ETHICS CFA EXAM SAMPLE

1. Which of the following statements about fundamental responsibilities of members who practice in multiple jurisdictions is TRUE?

A. In cases where federal law differs from CFA Institute®'s Code and Standards, federal law prevails.
B. In the absence of specific applicable laws or other regulatory requirements, the CFA Institute Code and Standards govern the member's conduct.
C. A member who trades securities in a foreign market having no applicable local laws or rules may use material nonpublic information to make investment decisions.
D. A member is required to comply only with applicable local laws, rules, and regulations even though CFA Institute's Code and Standards may impose a higher degree of responsibility.

2. An analyst subject to CFA Institute® Standards of Professional Conduct, to comply with Standard I(A) Fundamental Responsibilities, should do all the following EXCEPT:

A. learn the laws and rules governing his or her conduct.
B. seek the advice of counsel when in doubt concerning the requirements of the law.
C. implementation and/or follow internal compliance procedure designed to prevent legal violations.
D. adopt CFA Institute’s Global Investment Performance Standards (GIPS®) for reporting investment results.

3. Tamara Higgins is the Compliance Officer for Hedge Funds Unlimited, a global hedge fund with offices in New York, London and Singapore. The firm has publicly acknowledged in writing that it has adopted the CFA Institute Code and Standards as its policies. Although Higgins is not currently participating in the CFA program, she will begin the program next year. For purposes of compliance, which of the following is least likely a violation of the firm's policies and the CFA Institute Code and Standards?

A. A portfolio manager at the firm accepts an undisclosed trip to Bermuda as a gift for good performance from a client.
B. An analyst at the firm working overseas uses material nonpublic information as allowed by local law to make investment decisions for discretionary client accounts.
C. A junior analyst at the firm uses a subscription to a financial publication and input from friends and colleagues to make investment recommendations for discretionary client accounts.
D. A CFA Level 3 candidate at the firm includes reference to participation in the CFA program and her status as a Level 3 candidate in her biographical background for an upcoming client presentation.

4. Which of the following violates the CFA Institute® Standards of Professional Conduct on the appropriate use of the Chartered Financial Analyst® and CFA® mark?

A. Langley has passed all three levels of the CFA program, has received his charter, and is a charterholder in good standing. He writes on his business card, "Roger Langley, Chartered Financial Analyst."
B. Langley has passed all three levels of the CFA program, has received his charter, and is a charterholder in good standing. His company writes in promotional literature, "Roger Langley is one of two CFAs in the company."
C. Langley has passed Level 2 and is registered to take the Level 3 examination. In his resume he states, "I am a Level 3 candidate in the CFA program."
D. Langley was awarded the CFA designation in 1980 but stopped paying dues in 2000. In his retirement speech in 2001, he stated, "I was awarded the CFA charter in 1980."

5. John Anderson's company is participating in an acquisition. To speed up the process, his manager gave him a report from another company's analyst, also working on the project, and told Anderson to put it on company letterhead and distribute the report by the end of the day. If Anderson, who is an CFA Institute member, complies, which of the following CFA Institute Standards of Professional Conduct will he have broken?

A. Standard IV(A.2), Research Reports.
B. Standard II(C), Prohibition against Plagiarism.
C. Standard IV(B.6), Prohibition against Misrepresentation.
D. Standard IV(B.2), Portfolio Investment Recommendations and Actions.

6. Ann Smith, CFA, calls Bill Jones, CFA, and tells him that her research shows that Biokem Company is overpriced. After their conversation, Jones arranges a conference call with all the firm’s portfolio managers and announces that his research indicates Biokem is a strong “sell”. According to CFA Institute Standards of Professional Conduct, which of the following statements is most accurate?

A. Jones did not commit plagiarism because Smith’s comments were verbal.
B. Jones has just plagiarized Smith’s research because he did not credit her as the source.
C. Because Smith told Jones, the information is now public; Jones can do whatever he wants with it.
D. Jones did not plagiarize Smith’s work because he did not actually see the research that she produced.

7. Sommerset Brokerage, a retail broker-dealer, employs several CFA charterholders and candidates participating in the CFA program and has publicly acknowledged in writing the adoption of the CFA Institute Code and Standards as the firm's policies. Doug Watson, a CFA Level 2 candidate and registered representative, was recently hired by Sommerset, but failed to notify the firm about his status as a CFA candidate and his outside employment as an instructor for securities licensing examinations. Which of the following best describes Watson's actions under the CFA Institute Code and Standards? Watson has violated:

A. Standard III Relationships and Responsibilities to the Employer, for failing to disclose additional compensation received as an instructor.
B. Standard I Fundamental Responsibilities, by failing to notify his employer within 30 days of hiring of his status as a CFA candidate and that he holds securities licenses.
C. Standard III Relationships and Responsibilities to the Employer, for failing to inform his employer of his obligations under the Code and Standards and to deliver a copy of the Code and Standards.
D. Standard III Relationships and Responsibilities to the Employer, by failing to inform his employer of his obligations under the Code and Standards and for failing to disclose additional compensation received as an instructor.

