Ethics TE4 Test

Raymond Ortiz, CFA, provides investment advice to high-net-worth investors. Ortiz has just completed an analysis of Continental Wheat, a manufacturer of wheat-based food products. He rated the company a long-term hold for investors seeking growth and income. Ortiz’s analysis included a review of the company’s management team, financial data, pro forma financial positions, dividends and dividend policy, and a comparison of Continental with its competitors. Although he does not tell anyone, five years ago, Ortiz worked for and managed the commodities derivatives trading unit of Continental. As part of his compensation at Continental, he received stock, which he still owns. Based upon his research, Ortiz recommends Continental to clients who have a moderate risk tolerance. Two weeks later Continental announces its quarterly earnings are 30% less than a year ago. Consequently, shares of Continental drop by 50%. Ortiz most likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct related to his stock:

• A. research.
• B. ownership.
• C. recommendation.

An investment management firm has been hired by ETV Corporation to work on an additional public offering for the company. The firm’s brokerage unit now has a “sell” recommendation on ETV, but the head of the investment banking department has asked the head of the brokerage unit to change the recommendation from “sell” to “buy.” According to the Standards, the head of the brokerage unit would be permitted to:

• A. Increase the recommendation by no more than one increment (in this case, to a “hold” recommendation).
• B. Place the company on a restricted list and give only factual information about the company.
• C. Assign a new analyst to decide if the stock deserves a higher rating.

A current Code of Ethics principle reads in full, “Promote the integrity:

• A. and viability of the global capital markets.”
• B. of and uphold the rules governing capital markets.”
• C. and viability of the global capital markets for the ultimate benefit of society.”

Quinn sat for the Level III CFA exam this past weekend. He updates his resume with the following statement: “In finishing the CFA Program, I improved my skills related to researching investments and managing portfolios. I will be eligible for the CFA charter upon completion of the required work experience.”

• A. Quinn violated the Code and Standards by claiming he improved his skills through the CFA Program.
• B. Quinn violated the Code and Standards by incorrectly stating that he is eligible for the CFA charter.
• C. Quinn did not violate the Code and Standards with his resume update.

To claim compliance with the GIPS standards, a firm is required to:

• A. adhere to certain calculation methodologies.
• B. conduct an independent third-party verification of its claim of compliance.
• C. perform periodic internal compliance checks of its investment performance process.

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

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

When an ethical dilemma occurs, an investment professional should most likely first raise the issue with a:

• A. mentor outside the firm.
• B. professional body’s hotline.
• C. senior individual in the firm.

Hui Chen, CFA, develops marketing materials for an investment fund he founded three years ago. The materials show the 3-year, 2-year, and 1-year returns for the fund. He includes a footnote that states in small print “Past performance does not guarantee future returns.” He does not claim compliance with GIPS in the disclosures or footnotes. He also includes a separate sheet showing the most recent semi-annual and quarterly returns, which notes that they have been neither audited nor verified. Has Chen most likely violated any CFA Institute Standards of Professional Conduct?

• A. No.
• B. Yes, because he included un-audited and unverified results.
• C. Yes, because he did not adhere to the Global Investment Performance standards.

Ileana Inkster, CFA, was recently offered a senior management position within the trust department at a regional bank. The department is new, but the bank has plans to expand it significantly over the next few months. Inkster has been told she will be expected to help grow the client base of the trust department. She is informed that the trust department plans to conduct educational seminars and pursue the attendees as new clients. Inkster notices that recent seminar advertisements prepared by the bank’s marketing department do not mention that investment products will be for sale at the seminar. The ads indicate attendees can “learn how to immediately add $100,000 to their net worth.” What should Inkster most likely do to avoid violating any CFA Institute Standards of Professional Conduct?

• A. Decline to accept the new position
• B. Accept the position and revise the marketing material
• C. Accept the position and inform senior management of inadequate compliance procedures

Jackson Barnes, CFA, works for an insurance company providing financial planning services to clients for a fee. Barnes has developed a network of specialists, including accountants, lawyers, and brokers, who contribute their expertise to the financial planning process. Each of the specialists is an independent contractor. Each contractor bills Barnes separately for the work he or she performs, providing a discount based upon the number of clients Barnes has referred. What steps should Barnes take to be consistent with the CFA Institute Standards of Professional Conduct?

• A. Have his independent contractors approved by the insurance company
• B. List the consideration he receives from the specialists on monthly client invoices
• C. Inform potential clients about his arrangement with the contractors before they agree to hire him