1 . Milton Baker, CFA,prepares a research report on the dynamics of a stock price. In his study, heuses a considerable number of information sources, both outside sources and hiscompany’s own research papers, prepared for both internal and public use. Thereport will first be distributed at the monthly department meeting and thenlater will be published on the company’s Internet site. He thinks that he mayhave neglected to mention some of his sources in his reference list but decidesthat he needs to be concerned about full disclosure of his sources only for thepublic version of the report, so he will wait to revise his work until afterthe monthly meeting but before it is published on the internet site. WhichStandards does Baker NOT comply with?
A)Standard I(C),Misrepresentation, I(B), Independence and Objectivity, and I(A), Knowledge ofthe Law.
B)Standard I(C),Misrepresentation, only.
C)Standard I(C),Misrepresentation, and I(A), Knowledge of the Law.
The correct answer wasC
Baker has some doubtsbut does not initiate any action presuming they only apply to the publiclydisclosed report. The lack of action is a violation of Standard I(A), Knowledgeof the Law. He also violates Standard I(C), Misrepresentation, by failing toproperly disclose the sources of his information, where necessary.
2 . Lisa Pierce, CFA,has been researching Lander Manufacturing for the past three weeks. She likesthe company’s history of fulfilling its contracts on time and within budget.She learns from the uncle of a maintenance worker at Lander’s headquarters thata group of well-dressed individuals arrived at headquarters in a limegreen-colored limousine. Pierce knows from publicly available information thatGilbert Controls needs a large supply of specialized motors in its domesticdivision. She also knows that the executive officers of Gilbert usually travelin a lime green limousine. Pierce concludes that it is very likely that Gilbertwill offer a large contract to Lander. Based on this development and her priorresearch Pierce would like to acquire Lander Manufacturing shares for herclient accounts.
A)proceed to acquirethe shares.
B)not acquire theshares because she possesses material nonpublic information.
C)not acquire theshares until after she has contacted Lander´s management and encouraged them topublicly announce information about the Gilbert Controls contract. She shouldalso wait until Lander has made the announcement and the public has had time toreact to it and then make the acquisition.
The correct answer wasA
Standard II(A)prohibits members from taking investment action if they possess materialnonpublic information. Pierce combined information that was notmisappropriated, with her knowledge of the company, to reach a conclusion underthe mosaic theory, which is permissible under the standards. She can proceed tobuy the shares.
3 . According to theCode of Ethics, which of the following statements is NOT correct? CFA Institutemembers are required to:
A)use reasonable careand exercise independent professional judgment.
B)maintain and improvetheir competence and strive to maintain the competence of others in the profession.
C)comply with the CFAInstitute Global Investment Performance Standards.
The correct answer wasC
The CFA Institute-GIPSare voluntary standards for the industry. Firms are not required to comply withthese standards when presenting performance. The other statements are eachcomponents of the CFA Institute Code of Ethics.
4 . Sometimes a CFAInstitute member simply feels a law has been violated by his firm, andsometimes the member knows a law has been violated. Which of the followingpairs of guidelines is CORRECT with respect to the first step a member shouldtake in each case? The member should first contact:
A)the firm´s counselif he feels a law has been violated and the SEC if he knows a law has beenviolated.
B)his supervisor inthe firm if he feels a law has been violated and contact the firm´s counsel ifhe knows a law has been violated.
C)the firm´s counselif he feels a law has been violated and contact his supervisor if he knows alaw has been violated.
The correct answer wasC
Standard I(A) saysthat when a member feels a law has been broken, the member should seek advicefrom the firm’s counsel. If the member feels the advice is unbiased andcompetent, the member should follow it. If the member knows a law has beenviolated, the member should contact a supervisor.
5 . Which of thefollowing is least likely required of fiduciaries who are responsible forpension plans?
A)Judging investmentsin the context of the total portfolio.
B)Supporting thesponsor´s management during proxy fights.
C)Acting solely in theinterest of plan participants.
The correct answerwas: B
Under Standard III(A)Loyalty, Prudence, and Care, fiduciaries must evaluate management’s proposalsduring proxy fights to see if they are in the best interest of the planparticipants. If management’s ideas are justifiable and reasonably ensure planparticipants’ betterment, then fiduciaries can support them. If management isonly trying to further its own objectives, especially at the cost of planparticipants, then fiduciaries must vote against management in proxy fights.