8. Anna Jacobs, Level 2 CFA candidate, recently left Wellwood Advisers, where she was a portfolio manager, for Lockwood Financial Services. Prior to leaving Wellwood, Jacobs sent a mailing to rejected clients informing them of her move to Lockwood. Jacobs serves as a financial consultant for several local businesses for which she is paid a cash retainer. Upon starting at Lockwood, Jacobs informs her supervisor that she is a CFA candidate and subject to certain rules that the supervisor can learn about from the CFA Institute website. Which of the following regarding Standard III Relationships and Responsibilities to the Employer best describes Jacobs' actions? Jacobs has:

A. violated the Standard by soliciting clients of Wellwood prior to moving to Lockwood.
B. violated the Standard by failing to disclose additional compensation received as a consultant.
C. NOT violated the Standard since she provided proper notification to clients regarding her change from Wellwood to Lockwood.
D. NOT violated the Standard since she informed her new supervisor about her participation in the CFA program and how to find out more information.

9. Which of the following statements about soft dollar standards is FALSE?

A. The investment manager must inform the client that the manager may engage in soft dollar arrangements before doing so.
B. The broker can use brokerage from another client's account to pay for research under the client-directed brokerage arrangement.
C. The investment manager cannot allocate a client's brokerage to a broker based on the amount of referrals the manager receives from the broker.
D. To use client brokerage to buy research, the manager should determine that the research meets the definition of research and that it directly benefits the client.

10. Marianne Riley, CFA, owns an investment research boutique that specializes in mining and exploration stocks. As a local investor, Riley maintains close relationships with local corporate officers, often participating in one-on-one meetings. Riley has a history of prescient investment recommendations and maintains clients throughout Canada, the U.S. and Europe. On a recent conference call with clients and prospects, Riley gives a brief description of a local silver mining company she follows, Silverado, Inc. Riley recommends a "buy" on Silverado, indicating that the stock should advance in the next three to six months based on the fact that she believes consumers are buying more silver products. Which of the following Standards most likely governs Riley's investment recommendation?

A. Standard IV(A.2) Research Reports.
B. Standard II(C) Prohibition Against Plagiarism.
C. Standard IV(B.2) Portfolio Investment Recommendations and Actions.
D. Standard V(A) Prohibition Against Use of Material Nonpublic Information.

11. Ken Toma, a CFA charterholder and leisure services analyst, has just completed an extensive review of the demand for beach vacations in Hawaii and concluded that the demand will far exceed the supply for the foreseeable future. Toma writes a research report stating, "Based on the fact that the demand for Hawaiian beach vacations will exceed the supply of rooms for the foreseeable future, I recommend the purchase of shares of the Hawaiian fund, a diversified portfolio of Hawaiian beachfront resorts." If Toma presents this report to his clients, he will have:

A. violated the CFA Institute standards because he did not distinguish between fact and opinion.
B. complied with the CFA Institute standards by completing a thorough and diligent review of the facts.
C. violated the CFA Institute standards because he made conclusions based only upon his own research.
D. violated the CFA Institute standards because he did not indicate the basic characteristics of the investment.

12. Roger Smith, CFA, has been invited to join a group of analysts in touring the riverboats of River Casino Corp. For the tour, River Casino has arranged chartered flights from casino to casino, since commercial flight schedules are inconvenient and not practical for the group's time schedule. River Casino has also arranged to pay the hotel bill for the three nights of the tour. The trip is purely business. According to CFA Institute Standards of Professional Conduct, Smith should:

A. accept the arrangements as they are.
B. accept the flight, but pay his own hotel bill.
C. offer to pay for his share of the airfare and his own hotel bill.
D. decline to accept the trip because the arrangements are inappropriate.

13. Natalie Oswald, CFA, is the investment manager of a corporate pension plan. Under Employee Retirement Income Security Act (ERISA), she owes her fiduciary duty to:

A. the plan sponsor.
B. the firm's shareholders.
C. all of the above equally.
D. the plan participants and beneficiaries.

