign investments, so Stephenson’s supervisor has asked him to draft a report on accounting methods and ratio analysis. The following are statements from Stephenson’s research report.
Statement 1: Under U.S. GAAP, firms are required to use proportionate consolidation to account for joint ventures.
Statement 2: In general, if the parent’s consolidated net income is positive, the equity method reports a higher net profit margin than the acquisition method.
What amount should Iberia report on its balance sheet at the end of 2009 as a result of its investments in Midland and Odessa?
- A . 84.4 million.
- B . 101.4 million.
- C . 102.0 million.
B
Explanation:
Under the equity method, the balance sheet carrying Value is increased by the pro-rata earnings of the investee and decreased by the dividends received from the investee. The balance sheet value at the end of 2008 is 88 million [80 million + (30 million Midland 2008 net income x 40%) – (10 million dividend x 40%)]. The balance sheet value at the end of 2009 is 84.4 million (88 million – (5 million loss x 40%) (4 million dividend x 40%)].
Available-for-sale securities are reported on the balance sheet at fair value. Thus, the fair value of Odessa is 17 million (17 x 1 million shares).
As a result of its investment in Midland and Odessa, Iberia will report investment assets of 101.4 million (84.4 million book value of Midland + 17 million fair value Odessa). (Study Session 5, LOS 2 La)
Bryan Stephenson is an equity analyst and is developing a research report on Iberia Corporation at the request of his supervisor. Iberia is a conglomerate entity with significant corporate holdings in various industries. Specifically, Stephenson is interested in the effects of Iberia’s investments on its financial performance and has decided to focus on two investments: Midland Incorporated and Odessa Company.
Midland Incorporated
On December 31, 2007, Iberia purchased 5 million common shares of Midland Incorporated for 80 million. Midland has a total of 12.5 million common shares outstanding. The market value of Iberia’s investment in Midland was 89 million at the end of 2008 and 85 million at the end of 2009. For the year ended 2008, Midland reported net income of 30 million and paid dividends of 10 million. For the year ended 2009, Midland reported a loss of 5 million and paid dividends of 4 million.
During 2010, Midland sold goods to Iberia and reported 20% gross profit from the sale. Iberia sold all of the goods to a third party in 2010.
Odessa Company
On January 2, 2009, Iberia purchased 1 million common shares of Odessa Company as a long-term investment. The purchase price was 20 per share and on December 31, 2009, the market price of Odessa was 17 per share. The decline in value was considered temporary. For the year ended 2009, Odessa reported net income of 750 million and paid a dividend of 3 per share. Iberia considers its investment in Odessa as an investment in financial assets.
In addition, Iberia has a number of foreign investments, so Stephenson’s supervisor has asked him to draft a report on accounting methods and ratio analysis. The following are statements from Stephenson’s research report.
Statement 1: Under U.S. GAAP, firms are required to use proportionate consolidation to account for joint ventures.
Statement 2: In general, if the parent’s consolidated net income is positive, the equity method reports a higher net profit margin than the acquisition method.
What adjustment, if any, must Iberia make to its 2010 income statement as a result of the intercompany transaction with Midland?
- A . Sales and cost of goods sold should be reduced by Iberia’s pro-rata ownership interest in the intercompany sale.
- B . Midland’s net income should be reduced by 20% of the gross profit from the intercompany sale.
- C . No adjustment is necessary.
C
Explanation:
Profit from intercompany transactions must be deferred until the profit is confirmed through use or sale to a third party. Since all of the goods purchased from Midland have been sold to third parties, all of the profit from the intercompany sale has been confirmed. Thus, no adjustment is needed. (Study Session 5, LOS 21.a)
Bryan Stephenson is an equity analyst and is developing a research report on Iberia Corporation at the request of his supervisor. Iberia is a conglomerate entity with significant corporate holdings in various industries. Specifically, Stephenson is interested in the effects of Iberia’s investments on its financial performance and has decided to focus on two investments: Midland Incorporated and Odessa Company.
Midland Incorporated
On December 31, 2007, Iberia purchased 5 million common shares of Midland Incorporated for 80 million. Midland has a total of 12.5 million common shares outstanding. The market value of Iberia’s investment in Midland was 89 million at the end of 2008 and 85 million at the end of 2009. For the year ended 2008, Midland reported net income of 30 million and paid dividends of 10 million. For the year ended 2009, Midland reported a loss of 5 million and paid dividends of 4 million.
During 2010, Midland sold goods to Iberia and reported 20% gross profit from the sale. Iberia sold all of the goods to a third party in 2010.
Odessa Company
On January 2, 2009, Iberia purchased 1 million common shares of Odessa Company as a long-term investment. The purchase price was 20 per share and on December 31, 2009, the market price of Odessa was 17 per share. The decline in value was considered temporary. For the year ended 2009, Odessa reported net income of 750 million and paid a dividend of 3 per share. Iberia considers its investment in Odessa as an investment in financial assets.
In addition, Iberia has a number of foreign investments, so Stephenson’s supervisor has asked him to draft a report on accounting methods and ratio analysis. The following are statements from Stephenson’s research report.
Statement 1: Under U.S. GAAP, firms are required to use proportionate consolidation to account for joint ventures.
Statement 2: In general, if the parent’s consolidated net income is positive, the equity method reports a higher net profit margin than the acquisition method.
