Question 1
Multiple ChoiceJacob Linwood, CFA, practices in a country that does not regulate corporate retirement plan investments. He is hired by Ormond Industries to manage its employee pension plan. Ormond’s management requests that Linwood invest the entire retirement fund in Ormond stock.
Linwood may:
Explanation
Standard III(A), Loyalty, Prudence, and Care, requires that a member act in the best interest of plan beneficiaries, not the sponsoring company. While investing some portion of the plan in the sponsor’s stock may be permissible, doing so must be prudent and consistent with diversification and the overall objectives of the plan.
Question 2
Multiple ChoiceAn independent analyst has only one client, who holds a significant position in a brokerage firm. As a result of the client’s influence, the brokerage allows the analyst access to its research tools and network. According to the CFA Institute Standards of Professional Conduct, this arrangement is permissible as long as the analyst:
Explanation
Under Standard III(A), Loyalty, Prudence, and Care, the analyst must both disclose any potential conflicts of interest and ensure that any benefits arising from the client relationship are directed to the client. Simply using the resources or disclosing the relationship alone is not sufficient. Both transparency and loyalty are required.
Question 3
Multiple ChoiceA portfolio manager at Linton Capital executes a block trade for multiple client accounts. After execution, she allocates the trade primarily to larger accounts that generate higher advisory fees for the firm, justifying the allocation by stating that those clients are more important to retain. According to CFA Institute Standards, how should the manager have allocated the trade?
Explanation
Standard III(B), Fair Dealing, requires that investment opportunities be allocated fairly among all clients. Allocating based on revenue generation or subjective importance violates this standard. A pro-rata method among all suitable accounts is considered equitable and compliant.
Question 4
Multiple ChoiceWith regard to disseminating investment recommendations, the recommended procedures for compliance with the Standard concerning fair dealing least likely state that members and candidates should:
Explanation
Standard III(B), Fair Dealing, aims to ensure that all clients are treated equitably when investment recommendations are made. Compliance procedures include limiting the number of people who are aware of a pending recommendation to reduce the risk of selective disclosure. Maximizing the number of people aware of the recommendation increases the risk of unfair advantage and potential information leakage.
Question 5
Multiple ChoiceA wealth advisory firm implements a policy in which investment recommendations are first communicated to clients who generate the highest fees, followed by others in descending order of account size. All clients are informed of this practice and have signed agreements acknowledging their understanding. According to Standard III(B), Fair Dealing, this approach is:
Explanation
Standard III(B), Fair Dealing, requires that all clients be treated fairly and equitably. Prioritizing clients based on fees or account size, even with disclosure and consent, does not meet this fairness requirement. Client acknowledgment does not override a member's obligation to adhere to ethical standards.
Question 6
Multiple ChoiceNora Ellington, CFA, manages a number of client portfolios at Alpine Ridge Capital. She places three separate trades for the same stock on a volatile trading day, each at different prices. To allocate the trades, she assigns the first block to clients with last names beginning A–G, the second block to clients H–P, and the third block to clients Q–Z. According to the CFA Institute Code and Standards, this allocation method is:
Explanation
Standard III(B), Fair Dealing, requires members to ensure that investment opportunities are allocated fairly among all clients. Allocating trades based on surname groupings is arbitrary and results in inconsistent treatment. A pro-rata allocation based on investment objectives and order size would be compliant.
Question 7
Multiple ChoiceTrevor Langston, CFA, manages the NorthGate Microcap Fund based in Vancouver. He places a buy order through Zenith Securities. Due to an internal error at Zenith, a trade is incorrectly executed in Langston's account. Upon discovering the mistake, Langston immediately informs Zenith, and Zenith agrees to absorb the loss without charging the fund. According to the CFA Institute Standards of Professional Conduct, this action is:
Explanation
Standard III(A), Loyalty, Prudence, and Care, permits this action because the error originated with the brokerage firm, not the investment manager. As long as the manager does not agree to direct future business to the broker in exchange for covering the loss, and no harm comes to the client, there is no violation. The situation does not create a conflict of interest or breach of duty.
Question 8
Multiple ChoiceGrant Delaney, CFA, manages the Maple Leaf Small Cap Equity Fund and executes trades through Lakeside Brokerage. Lakeside provides Delaney with soft dollars, which he uses to obtain research on small cap equities for the fund. However, Delaney also requests research on municipal bonds—some of which he holds in his personal investment account—using the same soft dollar arrangement. These actions are:
Explanation
Under Standard III(A), Loyalty, Prudence, and Care, soft dollars are considered the property of the client and must be used solely to benefit that client. Using soft dollars to obtain research unrelated to the client’s portfolio—such as research on municipal bonds held personally—constitutes a breach of fiduciary duty. Using them for small cap research is appropriate if it directly benefits the fund.
Question 9
Multiple ChoiceEd Staples, CFA, manages a retirement fund for the employees of Hill Corporation. According to the CFA Institute Code and Standards, Staples is most likely required to:
Explanation
Under Standard III(A), Loyalty, Prudence, and Care, Staples must act for the benefit of the fund’s beneficiaries—not the sponsoring company. His responsibility is to manage the fund in the best interest of all participants collectively, rather than tailoring decisions to individual needs or aligning with corporate management.
Question 10
Multiple ChoiceAlana Porter, CFA, is a senior analyst at Greenfield Capital Management. She is preparing to release a downgrade on BioQuanta Inc., a pharmaceutical company she previously rated as a "strong buy." Before issuing the downgrade publicly, Porter informs a select group of relationship managers who service the firm's high-net-worth clients. Acting on this information, several of these managers contact their clients, who then quickly sell off large positions in BioQuanta. Two days later, Porter finalizes the downgrade and sends the report to all clients simultaneously through the firm's standard distribution process.
Under the CFA Institute Standards of Professional Conduct, Porter's actions are:
Explanation
Standard III(B) Fair Dealing requires CFA members and candidates to ensure that investment recommendations are distributed fairly to all clients. Porter gave select individuals early access to material non-public information, leading to unfair advantages for certain clients. Both she and the relationship managers who acted on this information are in violation of the standard.