14. Jaime Young, CFA, has constructed a portfolio for Donna Rhee that generates an income stream suitable to Rhee's needs and risk tolerances. However, Jim Weaver, Young's supervisor, believes some of the individual assets in the portfolio are inconsistent with an individual of Rhee's age. The supervisor believes Young should eliminate the questionable securities even if it requires putting Rhee into some low-yield assets. According to CFA Institute Standards of Professional Conduct, which of the following is the most appropriate response for Young to give Weaver?

A. Go along with Weaver because he is her supervisor.
B. Quit; her supervisor has no adequate basis for his request.
C. Go along with Weaver because the prudent expert rule applies to the individual components in a portfolio.
D. Explain to Weaver that prudence is based on the characteristics of the client's entire portfolio and not on the individual assets in the portfolio.

15. Dawn Shepard, CFA, is a research analyst for a regional brokerage firm. Her research has convinced her to change her recommendation on the common stock of Orlando, Inc. from "buy" to "sell." She faxed this change to all her current customers who had expressed an interest in Orlando, Inc. The next day, one of her occasional customers who had never before expressed an interest in Orlando calls and places a "buy" order for 500 shares of Orlando. According to CFA Institute Standards of Professional Conduct, Shepard, in these circumstances:

A. may accept the order because she has complied with the fair dealing standard.
B. should advise the customer of the change in recommendation before accepting the order.
C. should delay executing the order until five days have elapsed after the communication of the change in recommendation.
D. may accept the order only if the customer acknowledges in writing that she was notified of the change in the recommendation.

16. Matt Jacobs is a portfolio assistant for Cumberland Investments, a registered investment adviser. Jacobs recently completed Level 2 of the CFA examination and is currently registered for Level III. As part of his daily responsibilities in assisting the portfolio manager, Jacobs implements portfolio trades for discretionary client accounts. All of the following comply with the CFA Institute Code and Standards regarding fiduciary duty EXCEPT Jacobs:

A. includes discretionary accounts of friends and family in client allocations of new issues.
B. allocates trades to asset-based fee accounts and performance-based fee accounts on a pro-rata basis.
C. includes the Cumberland Pension Plan accounts in client trade allocations for similar investment mandates.
D. allocates trades to personal trust accounts under his discretion before client accounts, but after Cumberland proprietary accounts.

17. According to CFA Institute Standards of Professional Conduct, a member who receives confidential information through a relationship of trust must maintain the confidentiality of this information if:

A. the information is highly sensitive or illegal.
B. and only if the information is of a material and nonpublic nature.
C. the information may be construed as a conflict of interest to the member's employer.
D. the information results from, and is relevant to, the business covered by the client relationship.

18. An analyst just told an investor, "You should buy Delfonics Inc. This stock is guaranteed to give you a 100 percent risk-free return over the next six months." Which standard did the analyst violate?

A. Standard IV(B.3) Fair Dealing.
B. Standard IV(B.2b) Appropriateness and Suitability.
C. Standard IV(B.6) Prohibition against Misrepresentation.
D. Standard IV(A. 1) Reasonable Basis and Representations.

19. Chris Matlock, a CFA charterholder and an analyst for R&B Securities, is preparing a buy recommendation on King Company. According to CFA Institute Standards of Professional Conduct, which of the following is NOT a conflict of interest that he would normally disclose?

A. R&B is a market maker for King Company stock.
B. Matlock's son works at King Company.
C. Matlock has a consulting contract with King Company.
D. Matlock's wife has a family trust fund that holds a substantial block of King Company stock.

20. Alyssa Wilcox is a registered representative for Comprehensive Brokers and a CFA Level 1 candidate. Wilcox usually makes investment recommendations for clients based on a semi-annual mailing to clients that requests an update on clients' investment objectives, financial situation and investment experience. Wilcox regularly attends new issue roadshows offered by her colleagues in investment banking, who will give her shares of a new issue if the issue is purchased by at least half of her client accounts. Wilcox has personally received shares in half of the company's total new issue underwritings for the year, but will only allocate shares to large client accounts suitable for investing in new issues. Which of the following best describes Wilcox's actions under the CFA Institute Code and Standards? Wilcox has:

A. fulfilled her responsibility under the Fair Dealing standard [Standard IV(B.3)].
B. not fulfilled her responsibility under the Preservation of Confidentiality standard [Standard IV(B.5)].
C. not fulfilled her responsibility under the Disclosure of Conflicts to Clients standard [Standard IV(B.7)].
D. fulfilled her responsibility under the Portfolio Investment Recommendations and Actions standard [Standard IV(B.2)].