Is Stephenson’s statement regarding proportionate consolidation correct?
- A . Yes.
- B . No, because under U.S. GAAP, proportionate consolidation is allowed only in very limited situations.
- C . No, because under U.S. GAAP, proportionate consolidation is never allowed under any circumstances.
B
Explanation:
Under U.S. GAAP, the equity method is required in accounting for a joint venture. Proportionate consolidation is not allowed except in very limited situations. Proportionate consolidation is the preferred method for joint venture accounting under International Financial Reporting Standards (IFRS). Therefore,
(he statement is not correct. (Study Session 5, LOS 21 .fa)
Bryan Stephenson is an equity analyst and is developing a research report on Iberia Corporation at the request of his supervisor. Iberia is a conglomerate entity with significant corporate holdings in various industries. Specifically, Stephenson is interested in the effects of Iberia’s investments on its financial performance and has decided to focus on two investments: Midland Incorporated and Odessa Company.
Midland Incorporated
On December 31, 2007, Iberia purchased 5 million common shares of Midland Incorporated for 80 million. Midland has a total of 12.5 million common shares outstanding. The market value of Iberia’s investment in Midland was 89 million at the end of 2008 and 85 million at the end of 2009. For the year ended 2008, Midland reported net income of 30 million and paid dividends of 10 million. For the year ended 2009, Midland reported a loss of 5 million and paid dividends of 4 million.
During 2010, Midland sold goods to Iberia and reported 20% gross profit from the sale. Iberia sold all of the goods to a third party in 2010.
Odessa Company
On January 2, 2009, Iberia purchased 1 million common shares of Odessa Company as a long-term investment. The purchase price was 20 per share and on December 31, 2009, the market price of Odessa was 17 per share. The decline in value was considered temporary. For the year ended 2009, Odessa reported net income of 750 million and paid a dividend of 3 per share. Iberia considers its investment in Odessa as an investment in financial assets.
In addition, Iberia has a number of foreign investments, so Stephenson’s supervisor has asked him to draft a report on accounting methods and ratio analysis. The following are statements from Stephenson’s research report.
Statement 1: Under U.S. GAAP, firms are required to use proportionate consolidation to account for joint ventures.
Statement 2: In general, if the parent’s consolidated net income is positive, the equity method reports a higher net profit margin than the acquisition method.
Is Stephenson’s statement regarding the effect on profit margin correct?
- A . Yes.
- B . No. Net profit margin will be lower using the equity method.
- C . No. Net profit margin will be the same using either the equity method or the acquisition method.
A
Explanation:
In a profitable year, net profit margin (net income/sales) will be higher under the equity method because sales are lower under the equity method. Acquisition includes the sales figures for both the parent and subsidiary while the equity method only includes the sales figure for the parent company. Net income is the same under both methods. Therefore, the statement is correct. (Study Session 5, LOS 21.c)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Is Carson correct with respect to defined contribution plans?
- A . Both statements are incorrect.
- B . Only Statement 1 is incorrect.
- C . Only Statement 2 is incorrect.
A
Explanation:
Statement 1: Employers often face onerous disclosure requirements―incorrect; the accounting is quite simple and the onerous disclosure requirements are more characteristic of defined benefit plans.
Statement 2: Employers often bear all the investment risk―incorrect; benefits received by each individual employee on retirement depends on the investment performance of each individuals personal retirement fund. Thus, the employees bear the investment risk.
Therefore, both statements arc incorrect. (Study Session 6, LOS 22.a)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Under current U.S. GAAP pension accounting standards, the amount of the pension asset or liability that Samilski should report on its 2009 fiscal year end balance sheet is closes/ to a:
- A . $4 million liability
- B . $10 million liabilily
- C . $14 million liability
A
Explanation:
Under current U.S. GAAP pension accounting rules, which apply 10 firms with fiscal year ends after December 2006, Samilski will report the funded status of the plan on its balance sheet.
funded status = fair market value of plan assets less PBO = $316 milli on less $320 million = $4 million underfunded Therefore. Samilski will report a $4 million liability on its balance sheet. (Study Session 6, LOS 22.b)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Based on Carson’s projections of the discount rate, what are the likely effects on the projected benefit obligation (PBO) and the pension cost?
- A . Both will increase.
- B . Both will decrease.
- C . One will increase and the other will decrease.
A
Explanation:
A lower discount rate increases the PBO. It also increases the overall pension expense by increasing the service cost and, most likely, the interest cost. (For mature plans, a higher discount rate might increase interest costs. In rare cases, interest cost will increase by enough to offset the decrease in the current service cost, and pension expense will increase.) (Study Session 6, LOS 22.c)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Under current U.S. GAAP pension accounting standards, the amount of the pension asset or liability that Samilski should report on its 2009 fiscal year end balance sheet is closes/ to a:
- A . $4 million liability
- B . $10 million liabilily
- C . $14 million liabiliy
A
Explanation:
An higher rate of compensation increase will increase the PBO. It will also increase the overall pension expense by increasing both the service and interest costs. (Study Session 6, LOS 22.b,c)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
What are the likely effects of the required change in accounting for SPEs on Samilski’s:
Return on assets? Return on equity?
