Ethics TE9 Test

Q. Jurgen is a portfolio manager. One of her firm’s clients has told Jurgen that he will compensate her beyond the compensation provided by her firm on the basis of the capital appreciation of his portfolio each year. Jurgen should:

• A. Turn down the additional compensation because it will result in conflicts with the interests of other clients’ accounts.
• B. Turn down the additional compensation because it will create undue pressure on her to achieve strong short-term performance.
• C. Obtain permission from her employer prior to accepting the compensation arrangement.

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.

Q. Townsend was recently appointed to the board of directors of a youth golf program that is the local chapter of a national not-for-profit organization. The program is beginning a new fund-raising campaign to expand the number of annual scholarships it provides. Townsend believes many of her clients make annual donations to charity. The next week in her regular newsletter to all clients, she includes a small section discussing the fund-raising campaign and her position on the organization’s board.

• A. Townsend did not violate the Code and Standards.
• B. Townsend violated the Code and Standards by soliciting donations from her clients through the newsletter.
• C. Townsend violated the Code and Standards by not getting approval of the organization before soliciting her clients.

Q. Which of the following statements regarding GIPS compliance is correct?

• A. Asset owners that manage assets can claim compliance with the GIPS Standards.
• B. Software that calculates performance in a manner consistent with the GIPS standards can claim compliance with GIPS standards.
• C. Firms can comply with the GIPS standards by limiting their compliance claims to the provisions they have chosen to follow.

Q. Which statement about a manager’s use of client brokerage commissions violates the Code and Standards?

• A. A client may direct a manager to use that client’s brokerage commissions to purchase goods and services for that client.
• B. Client brokerage commissions should be used to benefit the client and should be commensurate with the value of the brokerage and research services received.
• C. Client brokerage commissions may be directed to pay for the investment manager’s operating expenses.

Q. Stewart has been hired by Goodner Industries, Inc., to manage its pension fund. Stewart’s duty of loyalty, prudence, and care is owed to:

• A. The management of Goodner.
• B. The participants and beneficiaries of Goodner’s pension plan.
• C. The shareholders of Goodner.

Sheila Schleif, CFA, is an equity analyst at an investment banking division of Mokara Financial Group, a full service financial group. Schleif uses a multi-factor computer model to make stock recommendations for all clients of Mokara. Schleif discovers that the model contains an error. If the error were corrected, her most recent buy recommendation communicated to all clients would change to a sell. Schleif corrects the error, changing the buy to a sell recommendation, and then simultaneously distributes via e-mail the revision to all investment banking clients who received the initial recommendation. A week later, Schleif sells the same shares she held in her personal portfolio. Concerning her actions, Schleif most likely violated which of the following CFA Institute Standards of Professional Conduct?

• A. Fair Dealing
• B. Priority of Transactions
• C. Diligence and Reasonable Basis

Which of the following situations most likely helps to explain why the GIPS® standards were created?

• A. Firms were including only top performing funds to represent their performance history.
• B. Asset managers were including the performance of all portfolios, including those no longer managed in their performance history.
• C. Consistency among fund managers were needed when making investment performance presentations.

Q. Jamison is a junior research analyst with Howard & Howard, a brokerage and investment banking firm. Howard & Howard’s mergers and acquisitions department has represented the Britland Company in all of its acquisitions for the past 20 years. Two of Howard & Howard’s senior officers are directors of various Britland subsidiaries. Jamison has been asked to write a research report on Britland. What is the best course of action for her to follow?

• A. Jamison may write the report but must refrain from expressing any opinions because of the special relationships between the two companies.
• B. Jamison should not write the report because the two Howard & Howard officers serve as directors for subsidiaries of Britland.
• C. Jamison may write the report if she discloses the special relationships with the company in the report.

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

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