CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 3541:

  A supervisor complies with Standard III (E) by establishing and enforcing ________ to prevent violations.

  A. legal requirements

  B. fiduciary duties

  C. none of these answers

  D. code of ethics

  E. compliance procedures

  Correct Answer: E

  A supervisor complies with Standard III (E) by identifying situations in which legal violations or violations of the Code and Standards are likely to occur and establishing and enforcing compliance procedures to prevent such violations.

• Question 3542:

  Which of the following are characteristics of material nonpublic information?

  A. The information may be considered relevant by reasonable investors.

  B. The information would have a substantial impact on the market if released.

  C. All of these answers.

  D. The information has not been generally disclosed.

  Correct Answer: C

  Information is "material" if its disclosure would be likely to have an impact on the price of a security or if reasonable investors would want to know the information before making an investment decision. In other words, information is material if it would significantly alter the total mix of information currently available regarding a security. Information is "nonpublic" until it has been disseminated to the marketplace in general and investors have had an opportunity to react to the information.

• Question 3543:

  Michelieu tells a prospective client, "I may not have a long-term track record yet, but I'm sure that you'll be very pleased with my recommendations and service. In the three years that I've been in the business, my equity-oriented clients have averaged a total return of more than 26 percent a year." The statement is true, but Michelieu only has a few clients and one of his clients took a large position in a penny stock (against Michelieu's advice) and realized a huge gain. This large return caused the average of all of Michelieu's clients to exceed 26 percent a year. Without this one investment, the average gain would have been 8 percent a year. Has Michelieu violated the Standards?

  A. Yes, because the statement misrepresents Michelieu's track record.

  B. Yes, because the statement about return ignores the risk preferences of his clients.

  C. No, because the statement is a true and accurate description of Michelieu's track record.

  D. No, because Michelieu is not promising that he can earn a 26 percent return in the future.

  Correct Answer: A

  Standard IV (B.6), Prohibition against Misrepresentation. Although Micheliu's statement regarding the total return of his client's accounts on average may be technically true, it is misleading because the majority of the gain resulted from one client's large position taken against Micheliu's advice. He has not taken steps to present a fair, accurate and complete presentation of performance. Even though he is not guaranteeing future results, his words are still a misrepresentation of performance. Not disclosing the risk preferences of clients does not make a statement misleading and is not a violation of the Standards in this context.

• Question 3544:

  When creating composites, ________ returns must not be mixed with asset-plus-cash returns.

  A. model

  B. portfolio

  C. cash

  D. performance

  E. asset-only

  Correct Answer: E

  To be in compliance with the PPS, a firm creating a composite must meet this requirement.

• Question 3545:

  When complying with Standard IV (B.3) - Fair Dealing, there are certain points one should be sure to address when establishing compliance procedures. Which of the following points is NOT mentioned in the Standards of Practice Handbook?

  A. Simultaneous dissemination.

  B. Establish procedures for determining material change.

  C. Disclose levels of service.

  D. Publish personnel guidelines for predissemination.

  E. Limit the number of people involved.

  F. Be flexible on the time frame between decision and dissemination.

  G. Establish control over trading activity.

  Correct Answer: F

  Members have an obligation to ensure that their firms establish compliance procedures requiring all employees who disseminate investment recommendations or actions to treat clients fairly. The number of people privy to an investment recommendation should be limited. The amount of time that lapses between the decision and the dissemination of the recommendation should be shortened. Guidelines must be established to prohibit persons who have prior knowledge from discussing a pending recommendation. Trading activities should be monitored and controlled. Procedures should be established to determine whether a change in an investment recommendation is considered material. The organization should disclose to firms whether or not it offers two or more levels of service to clients for the same or different fees.

• Question 3546:

  Sid Barnes is the senior most partner with Noble and Noble, a well-known brokerage firm. Bruce Lohmann is a senior partner who reports to Barnes. Lohmann is an AIMR member while Barnes is not. Recently, NandN's research department identified a sterling investment opportunity and Barnes decided to allow some of the largest discretionary accounts to benefit from this first. He directed Lohmann to take the appropriate steps and in turn, Lohmann assigned Doug Jardine, a senior analyst, to complete the portfolio rebalancing. Doug, an AIMR member, informed Bruce and Barnes that such a course of action would be in violation of the AIMR Standard IV (B.3) - Fair Dealing. Barnes told him that he was not aware of any such code and that in any case, the firm had not adopted it. If Doug refuses to carry out the action but Lohmann does, which of the following is/are true?