- A . Decrease ;Decrease
- B . Decrease ;No effect
- C . No effect ;Decrease
B
Explanation:
As a result of consolidating SPEs that were previously accounted for using the equity method, assets will increase but net income and equity won’t change. Therefore, return on assets will decrease, but there will be no effect on return on equity. (Study Session 5, LOS 21. c)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Which of the following items, when recognized, will likely increase:
PBO? Pension expense?
- A . Actuarial loss ;Expected return on plan assets
- B . Actuarial loss ;Amortization of prior service costs
- C . Actuarial gain ;Amortization of prior service costs
B
Explanation:
An actuarial loss results from a change in actuarial assumptions. In the case of a loss, the amount of pension benefits payable in the future would increase, thus increasing the PBO. Actuarial gains have the opposite effect.
The amortization of prior service costs results in pension expense being increased gradually over a number of years, rather than all at once in the year of occurrence. In contrast, the expected return on plan assets is an "income" component in calculating pension cost (service cost and interest cost being the expense components), so recognition of expected return on plan assets would decrease pension expense. (Study Session 6, LOS 22.b)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Which of the following items, when recognized, will likely increase:
PBO? Pension expense?
- A . Actuarial loss ;Expected return on plan assets
- B . Actuarial loss ;Amortization of prior service costs
- C . Actuarial gain ;Amortization of prior service costs
B
Explanation:
An actuarial loss results from a change in actuarial assumptions. In the case of a loss, the amount of pension benefits payable in the future would increase, thus increasing the PBO. Actuarial gains have the opposite effect.
The amortization of prior service costs results in pension expense being increased gradually over a number of years, rather than all at once in the year of occurrence. In contrast, the expected return on plan assets is an "income" component in calculating pension cost (service cost and interest cost being the expense components), so recognition of expected return on plan assets would decrease pension expense. (Study Session 6, LOS 22.b)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Which of the following items, when recognized, will likely increase:
PBO? Pension expense?
- A . Actuarial loss ;Expected return on plan assets
- B . Actuarial loss ;Amortization of prior service costs
- C . Actuarial gain ;Amortization of prior service costs
B
Explanation:
An actuarial loss results from a change in actuarial assumptions. In the case of a loss, the amount of pension benefits payable in the future would increase, thus increasing the PBO. Actuarial gains have the opposite effect.
The amortization of prior service costs results in pension expense being increased gradually over a number of years, rather than all at once in the year of occurrence. In contrast, the expected return on plan assets is an "income" component in calculating pension cost (service cost and interest cost being the expense components), so recognition of expected return on plan assets would decrease pension expense. (Study Session 6, LOS 22.b)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Which of the following items, when recognized, will likely increase:
PBO? Pension expense?
- A . Actuarial loss ;Expected return on plan assets
- B . Actuarial loss ;Amortization of prior service costs
- C . Actuarial gain ;Amortization of prior service costs
B
Explanation:
An actuarial loss results from a change in actuarial assumptions. In the case of a loss, the amount of pension benefits payable in the future would increase, thus increasing the PBO. Actuarial gains have the opposite effect.
The amortization of prior service costs results in pension expense being increased gradually over a number of years, rather than all at once in the year of occurrence. In contrast, the expected return on plan assets is an "income" component in calculating pension cost (service cost and interest cost being the expense components), so recognition of expected return on plan assets would decrease pension expense. (Study Session 6, LOS 22.b)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Which of the following items, when recognized, will likely increase:
PBO? Pension expense?
- A . Actuarial loss ;Expected return on plan assets
- B . Actuarial loss ;Amortization of prior service costs
- C . Actuarial gain ;Amortization of prior service costs
B
Explanation:
An actuarial loss results from a change in actuarial assumptions. In the case of a loss, the amount of pension benefits payable in the future would increase, thus increasing the PBO. Actuarial gains have the opposite effect.
The amortization of prior service costs results in pension expense being increased gradually over a number of years, rather than all at once in the year of occurrence. In contrast, the expected return on plan assets is an "income" component in calculating pension cost (service cost and interest cost being the expense components), so recognition of expected return on plan assets would decrease pension expense. (Study Session 6, LOS 22.b)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Which of the following items, when recognized, will likely increase:
PBO? Pension expense?
- A . Actuarial loss ;Expected return on plan assets
- B . Actuarial loss ;Amortization of prior service costs
- C . Actuarial gain ;Amortization of prior service costs
B
Explanation:
An actuarial loss results from a change in actuarial assumptions. In the case of a loss, the amount of pension benefits payable in the future would increase, thus increasing the PBO. Actuarial gains have the opposite effect.
The amortization of prior service costs results in pension expense being increased gradually over a number of years, rather than all at once in the year of occurrence. In contrast, the expected return on plan assets is an "income" component in calculating pension cost (service cost and interest cost being the expense components), so recognition of expected return on plan assets would decrease pension expense. (Study Session 6, LOS 22.b)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Which of the following items, when recognized, will likely increase:
PBO? Pension expense?
- A . Actuarial loss ;Expected return on plan assets
- B . Actuarial loss ;Amortization of prior service costs
- C . Actuarial gain ;Amortization of prior service costs
B
Explanation:
An actuarial loss results from a change in actuarial assumptions. In the case of a loss, the amount of pension benefits payable in the future would increase, thus increasing the PBO. Actuarial gains have the opposite effect.
