Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester
of studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her score.
Garvey's work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks
and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo
Engineering, a small stock he has tried repeatedly to convince the investment director to add to the
monitored list. While the investment director does not like Vallo, Topel has faith in the company and
has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells
the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last
week at the office doing research on Koral. She has concluded that the stock is undervalued and
consensus earnings estimates are conservative. However, she has not filed a report for Samson, nor
does she intend to. She said she has purchased the stock for herself and advises her colleagues to do
the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of
Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district
to supplement her income. The dinner crowd includes many analysts and brokers who work at
nearby businesses. While waiting tables that night, Garvey hears two employees of a major
brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that
the broker's star analyst has issued a report with a buy rating on Metrona that morning. The diners
plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy
Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work
at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a
Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon
afterward, she receives a call from Harold Koons, one of Samson's largest money-management
clients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koons
wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock
soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil
Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks
Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not
mention the gift from Jones. May approves the Koons' gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.
Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garvey
uses a simple linear regression to estimate the relationship between GDP growth and Zenith's sales
growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service
and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She
listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job
responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage the
fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,
instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an
online placement service. In it she makes the following two statements:
Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA
program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of
financial instruments as well as knowledge of the forces that drive our economy and financial
markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.
As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.
During the lunch conversation, which CFA Institute Standard of Professional Conduct was most likely
violated?
B
Explanation:
Topel recommended the stock to his superiors, but they chose not to buy it. While Topcl should not
buy the stock in advance of his recommendation, he is not prohibited from purchasing it for himself
should the company choose not to act. Kennedys research may have been thorough, and there is no
evidence that she violated the reasonable-basis Standard. However, the loyalty Standard requires
that Kennedy put Samson Securities' interest before her own and not deprive her employer of her
skills and abilities. Since Kennedy spent five days of company time researching Koral Koatings, the
company has a right to benefit from her research. (Study Session 1, LOS 2.a)
Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester
of studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her score.
Garvey's work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks
and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo
Engineering, a small stock he has tried repeatedly to convince the investment director to add to the
monitored list. While the investment director does not like Vallo, Topel has faith in the company and
has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells
the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last
week at the office doing research on Koral. She has concluded that the stock is undervalued and
consensus earnings estimates are conservative. However, she has not filed a report for Samson, nor
does she intend to. She said she has purchased the stock for herself and advises her colleagues to do
the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of
Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district
to supplement her income. The dinner crowd includes many analysts and brokers who work at
nearby businesses. While waiting tables that night, Garvey hears two employees of a major
brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that
the broker's star analyst has issued a report with a buy rating on Metrona that morning. The diners
plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy
Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work
at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a
Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon
afterward, she receives a call from Harold Koons, one of Samson's largest money-management
clients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koons
wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock
soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil
Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks
Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not
mention the gift from Jones. May approves the Koons' gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.
Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garvey
uses a simple linear regression to estimate the relationship between GDP growth and Zenith's sales
growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service
and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She
listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job
responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage the
fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,
instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an
online placement service. In it she makes the following two statements:
Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA
program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of
financial instruments as well as knowledge of the forces that drive our economy and financial
markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.
As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.
Does Garvey's acceptance of the gifts from Koons and Jones violate Standard 1(B) Independence and
Objectivity?
C
Explanation:
The Koons' gift does not violate Standard 1(B). According to the standard, gifts from clients are
different from gifts from other parties because the potential for obtaining influence to the detriment
of other clients is not as great. Therefore, according to the standard, Garvey may accept the Koons'
gift as long as she discloses it to her employer, which she did. See Example 7 on pages 22 and 23 of
the Standards of Practice Handbook, 9th edition^ for an example of how the standard was applied in
a similar situation.
Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester
of studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her score.
Garvey's work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks
and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo
Engineering, a small stock he has tried repeatedly to convince the investment director to add to the
monitored list. While the investment director does not like Vallo, Topel has faith in the company and
has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells
the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last
week at the office doing research on Koral. She has concluded that the stock is undervalued and
consensus earnings estimates are conservative. However, she has not filed a report for Samson, nor
does she intend to. She said she has purchased the stock for herself and advises her colleagues to do
the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of
Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district
to supplement her income. The dinner crowd includes many analysts and brokers who work at
nearby businesses. While waiting tables that night, Garvey hears two employees of a major
brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that
the broker's star analyst has issued a report with a buy rating on Metrona that morning. The diners
plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy
Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work
at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a
Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon
afterward, she receives a call from Harold Koons, one of Samson's largest money-management
clients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koons
wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock
soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil
Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks
Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not
mention the gift from Jones. May approves the Koons' gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.
Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garvey
uses a simple linear regression to estimate the relationship between GDP growth and Zenith's sales
growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service
and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She
listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job
responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage the
fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,
instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an
online placement service. In it she makes the following two statements:
Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA
program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of
financial instruments as well as knowledge of the forces that drive our economy and financial
markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.
As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.
Did Garvey violate Standard 11(A) Material Nonpublic Information when she purchased Vallo and
Metrona?
C
Explanation:
Topels purchases of Vallo do not violate Standard 11(A) because ii was not based on material
nonpublic information, and he has no duty to keep the information to himself Therefore, Garvey's
purchase of Vallo for her own account is also consistent with Standard 11(A).
Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester
of studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her score.
Garvey's work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks
and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo
Engineering, a small stock he has tried repeatedly to convince the investment director to add to the
monitored list. While the investment director does not like Vallo, Topel has faith in the company and
has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells
the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last
week at the office doing research on Koral. She has concluded that the stock is undervalued and
consensus earnings estimates are conservative. However, she has not filed a report for Samson, nor
does she intend to. She said she has purchased the stock for herself and advises her colleagues to do
the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of
Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district
to supplement her income. The dinner crowd includes many analysts and brokers who work at
nearby businesses. While waiting tables that night, Garvey hears two employees of a major
brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that
the broker's star analyst has issued a report with a buy rating on Metrona that morning. The diners
plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy
Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work
at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a
Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon
afterward, she receives a call from Harold Koons, one of Samson's largest money-management
clients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koons
wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock
soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil
Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks
Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not
mention the gift from Jones. May approves the Koons' gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.
Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garvey
uses a simple linear regression to estimate the relationship between GDP growth and Zenith's sales
growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service
and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She
listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job
responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage the
fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,
instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an
online placement service. In it she makes the following two statements:
Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA
program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of
financial instruments as well as knowledge of the forces that drive our economy and financial
markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.
As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.
In her estimation of Zenith's future growth rate, what standard did Garvey violate?
B
Explanation:
Garveys idea for a growth estimate is interesting, but a number of factors affect the growth rate of a
beverage company, many arguably more so than GDP growth. In addition, it is not sufficient to use
two years worth of quarterly data (eight observations) to estimate a regression model and forecast
growth over the following three years. The research was not thorough enough to satisfy Standard
V(A).
Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester
of studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her score.
Garvey's work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks
and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo
Engineering, a small stock he has tried repeatedly to convince the investment director to add to the
monitored list. While the investment director does not like Vallo, Topel has faith in the company and
has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells
the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last
week at the office doing research on Koral. She has concluded that the stock is undervalued and
consensus earnings estimates are conservative. However, she has not filed a report for Samson, nor
does she intend to. She said she has purchased the stock for herself and advises her colleagues to do
the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of
Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district
to supplement her income. The dinner crowd includes many analysts and brokers who work at
nearby businesses. While waiting tables that night, Garvey hears two employees of a major
brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that
the broker's star analyst has issued a report with a buy rating on Metrona that morning. The diners
plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy
Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work
at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a
Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon
afterward, she receives a call from Harold Koons, one of Samson's largest money-management
clients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koons
wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock
soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil
Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks
Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not
mention the gift from Jones. May approves the Koons' gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.
Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garvey
uses a simple linear regression to estimate the relationship between GDP growth and Zenith's sales
growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service
and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She
listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job
responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage the
fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,
instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an
online placement service. In it she makes the following two statements:
Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA
program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of
financial instruments as well as knowledge of the forces that drive our economy and financial
markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.
As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.
Which of Bloomquist's statements most likely applies to both the Prudent Man Rule and the Prudent
Investor Rule?
B
Explanation:
The impartiality standard requires prudent handling of different interests, such as those of different
beneficiaries. This standard changed very little with the adoption of the Prudent Investor Rule. All of
the other statements reflect provisions of the Prudent Investor Rule rhat would not have been
permitted under rhe old Prudent Man Rule. Under the old Prudent Man Rule:
• The trustee was not allowed to delegate any duties to others.