  I. Barnes has violated the AIMR code.

  II. Lohmann has violated the AIMR code.

  III.

  Doug has violated the AIMR code by disobeying his superiors.

  A.

  I, II and III

  B.

  II only

  C.

  I and III only

  D.

  II and III only

  Correct Answer: B

  Barnes cannot be said to have violated the AIMR code since he's not a member or a CFA candidate and does not have to abide by those rules. Lohmann, on the other hand, has violated the code in two ways: first, as the senior most AIMR member in the firm, it was his responsibility to ensure that Barnes knew not only about the AIMR code but also Lohmann's obligation to uphold it. Barnes' ignorance about the code implies Lohmann violated Standard III (A) - Obligation to Inform Employer of Code and Standards. Second, by allowing some of the largest discretionary accounts to benefit from the research first, he violated AIMR standard IV (B.3) - Fair Dealing. Doug, on the other hand, dissociated himself from the activity and did not violate any standard.

• Question 3547:

  If the use of leverage is ________, the performance presented must include the effects of the leverage.

  A. discretionary

  B. mandatory

  C. nondiscretionary

  D. optional

  Correct Answer: A

  If the use of leverage is nondiscretionary (i.e. mandated by the client), performance must be presented on an all-cash basis.

• Question 3548:

  Which of the following statements is correct regarding Standard II (A) Use of Professional Designation?

  A. Joe Martin passed Level I and Level II of the CFA exams and is scheduled for the next Level III exam. He may write "Joe Martin, CFA II."

  B. All of these answers are correct.

  C. Joe Martin passed Level I and Level II of the CFA exams and is scheduled for the next Level III exam. He may write, "I am a Level III candidate in the CFA program."

  D. Joe Martin passed Level I and Level II of the CFA exams, but is not scheduled for the next Level III exam. He may write, "I am a Level III Candidate in the CFA program."

  Correct Answer: C

  "Joe Martin, CFA II" is a misrepresentation and a violation of Standard II (A). There is no designation for someone who has passed Level I, Level II, or Level III. He may not state he is a candidate unless he is registered for the next exam.

• Question 3549:

  Standard V of the Standards of Professional Conduct deals with Relationships with and Responsibilities to ________.

  A. Supervisors

  B. Employers

  C. Employees

  D. the Investing Public

  E. None of these answers

  Correct Answer: D

  Standard V of the Standards of Professional Conduct deals with Relationships with and Responsibilities to the Investing Public.

• Question 3550:

  Cornelius is a portfolio manager with Apex Investments, an investment advisory firm. Cornelius has, over the years, developed a special symbiotic relationship with Mike Milken, the owner of Milk 'em, Inc., a small brokerage firm. Cornelius puts subtle pressure on the trading desk at Apex to execute its trades through Milk 'em, thus generating brokerage revenue for Mike. In return, Mike recommends the services of Apex Investments to many of its clients. This arrangement is not disclosed to either the senior management at Apex nor to any of the clients. It has been observed by many at Apex Investments that the commissions charged by Milk 'em are 10-15% higher than those by other brokers. However, Cornelius has justified the higher costs by pointing to the extra revenue-flow from Milk 'em. Cornelius has:

  I. not violated any AIMR standards.

  II. violated Standard III (C) - Disclosure of Conflicts to Employer.

  III. violated Standard IV (B.8) - Disclosure of Referral Fees.

  IV.

  violated Standard IV (B.1) - Fiduciary Duties.

  A.

  II, III and IV only

  B.

  II and IV only

  C.

  I only

  D.

  II and III only

  Correct Answer: A

  Cornelius is clearly in a situation representing a conflict of interests. His arrangement and non-disclosure of the arrangement are unfair to the current clients of Apex and potential clients recommended by Milk 'em. They represent a violation of his fiduciary duties to the clients. By not informing senior management at Apex about the arrangement, he has also violated Standard III (B) - Disclosure of Conflicts to Employer.