The amortization of prior service costs results in pension expense being increased gradually over a number of years, rather than all at once in the year of occurrence. In contrast, the expected return on plan assets is an "income" component in calculating pension cost (service cost and interest cost being the expense components), so recognition of expected return on plan assets would decrease pension expense. (Study Session 6, LOS 22.b)
Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski’s employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
Which of the following items, when recognized, will likely increase:
PBO? Pension expense?
- A . Actuarial loss ;Expected return on plan assets
- B . Actuarial loss ;Amortization of prior service costs
- C . Actuarial gain ;Amortization of prior service costs
B
Explanation:
An actuarial loss results from a change in actuarial assumptions. In the case of a loss, the amount of pension benefits payable in the future would increase, thus increasing the PBO. Actuarial gains have the opposite effect.
The amortization of prior service costs results in pension expense being increased gradually over a number of years, rather than all at once in the year of occurrence. In contrast, the expected return on plan assets is an "income" component in calculating pension cost (service cost and interest cost being the expense components), so recognition of expected return on plan assets would decrease pension expense. (Study Session 6, LOS 22.b)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following is least likely to prevent earnings manipulation?
- A . The independent audit.
- B . SEC certification filed by High Plains’ CEO and CFO.
- C . High Plains’ bond covenants.
C
Explanation:
Bond covenants can create an incentive to engage in earnings manipulation. If High Plains remains noncompliant, the bondholders can demand immediate repayment of the debt. (Study Session 7, LOS 25.c)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
What is the most likely effect of High Plains’ revenue recognition policy on net income and inventory turnover?
- A . Net income and inventory turnover are overstated.
- B . Only net income is overstated.
- C . Only inventory turnover is overstated.
A
Explanation:
Revenue should be recognized when earned and payment is assured. High Plains is recognizing revenue as orders are received. Since High Plains still has an obligation to deliver the goods, revenue is not yet earned. By recognizing revenue too soon, net income is overstated and ending inventory is understated. Understated ending inventory would result in an overstated inventory turnover ratio. (Study Session 7, LOS
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
What is the most likely effect of High Plains’ revenue recognition policy on net income and inventory turnover?
- A . Net income and inventory turnover are overstated.
- B . Only net income is overstated.
- C . Only inventory turnover is overstated.
A
Explanation:
Revenue should be recognized when earned and payment is assured. High Plains is recognizing revenue as orders are received. Since High Plains still has an obligation to deliver the goods, revenue is not yet earned. By recognizing revenue too soon, net income is overstated and ending inventory is understated. Understated ending inventory would result in an overstated inventory turnover ratio. (Study Session 7, LOS
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
What is the most likely effect of High Plains’ revenue recognition policy on net income and inventory turnover?
- A . Net income and inventory turnover are overstated.
- B . Only net income is overstated.
- C . Only inventory turnover is overstated.
A
Explanation:
Revenue should be recognized when earned and payment is assured. High Plains is recognizing revenue as orders are received. Since High Plains still has an obligation to deliver the goods, revenue is not yet earned. By recognizing revenue too soon, net income is overstated and ending inventory is understated. Understated ending inventory would result in an overstated inventory turnover ratio. (Study Session 7, LOS
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
What is the most likely effect of High Plains’ revenue recognition policy on net income and inventory turnover?
- A . Net income and inventory turnover are overstated.
- B . Only net income is overstated.
- C . Only inventory turnover is overstated.
A
Explanation:
Revenue should be recognized when earned and payment is assured. High Plains is recognizing revenue as orders are received. Since High Plains still has an obligation to deliver the goods, revenue is not yet earned. By recognizing revenue too soon, net income is overstated and ending inventory is understated. Understated ending inventory would result in an overstated inventory turnover ratio. (Study Session 7, LOS
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
What is the most likely effect of High Plains’ revenue recognition policy on net income and inventory turnover?
- A . Net income and inventory turnover are overstated.
- B . Only net income is overstated.
- C . Only inventory turnover is overstated.
A
Explanation:
Revenue should be recognized when earned and payment is assured. High Plains is recognizing revenue as orders are received. Since High Plains still has an obligation to deliver the goods, revenue is not yet earned. By recognizing revenue too soon, net income is overstated and ending inventory is understated. Understated ending inventory would result in an overstated inventory turnover ratio. (Study Session 7, LOS
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
What is the most likely effect of High Plains’ revenue recognition policy on net income and inventory turnover?
- A . Net income and inventory turnover are overstated.
- B . Only net income is overstated.
- C . Only inventory turnover is overstated.
A
Explanation:
Revenue should be recognized when earned and payment is assured. High Plains is recognizing revenue as orders are received. Since High Plains still has an obligation to deliver the goods, revenue is not yet earned. By recognizing revenue too soon, net income is overstated and ending inventory is understated. Understated ending inventory would result in an overstated inventory turnover ratio. (Study Session 7, LOS
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
What is the most likely effect of High Plains’ revenue recognition policy on net income and inventory turnover?
- A . Net income and inventory turnover are overstated.
- B . Only net income is overstated.
- C . Only inventory turnover is overstated.