• The preservation of the principal and purchasing power by earning a return sufficient to offset
inflation was required. Under the new Prudent Investor Rule, growth in the real value of the principal
(returns in excess of inflation) is permissible.
(Study Session 2, LOS lO.c)
Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester
of studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her score.
Garvey's work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks
and takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo
Engineering, a small stock he has tried repeatedly to convince the investment director to add to the
monitored list. While the investment director does not like Vallo, Topel has faith in the company and
has gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tells
the group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the last
week at the office doing research on Koral. She has concluded that the stock is undervalued and
consensus earnings estimates are conservative. However, she has not filed a report for Samson, nor
does she intend to. She said she has purchased the stock for herself and advises her colleagues to do
the same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares of
Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district
to supplement her income. The dinner crowd includes many analysts and brokers who work at
nearby businesses. While waiting tables that night, Garvey hears two employees of a major
brokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say that
the broker's star analyst has issued a report with a buy rating on Metrona that morning. The diners
plans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager Mandy
Jones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard work
at the restaurant, praising her punctuality and positive attitude, and offers her two tickets to a
Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon
afterward, she receives a call from Harold Koons, one of Samson's largest money-management
clients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koons
wanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock
soared soon after it was added to his portfolio. Garvey prepared the original report on Anvil
Hammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanks
Koons, then asks her immediate supervisor, Karl May, about the gift from Koons but does not
mention the gift from Jones. May approves the Koons' gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.
Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garvey
uses a simple linear regression to estimate the relationship between GDP growth and Zenith's sales
growth. Next she uses a consensus GDP estimate from a well-known economic data reporting service
and her regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She
listens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job
responsibilities. Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage the
fixed-income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,
instead I work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an
online placement service. In it she makes the following two statements:
Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA
program is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of
financial instruments as well as knowledge of the forces that drive our economy and financial
markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.
As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.
Did the two statements in Garvey's biography violate Standard VII(B) Reference to CFA Institute, the
CFA designation, and the CFA program?
C
Explanation:
In the first statement, Garvey accurately calls herself a CFA Level 3 candidate, but she is not
permitted to project when she will receive the charter, as she must still meet the work and eligibility
restrictions and pass the Level 3 exam. Therefore, the first statement violates Standard VII(B).
In the second statement, the use of the CFA mark as a noun also violates the Standard VII(B). {Study
Session 1, LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is
commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant
relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent
market volatility has led Islandwide to incur record-high trading volume and commissions with
Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-
expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her
supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.
While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation
between the president and chief financial officer (CFO) of Progressive Industries. The president
informs the CFO that Progressive's board of directors has just approved dropping the company's cash
dividend, despite its record of paying dividends for the past 46 quarters. The company plans to
announce this information in about a week. Harris owns Progressive's common stock and
immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue
serving on the board of directors of Landmark Enterprises, a private company owned by her brother-
in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local
symphony on investing their large endowment and receives four season tickets to the symphony
performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great
performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris
two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following
year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark
participates in a conference call for several analysts in which the chief executive officer at Dex says
his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy
Dex at a 40% premium over the market price. Clark contacts a friend and relates the information
about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's
stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a
buy program for a client. This buy program has driven up the price of a small-cap stock, in which
Islandwide owns shares, by approximately 5% because the orders were large in relation to the
average daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm to
market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will
create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids
and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an
oversubscribed IPO. One of his clients has been complaining about the execution price of a trade
Park made for her last month, but Park knows from researching it that the trade received the best
possible execution. In order to calm the client down. Park increases her allocation of shares in the
IPO above what it would be if he allocated them to all suitable client accounts based on account size.
He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which
his brother-in-law is the primary beneficiary.
By accepting the trip from Quadrangle, has Harris complied with the CFA Institute Code and
Standards?
C
Explanation:
Standard I{B) Professionalism: Independence and Objectivity prohibits members and candidates from
accepting any gift that reasonably could be expected to compromise their independence and
objectivity. The purpose of the gift appears to be to ensure that Islandwide continues to do business
with Quadrangle and can be seen, therefore, as a clear attempt to influence her choice of brokers in
the future. (Study Session 1, LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is
commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant
relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent
market volatility has led Islandwide to incur record-high trading volume and commissions with
Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-
expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her
supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.