21. Jarrett Rogers, CFA, is a registered principal for Macrovest Broker-Dealer. Rogers is the head of the firm's investment program and recommends certain investment advisers in the program to high net worth individuals looking for separately-managed discretionary accounts. Investment advisers in the program pay Macrovest a portion of their investment management fees to participate in the program, some of which is paid to Rogers as compensation for client recommendations. When a client inquires with Rogers about criteria for including managers in the Macrovest program, Rogers indicates that managers are selected based only on historical investment performance versus a universe of comparable peer investment managers. According to the CFA Institute Code and Standards, Rogers' actions are most likely covered by:

A. Standard IV(B.8) Disclosure of Referral Fees.
B. Standard III(C) Disclosure of Conflicts to Employer.
C. Standard IV(B.6) Prohibition Against Misrepresentation.
D. Standard IV(B.2) Portfolio Investment Recommendations and Actions.

22. Anne Franklin, CFA, is an analyst for Medallion Investments covering technology stocks. Franklin frequently meets with company management and makes on-site visits to company facilities. Cynthia Lucas, chief technology officer for Level Tech, tells Franklin during a one-on-one on-site visit that overseas shipments of the company's revolutionary product are going to be delayed indefinitely due to manufacturing defects. Medallion manages discretionary accounts for Lucas and her family and Lucas frequently shares information with Franklin in appreciation for good stock picks. Subsequent to her meeting, Franklin sends a note to Medallion's investment personnel telling them to "sell the stock", as the shipment information is significant and impacts recent earnings guidance in the market. Franklin's use of the information received from Lucas:

A. violates the Code and Standards, as Franklin received information that was misappropriated and should not have been disseminated.
B. violates the Code and Standards, as Franklin received information through a breach of fiduciary duty and should not have been disseminated.
C. does not violate the Code and Standards, as Franklin was using information that was publicly disclosed and can be used to initiate trading recommendations.
D. does not violate the Code and Standards, as Franklin was adhering to her fiduciary duty to Medallion's clients by sharing the information and recommending a "sell."

23. John Farr, CFA, has accumulated several pieces of nonpublic information about Cattle Corp. of Omaha from his contacts with the company. Although none of this information is material by itself, when Farr combines it with his own analysis, it leads him to conclude that Cattle Corp. will have an unexpectedly low earnings report this year. Cattle Corp. has not announced this information and although Farr has contacted the company, they will not confirm his finding. According to CFA Institute Standards of Professional Conduct, Farr:

A. can use the information to make investment recommendations and decisions.
B. cannot legally invest, divest or make recommendations based on this information.
C. should inform the company in writing that he possesses this information, then after a reasonable time period he can trade on this information.
D. may use the information, but only if his company's compliance officer is able to verify with Cattle Corp. that the material he used was indeed nonmaterial.

24. Bill Fox, CFA, has been preparing a research report on New London Wire and Cable, one of his major investment clients. He had completed much of his analysis and had planned on having his report typed and bound today. Unfortunately, his briefcase was stolen while he ate breakfast, and he lost all his notes and working papers. The lost materials included his notes from management interviews, conversations with suppliers and competitors, dates of company visits, and his computer diskette containing much of his quantitative analysis. Fox's client needs this report tomorrow. In a panic Fox called New London's vice president of finance and was faxed a copy of the company's most recent financial projections. Fox remembered that his own analysis showed that management's estimates were too high. He did not remember the exact amount, so he revised New London's figures downward by 10 percent. Fox also incorporated, without acknowledgement, some charts and graphs on New London from a research report he had received llast week from a small regional research firm and used some information from a S&P reference work. With the help of his secretary, a copy machine, and some creative word processing, Fox got the report done in time for the evening overnight delivery pick up. Fox violated all of the following standards in CFA Institute's Standards of Professional Conduct EXCEPT:

A. Standard II(C) Prohibition against Plagiarism.
B. Standard IV(A.1d) Reasonable Basis—maintain appropriate records.
C. Standard IV(A.1a) Reasonable Basis—exercise diligence and thoroughness.
D. Standard IV(B.2) Portfolio Investment Recommendations and Actions: separating fact from opinion.

25. According to CFA Institute Global Investment Performance Standards (GIPS), which of the following statements concerning the calculation of composite returns is FALSE?

A. Asset weighting within composites is required using beginning of period weights.
B. Portfolios no longer under management should be included in historical composites.
C. Model results may be presented if they conform to the portfolio's investment strategy and objectives.
D. Each composite must include all portfolios or asset classes representing a similar investment strategy or investment objective.

Please send your answers to RGBorja.LGUPolangui@gmail.com.ph on or before April 10, 2008. Thank You.