A
Explanation:
Revenue should be recognized when earned and payment is assured. High Plains is recognizing revenue as orders are received. Since High Plains still has an obligation to deliver the goods, revenue is not yet earned. By recognizing revenue too soon, net income is overstated and ending inventory is understated. Understated ending inventory would result in an overstated inventory turnover ratio. (Study Session 7, LOS
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
What is the most likely effect of High Plains’ revenue recognition policy on net income and inventory turnover?
- A . Net income and inventory turnover are overstated.
- B . Only net income is overstated.
- C . Only inventory turnover is overstated.
A
Explanation:
Revenue should be recognized when earned and payment is assured. High Plains is recognizing revenue as orders are received. Since High Plains still has an obligation to deliver the goods, revenue is not yet earned. By recognizing revenue too soon, net income is overstated and ending inventory is understated. Understated ending inventory would result in an overstated inventory turnover ratio. (Study Session 7, LOS
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
What is the most likely effect of High Plains’ revenue recognition policy on net income and inventory turnover?
- A . Net income and inventory turnover are overstated.
- B . Only net income is overstated.
- C . Only inventory turnover is overstated.
A
Explanation:
Revenue should be recognized when earned and payment is assured. High Plains is recognizing revenue as orders are received. Since High Plains still has an obligation to deliver the goods, revenue is not yet earned. By recognizing revenue too soon, net income is overstated and ending inventory is understated. Understated ending inventory would result in an overstated inventory turnover ratio. (Study Session 7, LOS
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
As compared to the year ended 2007, High Plains’ cash flow accrual ratio for the year ended 2008 is:
- A . higher.
- B . lower.
- C . the same.
A
Explanation:
The cash flow accrual ratio increased during 2008 from 15% to 19%. (Study Session 7, LOS 25-d)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
As compared to the year ended 2007, High Plains’ cash flow accrual ratio for the year ended 2008 is:
- A . higher.
- B . lower.
- C . the same.
A
Explanation:
The cash flow accrual ratio increased during 2008 from 15% to 19%. (Study Session 7, LOS 25-d)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
As compared to the year ended 2007, High Plains’ cash flow accrual ratio for the year ended 2008 is:
- A . higher.
- B . lower.
- C . the same.
A
Explanation:
The cash flow accrual ratio increased during 2008 from 15% to 19%. (Study Session 7, LOS 25-d)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
As compared to the year ended 2007, High Plains’ cash flow accrual ratio for the year ended 2008 is:
- A . higher.
- B . lower.
- C . the same.
A
Explanation:
The cash flow accrual ratio increased during 2008 from 15% to 19%. (Study Session 7, LOS 25-d)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
As compared to the year ended 2007, High Plains’ cash flow accrual ratio for the year ended 2008 is:
- A . higher.
- B . lower.
- C . the same.
A
Explanation:
The cash flow accrual ratio increased during 2008 from 15% to 19%. (Study Session 7, LOS 25-d)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
As compared to the year ended 2007, High Plains’ cash flow accrual ratio for the year ended 2008 is:
- A . higher.
- B . lower.
- C . the same.
A
Explanation:
The cash flow accrual ratio increased during 2008 from 15% to 19%. (Study Session 7, LOS 25-d)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
As compared to the year ended 2007, High Plains’ cash flow accrual ratio for the year ended 2008 is:
- A . higher.
- B . lower.
- C . the same.
A
Explanation:
The cash flow accrual ratio increased during 2008 from 15% to 19%. (Study Session 7, LOS 25-d)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
As compared to the year ended 2007, High Plains’ cash flow accrual ratio for the year ended 2008 is:
- A . higher.
- B . lower.
- C . the same.
A
Explanation:
The cash flow accrual ratio increased during 2008 from 15% to 19%. (Study Session 7, LOS 25-d)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Using only the information found in Exhibit 1 and Exhibit 2, which of the following is most indicative of lower earnings quality?
- A . High Plains’ discretionary expenses.
- B . The change in High Plains’ depreciation method.
- C . High Plains’ inventory cost flow assumption.
A
Explanation:
Maintenance and repairs, and advertising and marketing, are discretionary expenses. Both items are declining as the investment in capital assets and sales are increasing (investment in capital assets is increasing because CFI is greater than depreciation expense for the period). The change to the straight-line depreciation method is certainly less conservative.
However, measuring earnings quality based on conservative earnings is an inferior measure. (Study Session 7, LOS 25.d,f)
Note that the reason answer C is incorrect is that using LIFO as an inventory cost flow assumption during periods of stable or rising prices would cause net earnings to reflect economic (real) earnings, thereby leading to a higher quality of earnings.
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Using only the information found in Exhibit 1 and Exhibit 2, which of the following is most indicative of lower earnings quality?
- A . High Plains’ discretionary expenses.
- B . The change in High Plains’ depreciation method.
- C . High Plains’ inventory cost flow assumption.
A
Explanation:
Maintenance and repairs, and advertising and marketing, are discretionary expenses. Both items are declining as the investment in capital assets and sales are increasing (investment in capital assets is increasing because CFI is greater than depreciation expense for the period). The change to the straight-line depreciation method is certainly less conservative.
However, measuring earnings quality based on conservative earnings is an inferior measure. (Study Session 7, LOS 25.d,f)
Note that the reason answer C is incorrect is that using LIFO as an inventory cost flow assumption during periods of stable or rising prices would cause net earnings to reflect economic (real) earnings, thereby leading to a higher quality of earnings.