While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation
between the president and chief financial officer (CFO) of Progressive Industries. The president
informs the CFO that Progressive's board of directors has just approved dropping the company's cash
dividend, despite its record of paying dividends for the past 46 quarters. The company plans to
announce this information in about a week. Harris owns Progressive's common stock and
immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue
serving on the board of directors of Landmark Enterprises, a private company owned by her brother-
in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local
symphony on investing their large endowment and receives four season tickets to the symphony
performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great
performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris
two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following
year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark
participates in a conference call for several analysts in which the chief executive officer at Dex says
his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy
Dex at a 40% premium over the market price. Clark contacts a friend and relates the information
about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's
stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a
buy program for a client. This buy program has driven up the price of a small-cap stock, in which
Islandwide owns shares, by approximately 5% because the orders were large in relation to the
average daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm to
market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will
create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids
and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an
oversubscribed IPO. One of his clients has been complaining about the execution price of a trade
Park made for her last month, but Park knows from researching it that the trade received the best
possible execution. In order to calm the client down. Park increases her allocation of shares in the
IPO above what it would be if he allocated them to all suitable client accounts based on account size.
He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which
his brother-in-law is the primary beneficiary.
Has either Harris or Clark violated Standard 11(A) Integrity of Capital Markets: Material Nonpublic
Information?
C
Explanation:
Standard 11(A) Integrity of Capital Markets: Material Nonpublic Information prohibits members who
possess material nonpublic information to act on or cause others to act on that information.
Information disclosed to a select group of analysts is not made "public" by that fact. (Study Session 1,
LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is
commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant
relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent
market volatility has led Islandwide to incur record-high trading volume and commissions with
Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-
expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her
supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.
While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation
between the president and chief financial officer (CFO) of Progressive Industries. The president
informs the CFO that Progressive's board of directors has just approved dropping the company's cash
dividend, despite its record of paying dividends for the past 46 quarters. The company plans to
announce this information in about a week. Harris owns Progressive's common stock and
immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue
serving on the board of directors of Landmark Enterprises, a private company owned by her brother-
in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local
symphony on investing their large endowment and receives four season tickets to the symphony
performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great
performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris
two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following
year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark
participates in a conference call for several analysts in which the chief executive officer at Dex says
his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy
Dex at a 40% premium over the market price. Clark contacts a friend and relates the information
about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's
stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a
buy program for a client. This buy program has driven up the price of a small-cap stock, in which
Islandwide owns shares, by approximately 5% because the orders were large in relation to the
average daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm to
market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will
create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids
and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an
oversubscribed IPO. One of his clients has been complaining about the execution price of a trade
Park made for her last month, but Park knows from researching it that the trade received the best
possible execution. In order to calm the client down. Park increases her allocation of shares in the
IPO above what it would be if he allocated them to all suitable client accounts based on account size.
He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which
his brother-in-law is the primary beneficiary.
According to the Standards of Practice, with respect to the two offers from Adams and Baker, Harris:
C
Explanation:
Standard 1(B) Professionalism: Independence and Objectivity indicates that gifts from clients are
seen to less likely affect a member's independence and objectivity, and only disclosure is required.
The offer from Baker is based on future performance and is seen to carry greater risk of affecting
objectivity because preferential treatment for one client could be detrimental to others. Thus,
according to Standard IV (B) Duties to Employer: Additional Compensation Arrangements, Harris
must disclose the offer to her employer (in writing) and receive the employer's permission before
accepting the offer from Baker. (Study Session 1, LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is
commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant
relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent
market volatility has led Islandwide to incur record-high trading volume and commissions with
Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-
expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her
supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.
While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation
between the president and chief financial officer (CFO) of Progressive Industries. The president
informs the CFO that Progressive's board of directors has just approved dropping the company's cash
dividend, despite its record of paying dividends for the past 46 quarters. The company plans to
announce this information in about a week. Harris owns Progressive's common stock and
immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue
serving on the board of directors of Landmark Enterprises, a private company owned by her brother-
in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local
symphony on investing their large endowment and receives four season tickets to the symphony
performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great
performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris
two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following
year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark
participates in a conference call for several analysts in which the chief executive officer at Dex says
his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy
Dex at a 40% premium over the market price. Clark contacts a friend and relates the information
about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's
stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a
buy program for a client. This buy program has driven up the price of a small-cap stock, in which
Islandwide owns shares, by approximately 5% because the orders were large in relation to the
average daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm to
market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will
create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids
and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an
oversubscribed IPO. One of his clients has been complaining about the execution price of a trade
Park made for her last month, but Park knows from researching it that the trade received the best
possible execution. In order to calm the client down. Park increases her allocation of shares in the
IPO above what it would be if he allocated them to all suitable client accounts based on account size.
He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which
his brother-in-law is the primary beneficiary.
Has Michaels violated Standard 11(B) Integrity of Capital Markets: Manipulation with respect to any
of the following?
C
Explanation:
Michaels has not violated Standard 11(B) Integrity of Capital Markets: Market Manipulation by either
of these actions. In neither case is there the intent to mislead market participants. A large buy
program may well increase the price of a stock. The trading desk has informed market participants
that they will create additional liquidity for a period of 90 days after the offering and created no
expectation that the liquidity of the stock will permanently remain at that level. (Study Session 1, LOS
2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is
commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant
relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent
market volatility has led Islandwide to incur record-high trading volume and commissions with
Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-
expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her
supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.
While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation
between the president and chief financial officer (CFO) of Progressive Industries. The president
informs the CFO that Progressive's board of directors has just approved dropping the company's cash
dividend, despite its record of paying dividends for the past 46 quarters. The company plans to
announce this information in about a week. Harris owns Progressive's common stock and
immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue
serving on the board of directors of Landmark Enterprises, a private company owned by her brother-
in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local
symphony on investing their large endowment and receives four season tickets to the symphony
performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great
performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris
two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following
year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark
participates in a conference call for several analysts in which the chief executive officer at Dex says
his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy
Dex at a 40% premium over the market price. Clark contacts a friend and relates the information
about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's
stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a
buy program for a client. This buy program has driven up the price of a small-cap stock, in which
Islandwide owns shares, by approximately 5% because the orders were large in relation to the
average daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm to
market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will
create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids
and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an
oversubscribed IPO. One of his clients has been complaining about the execution price of a trade
Park made for her last month, but Park knows from researching it that the trade received the best
possible execution. In order to calm the client down. Park increases her allocation of shares in the
IPO above what it would be if he allocated them to all suitable client accounts based on account size.
He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which
his brother-in-law is the primary beneficiary.
According to Standard IV Duties to Employers, which of the following is most likely required of
Swamy? Swamy must:
A
Explanation:
According co Standard IV Duties to Employers, Swamy must secure written permission before
undertaking the investment advisory work for the symphony because this work competes with her
employer and could create a conflict of interest, as she is receiving compensation in the form of
season tickets. Her service on her brother-in-law's board may be subject to employer rules about
outside employment but is not covered by the Standard since there is no likely competition or
potential conflict with her employer. The question says most likely, so it is important to focus on rhe
key difference between the two outside activities. Both are compensated; the fact that one is cash
and the other tickets is irrelevant. The key difference is that for the symphony, Swamy is acting as an
investment advisor for a large endowment, which clearly competes with her employer's business.
(Study Session 1, LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is
commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant
relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent
market volatility has led Islandwide to incur record-high trading volume and commissions with
Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-
expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her
supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.
While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation
between the president and chief financial officer (CFO) of Progressive Industries. The president
informs the CFO that Progressive's board of directors has just approved dropping the company's cash
dividend, despite its record of paying dividends for the past 46 quarters. The company plans to
announce this information in about a week. Harris owns Progressive's common stock and
immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue
serving on the board of directors of Landmark Enterprises, a private company owned by her brother-
in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local
symphony on investing their large endowment and receives four season tickets to the symphony
performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great
performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris
two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following
year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark
participates in a conference call for several analysts in which the chief executive officer at Dex says
his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy
Dex at a 40% premium over the market price. Clark contacts a friend and relates the information
about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's
stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a
buy program for a client. This buy program has driven up the price of a small-cap stock, in which
Islandwide owns shares, by approximately 5% because the orders were large in relation to the
average daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm to
market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will
create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids
and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an
oversubscribed IPO. One of his clients has been complaining about the execution price of a trade
Park made for her last month, but Park knows from researching it that the trade received the best
possible execution. In order to calm the client down. Park increases her allocation of shares in the
IPO above what it would be if he allocated them to all suitable client accounts based on account size.