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Using only the information found in Exhibit 1 and Exhibit 2, which of the following is most indicative of lower earnings quality?
- A . High Plains’ discretionary expenses.
- B . The change in High Plains’ depreciation method.
- C . High Plains’ inventory cost flow assumption.
A
Explanation:
Maintenance and repairs, and advertising and marketing, are discretionary expenses. Both items are declining as the investment in capital assets and sales are increasing (investment in capital assets is increasing because CFI is greater than depreciation expense for the period). The change to the straight-line depreciation method is certainly less conservative.
However, measuring earnings quality based on conservative earnings is an inferior measure. (Study Session 7, LOS 25.d,f)
Note that the reason answer C is incorrect is that using LIFO as an inventory cost flow assumption during periods of stable or rising prices would cause net earnings to reflect economic (real) earnings, thereby leading to a higher quality of earnings.
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Using only the information found in Exhibit 1 and Exhibit 2, which of the following is most indicative of lower earnings quality?
- A . High Plains’ discretionary expenses.
- B . The change in High Plains’ depreciation method.
- C . High Plains’ inventory cost flow assumption.
A
Explanation:
Maintenance and repairs, and advertising and marketing, are discretionary expenses. Both items are declining as the investment in capital assets and sales are increasing (investment in capital assets is increasing because CFI is greater than depreciation expense for the period). The change to the straight-line depreciation method is certainly less conservative.
However, measuring earnings quality based on conservative earnings is an inferior measure. (Study Session 7, LOS 25.d,f)
Note that the reason answer C is incorrect is that using LIFO as an inventory cost flow assumption during periods of stable or rising prices would cause net earnings to reflect economic (real) earnings, thereby leading to a higher quality of earnings.
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Using only the information found in Exhibit 1 and Exhibit 2, which of the following is most indicative of lower earnings quality?
- A . High Plains’ discretionary expenses.
- B . The change in High Plains’ depreciation method.
- C . High Plains’ inventory cost flow assumption.
A
Explanation:
Maintenance and repairs, and advertising and marketing, are discretionary expenses. Both items are declining as the investment in capital assets and sales are increasing (investment in capital assets is increasing because CFI is greater than depreciation expense for the period). The change to the straight-line depreciation method is certainly less conservative.
However, measuring earnings quality based on conservative earnings is an inferior measure. (Study Session 7, LOS 25.d,f)
Note that the reason answer C is incorrect is that using LIFO as an inventory cost flow assumption during periods of stable or rising prices would cause net earnings to reflect economic (real) earnings, thereby leading to a higher quality of earnings.
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Using only the information found in Exhibit 1 and Exhibit 2, which of the following is most indicative of lower earnings quality?
- A . High Plains’ discretionary expenses.
- B . The change in High Plains’ depreciation method.
- C . High Plains’ inventory cost flow assumption.
A
Explanation:
Maintenance and repairs, and advertising and marketing, are discretionary expenses. Both items are declining as the investment in capital assets and sales are increasing (investment in capital assets is increasing because CFI is greater than depreciation expense for the period). The change to the straight-line depreciation method is certainly less conservative.
However, measuring earnings quality based on conservative earnings is an inferior measure. (Study Session 7, LOS 25.d,f)
Note that the reason answer C is incorrect is that using LIFO as an inventory cost flow assumption during periods of stable or rising prices would cause net earnings to reflect economic (real) earnings, thereby leading to a higher quality of earnings.
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Using only the information found in Exhibit 1 and Exhibit 2, which of the following is most indicative of lower earnings quality?
- A . High Plains’ discretionary expenses.
- B . The change in High Plains’ depreciation method.
- C . High Plains’ inventory cost flow assumption.
A
Explanation:
Maintenance and repairs, and advertising and marketing, are discretionary expenses. Both items are declining as the investment in capital assets and sales are increasing (investment in capital assets is increasing because CFI is greater than depreciation expense for the period). The change to the straight-line depreciation method is certainly less conservative.
However, measuring earnings quality based on conservative earnings is an inferior measure. (Study Session 7, LOS 25.d,f)
Note that the reason answer C is incorrect is that using LIFO as an inventory cost flow assumption during periods of stable or rising prices would cause net earnings to reflect economic (real) earnings, thereby leading to a higher quality of earnings.
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Using only the information found in Exhibit 1 and Exhibit 2, which of the following is most indicative of lower earnings quality?
- A . High Plains’ discretionary expenses.
- B . The change in High Plains’ depreciation method.
- C . High Plains’ inventory cost flow assumption.
A
Explanation:
Maintenance and repairs, and advertising and marketing, are discretionary expenses. Both items are declining as the investment in capital assets and sales are increasing (investment in capital assets is increasing because CFI is greater than depreciation expense for the period). The change to the straight-line depreciation method is certainly less conservative.
However, measuring earnings quality based on conservative earnings is an inferior measure. (Study Session 7, LOS 25.d,f)
Note that the reason answer C is incorrect is that using LIFO as an inventory cost flow assumption during periods of stable or rising prices would cause net earnings to reflect economic (real) earnings, thereby leading to a higher quality of earnings.
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Does High Plains’ accounting treatment of its capital leases and receivable sale lower its earnings quality?
- A . Both treatments lower earnings quality.