He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which
his brother-in-law is the primary beneficiary.
According to Standard IV Duties to Employers, which of the following is most likely required of
Swamy? Swamy must:
Which action by Park violated Standard III(B) Duties to Clients: Fair Dealing?
C
Explanation:
Standard III(B) Fair Dealing requires that shares of an oversubscribed IPO be prorated fairly to all
subscribers. Arbitrarily increasing the allocation to the "problem client" is a violation, as is the
resulting underallocation to the remainder of the firm's clients. (Study Session 1, LOS 2.a)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm
that employs three investment professionals and currently has approximately $250 million of assets
under management. The client base of United Partners is varied, and accounts range in size from
small retirement accounts to a $30 million private school endowment. In addition to Burton's
administrative responsibilities as the managing partner at United, he also serves as an investment
advisor to several clients. Because United Partners is a small firm, the company does not employ any
research analysts but instead obtains its investment research products and services from two
national brokerage firms, which in turn execute all client trades for United Partners. The
arrangement with the two brokers has enabled United to assure its clients that the firm will always
seek the best execution for them by having both brokers competitively bid for United's business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal
assets under management from MoneyCorp to United Partners. Burton provides Crossley with a
packet of marketing information that Burton developed himself. The packet contains five years of
historical performance data for the private school endowment, Unitcd's largest client. Burton states
that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in
the information packet are brief bios on each of United's three investment professionals. Crossley
notices that all three of United's investment professionals are described as "CFA charterholders," but
he is not familiar with the designation. In response to Crossley's inquiry. Burton explains the
significance of the program by stating that the designation, which is only awarded after passing three
rigorous exams and obtaining the requisite years of work experience, represents a commitment to
the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be
executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-
based broker/dealer but is not one of the two brokerage firms with which United currently does
business. Burton contacts Crossley's brother-in-law and determines that Security Bank's trade
execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for
directing any of United's clients to Security Bank's retail banking division. To bring Crossley on as a
client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all
of Crossley's trades but will use research materials provided by the other two brokers to assist in the
management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution
Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.
Burton attends the meeting, which is led by two investment bankers and one software industry
research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from
Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to
SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare
equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing
Crossley's order, Burton reads the SolutionWare marketing materials and performs a detailed
analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in
addition to Crossley's portfolio. United Partners, being a small firm, has no formal written policy
regarding trade allocation, employee participation in equity offerings, or established blackout
periods for employee trading. Burton adds his order to Crossley's order and places a purchase order
for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of
shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and his
own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless
pleased to have a position, though smaller than requested, in such a "hot" offering.
Did the marketing materials presented to Crossley by Burton violate Standard III(D) Performance
Presentation or Standard VI 1(B) Reference to CFA Institute, the CFA Designation, and the CFA
Program?
A
Explanation:
By presenting one client account as a representative composite of United's past performance, as well
as implying that it is representative of future performance, Burton is in violation of Standard III(D)
Performance Presentation. A member or candidate should give a fair and complete presentation of
performance and not state or imply that clients will obtain or benefit from a rate of return that was
generated in the past.
Burton's references to the CFA program in his marketing materials were acceptable according
Standard V1I(B) Reference to CFA Institute, the CFA Designation, and the CFA Program. The Standard
states that members and candidates may make references to the rigor of the program and the
commitment of members and candidates to ethical and professional standards. However, statements
must not exaggerate the meaning or implications of the designation, membership in CFA Institute, or
candidacy. {Study Session l, LOS 2.a)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm
that employs three investment professionals and currently has approximately $250 million of assets
under management. The client base of United Partners is varied, and accounts range in size from
small retirement accounts to a $30 million private school endowment. In addition to Burton's
administrative responsibilities as the managing partner at United, he also serves as an investment
advisor to several clients. Because United Partners is a small firm, the company does not employ any
research analysts but instead obtains its investment research products and services from two
national brokerage firms, which in turn execute all client trades for United Partners. The
arrangement with the two brokers has enabled United to assure its clients that the firm will always
seek the best execution for them by having both brokers competitively bid for United's business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal
assets under management from MoneyCorp to United Partners. Burton provides Crossley with a
packet of marketing information that Burton developed himself. The packet contains five years of
historical performance data for the private school endowment, Unitcd's largest client. Burton states
that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in
the information packet are brief bios on each of United's three investment professionals. Crossley
notices that all three of United's investment professionals are described as "CFA charterholders," but
he is not familiar with the designation. In response to Crossley's inquiry. Burton explains the
significance of the program by stating that the designation, which is only awarded after passing three
rigorous exams and obtaining the requisite years of work experience, represents a commitment to
the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be
executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-
based broker/dealer but is not one of the two brokerage firms with which United currently does
business. Burton contacts Crossley's brother-in-law and determines that Security Bank's trade
execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for
directing any of United's clients to Security Bank's retail banking division. To bring Crossley on as a
client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all
of Crossley's trades but will use research materials provided by the other two brokers to assist in the
management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution
Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.
Burton attends the meeting, which is led by two investment bankers and one software industry
research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from
Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to
SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare
equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing
Crossley's order, Burton reads the SolutionWare marketing materials and performs a detailed
analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in
addition to Crossley's portfolio. United Partners, being a small firm, has no formal written policy
regarding trade allocation, employee participation in equity offerings, or established blackout
periods for employee trading. Burton adds his order to Crossley's order and places a purchase order
for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of
shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and his
own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless
pleased to have a position, though smaller than requested, in such a "hot" offering.
The trading arrangement between Burton and Security Bank is most likely to be a violation of the CFA
Institute Soft Dollar Standards because:
C
Explanation:
According to CFA Institute Soft Dollar Standards, research paid for by client brokerage is the property
of the client, and the research should benefit the client. If the research is for the benefit of other
clients, in this case Crossley, disclosure must be made to the client, and prior permission must be
obtained. (Study Session I, LOS 3.b)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm
that employs three investment professionals and currently has approximately $250 million of assets
under management. The client base of United Partners is varied, and accounts range in size from
small retirement accounts to a $30 million private school endowment. In addition to Burton's
administrative responsibilities as the managing partner at United, he also serves as an investment
advisor to several clients. Because United Partners is a small firm, the company does not employ any
research analysts but instead obtains its investment research products and services from two
national brokerage firms, which in turn execute all client trades for United Partners. The
arrangement with the two brokers has enabled United to assure its clients that the firm will always
seek the best execution for them by having both brokers competitively bid for United's business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal
assets under management from MoneyCorp to United Partners. Burton provides Crossley with a
packet of marketing information that Burton developed himself. The packet contains five years of
historical performance data for the private school endowment, Unitcd's largest client. Burton states
that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in
the information packet are brief bios on each of United's three investment professionals. Crossley
notices that all three of United's investment professionals are described as "CFA charterholders," but
he is not familiar with the designation. In response to Crossley's inquiry. Burton explains the
significance of the program by stating that the designation, which is only awarded after passing three
rigorous exams and obtaining the requisite years of work experience, represents a commitment to
the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be
executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-
based broker/dealer but is not one of the two brokerage firms with which United currently does
business. Burton contacts Crossley's brother-in-law and determines that Security Bank's trade
execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for
directing any of United's clients to Security Bank's retail banking division. To bring Crossley on as a
client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all
of Crossley's trades but will use research materials provided by the other two brokers to assist in the
management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution
Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.
Burton attends the meeting, which is led by two investment bankers and one software industry
research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from
Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to
SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare
equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing
Crossley's order, Burton reads the SolutionWare marketing materials and performs a detailed
analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in
addition to Crossley's portfolio. United Partners, being a small firm, has no formal written policy
regarding trade allocation, employee participation in equity offerings, or established blackout
periods for employee trading. Burton adds his order to Crossley's order and places a purchase order
for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of
shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and his
own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless
pleased to have a position, though smaller than requested, in such a "hot" offering.
According to CFA Institute Standards of Professional Conduct, which of the following statements best
describes the circumstances under which Burton may enter into the referral agreement with Security
Bank? Burton may enter into the agreement:
C
Explanation:
Standard VI(C) Referral Fees states that members and candidates must disclose to their clients and
prospective clients any compensation or benefit received for the recommendation of services. In this
case. Burton may accept a referral fee if he discloses it to the client so that the client may evaluate
any partiality shown in the recommendation. (Study Session 1, LOS 2.a)