- B . The treatment of capital leases lowers earnings quality.
- C . The treatment of the receivables sale lowers earnings quality.
C
Explanation:
A capital lease is reported on the balance sheet as an asset and as a liability. In the income statement, the leased asset is depreciated and interest expense is recognized on the liability. Thus, capitalizing a lease enhances earnings quality. An operating lease lowers earnings quality.
The receivable sale, with recourse, lowers earnings quality. The sale is treated as a collection thereby increasing operating cash flow.
However, High Plains is still responsible to the buyer in the event the receivables are not ultimately collected. Thus, the receivable sale is a collateralized borrowing arrangement that remains orT-balance-sheet. (Study Session 7, LOS 25.d,f)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Does High Plains’ accounting treatment of its capital leases and receivable sale lower its earnings quality?
- A . Both treatments lower earnings quality.
- B . The treatment of capital leases lowers earnings quality.
- C . The treatment of the receivables sale lowers earnings quality.
C
Explanation:
A capital lease is reported on the balance sheet as an asset and as a liability. In the income statement, the leased asset is depreciated and interest expense is recognized on the liability. Thus, capitalizing a lease enhances earnings quality. An operating lease lowers earnings quality.
The receivable sale, with recourse, lowers earnings quality. The sale is treated as a collection thereby increasing operating cash flow.
However, High Plains is still responsible to the buyer in the event the receivables are not ultimately collected. Thus, the receivable sale is a collateralized borrowing arrangement that remains orT-balance-sheet. (Study Session 7, LOS 25.d,f)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Does High Plains’ accounting treatment of its capital leases and receivable sale lower its earnings quality?
- A . Both treatments lower earnings quality.
- B . The treatment of capital leases lowers earnings quality.
- C . The treatment of the receivables sale lowers earnings quality.
C
Explanation:
A capital lease is reported on the balance sheet as an asset and as a liability. In the income statement, the leased asset is depreciated and interest expense is recognized on the liability. Thus, capitalizing a lease enhances earnings quality. An operating lease lowers earnings quality.
The receivable sale, with recourse, lowers earnings quality. The sale is treated as a collection thereby increasing operating cash flow.
However, High Plains is still responsible to the buyer in the event the receivables are not ultimately collected. Thus, the receivable sale is a collateralized borrowing arrangement that remains orT-balance-sheet. (Study Session 7, LOS 25.d,f)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Does High Plains’ accounting treatment of its capital leases and receivable sale lower its earnings quality?
- A . Both treatments lower earnings quality.
- B . The treatment of capital leases lowers earnings quality.
- C . The treatment of the receivables sale lowers earnings quality.
C
Explanation:
A capital lease is reported on the balance sheet as an asset and as a liability. In the income statement, the leased asset is depreciated and interest expense is recognized on the liability. Thus, capitalizing a lease enhances earnings quality. An operating lease lowers earnings quality.
The receivable sale, with recourse, lowers earnings quality. The sale is treated as a collection thereby increasing operating cash flow.
However, High Plains is still responsible to the buyer in the event the receivables are not ultimately collected. Thus, the receivable sale is a collateralized borrowing arrangement that remains orT-balance-sheet. (Study Session 7, LOS 25.d,f)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Does High Plains’ accounting treatment of its capital leases and receivable sale lower its earnings quality?
- A . Both treatments lower earnings quality.
- B . The treatment of capital leases lowers earnings quality.
- C . The treatment of the receivables sale lowers earnings quality.
C
Explanation:
A capital lease is reported on the balance sheet as an asset and as a liability. In the income statement, the leased asset is depreciated and interest expense is recognized on the liability. Thus, capitalizing a lease enhances earnings quality. An operating lease lowers earnings quality.
The receivable sale, with recourse, lowers earnings quality. The sale is treated as a collection thereby increasing operating cash flow.
However, High Plains is still responsible to the buyer in the event the receivables are not ultimately collected. Thus, the receivable sale is a collateralized borrowing arrangement that remains orT-balance-sheet. (Study Session 7, LOS 25.d,f)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Does High Plains’ accounting treatment of its capital leases and receivable sale lower its earnings quality?
- A . Both treatments lower earnings quality.
- B . The treatment of capital leases lowers earnings quality.
- C . The treatment of the receivables sale lowers earnings quality.
C
Explanation:
A capital lease is reported on the balance sheet as an asset and as a liability. In the income statement, the leased asset is depreciated and interest expense is recognized on the liability. Thus, capitalizing a lease enhances earnings quality. An operating lease lowers earnings quality.
The receivable sale, with recourse, lowers earnings quality. The sale is treated as a collection thereby increasing operating cash flow.
However, High Plains is still responsible to the buyer in the event the receivables are not ultimately collected. Thus, the receivable sale is a collateralized borrowing arrangement that remains orT-balance-sheet. (Study Session 7, LOS 25.d,f)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Does High Plains’ accounting treatment of its capital leases and receivable sale lower its earnings quality?
- A . Both treatments lower earnings quality.
- B . The treatment of capital leases lowers earnings quality.
- C . The treatment of the receivables sale lowers earnings quality.
C
Explanation:
A capital lease is reported on the balance sheet as an asset and as a liability. In the income statement, the leased asset is depreciated and interest expense is recognized on the liability. Thus, capitalizing a lease enhances earnings quality. An operating lease lowers earnings quality.
The receivable sale, with recourse, lowers earnings quality. The sale is treated as a collection thereby increasing operating cash flow.
However, High Plains is still responsible to the buyer in the event the receivables are not ultimately collected. Thus, the receivable sale is a collateralized borrowing arrangement that remains orT-balance-sheet. (Study Session 7, LOS 25.d,f)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Does High Plains’ accounting treatment of its capital leases and receivable sale lower its earnings quality?
- A . Both treatments lower earnings quality.
- B . The treatment of capital leases lowers earnings quality.
- C . The treatment of the receivables sale lowers earnings quality.
C
Explanation:
A capital lease is reported on the balance sheet as an asset and as a liability. In the income statement, the leased asset is depreciated and interest expense is recognized on the liability. Thus, capitalizing a lease enhances earnings quality. An operating lease lowers earnings quality.
The receivable sale, with recourse, lowers earnings quality. The sale is treated as a collection thereby increasing operating cash flow.
However, High Plains is still responsible to the buyer in the event the receivables are not ultimately collected. Thus, the receivable sale is a collateralized borrowing arrangement that remains orT-balance-sheet. (Study Session 7, LOS 25.d,f)
High Plains’ average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.
Which of the following statements about evaluating High Plains financial reporting quality is least accurate?
- A . Higher Plains may have manipulated earnings due to the risk of
- B . High Plains’ extreme revenue growth will likely revert back to normal levels over time.
- C . Because of the estimates involved, a higher weighting should be assigned to the accrual component of High Plains’ earnings as compared to the cash component.
C
Explanation:
It appears thai High Plains manipulated its earnings upward in 2008 to avoid default under its bond covenants.
However, the higher earnings are lower quality as measured by the cash flow accrual ratio. Because of the estimates involved, a lower weighting should be assigned to the accrual component of High Plains’ earnings. Extreme earnings (including revenues) tend to revert to normal levels over time (mean reversion). (Study Session 7, LOS 25.b,e)
Stanley Bostwick, CFA, is a business services industry analyst with Morton world Financial. Currently, his attention is focused on the 2008 financial statements of Global Oilfield Supply, particularly the footnote disclosures related to the company’s employee benefit plans. Bostwick would like to adjust the financial statements to reflect the actual economic status of the pension plans and analyze the effect on the reported results of changes in assumptions the company used to estimate the projected benefit obligation (PBO) and net pension cost. But first, Bostwick must familiarize himself with the differences in the accounting for defined contribution and defined benefit pension plans.
Global Oilfield’s financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Excerpts from the company’s annual report are shown in the following exhibits.
If Global Oilfield’s retirement plan is a defined contribution arrangement, which of the following statements would be the most correct?
- A . Pension expense and the cash funding amount would be the same.
- B . The potential gains or losses from the assets contributed to the plan are borne by the firm.
- C . The firm would report the difference in the accumulated benefit obligation and the pension assets on the balance sheet.
A
Explanation:
In a defined contribution plan, pension expense is equal to the amount contributed by the firm. The plan participants bear the shortfall risk. There is no ABO in a defined contribution plan. (Study Session 6, LOS 22.a)
99 Stanley Bostwick, CFA, is a business services industry analyst with Morton world Financial. Currently, his attention is focused on the 2008 financial statements of Global Oilfield Supply, particularly the footnote disclosures related to the company’s employee benefit plans. Bostwick would like to adjust the financial statements to reflect the actual economic status of the pension plans and analyze the effect on the reported results of changes in assumptions the company used to estimate the projected benefit obligation (PBO) and net pension cost. But first, Bostwick must familiarize himself with the differences in the accounting for defined contribution and defined benefit pension plans.
Global Oilfield’s financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Excerpts from the company’s annual report are shown in the following exhibits.
If Global Oilfield were to adopt U.S. pension accounting standards, what adjustment, if any, is necessary to its balance sheet at the end of 2008 assuming no taxes?
Stanley Bostwick, CFA, is a business services industry analyst with Mortonworld Financial. Currently, his attention is focused on the 2008 financial statements of Global Oilfield Supply, particularly the footnote disclosures related to the company’s employee benefit plans. Bostwick would like to adjust the financial statements to reflect the actual economic status of the pension plans and analyze the effect on the reported results of changes in assumptions the company used to estimate the projected benefit obligation (PBO) and net pension cost. But first, Bostwick must familiarize himself with the differences in the accounting for defined contribution and defined benefit pension plans.
Global Oilfield’s financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Excerpts from the company’s annual report are shown in the following exhibits.
What was the most likely cause of the actuarial gain reported in the reconciliation of the projected benefit obligation for the year ended 2008?
- A . Increase in the average life expectancy of the participating employees.
- B . Decrease in the expected rate of return.
- C . Increase in the discount rate.
B
Explanation:
At rhe end of 2008, Global Oilfield reporred a net pension asset of 7,222 in accordance with IFRS. Under SFAS No. 158, Global Oilfields funded status of 2,524 should be reported on the balance sheet. Thus, it is necessary to reduce the net pension asset by 4,698 (7,222 as reported – 2,524 funded status). In order for the accounting equation to balance, it is also necessary to reduce equity by 4,698. (Study Session 6, LOS22.d)