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

• Question 3601:

  In order to comply with Standard IV (B.4), Priority of Transactions, firms should prepare and distribute to firm personnel a code of ethics and compliance procedures. The code and procedures should do all of the following, EXCEPT:

  A. establish reporting and prior-clearance requirements.

  B. ensure that procedures will be enforced.

  C. consider special situations.

  D. contain disciplinary procedures.

  E. define personal transactions, investment and prohibited transactions.

  F. maximize the number of access persons.

  Correct Answer: F

  The question deals with the compliance procedures under Standard IV (B.4). Personal transactions must be defined to all employees. The number of access persons - those who have knowledge of pending or actual recommendations or action - should be limited, by implementing Fire Walls.

• Question 3602:

  Anabella Marconi is a junior industry analyst with Trackstar Blue, an investment advisory service firm. She has been assigned to follow 3 different firms in the telecommunication industry and reports directly to the senior manager, Constantine Naples. Constantine manages 9 other analysts and has to frequently visit Trackstar's other offices around the country. Recently, Anabella received a "friendly tip" from her friend, Socorro Shue, who works for Quicktel Com, one of the firms that Anabella is following. Socorro informed Anabella about an ultra-fast broadband channel that was about to be released by Quicktel. The channel had the potential to catapult Quicktel from the minor league to competing with national telecom giants. Anabella quickly prepared a memo for Constantine advising him of her change in the recommendation on Quicktel from hold to buy. Constantine briefly discussed the reasons with her and asked her to circulate the memo amongst the portfolio managers. Shortly thereafter, he left for San Francisco for a 10-day business trip. Anabella conferred with the portfolio managers, who then bought a substantial stake in Quicktel in the open market.

  I. Anabella has not violated any AIMR code but Constantine has violated Standard III (E) - Responsibilities of Supervisors.

  II. Anabella has violated Standard III (B) - Duty to Employer.

  III. Anabella has violated Standard IV (B.3) - Fair Dealing.

  IV.

  Anabella has violated Standard V (A) - Prohibition against Use of Non-Public Information.

  A.

  III and IV only

  B.

  II and IV only

  C.

  IV only

  D.

  I only

  Correct Answer: C

  By using a "friendly tip" from an insider in her recommendation, Anabella has violated Standard V (A) Prohibition against Use of Non-Public Information. Note that due to this, she is also in violation of Standard I - Fundamental Responsibilities and Standard II (B) - Professional Misconduct (In general, any violation of the laws of a regulatory or governmental body will automatically trigger an infringement of these two laws). However, since she does not handle any client accounts, she is not in a position to violate Standard IV

  (B.3) - Fair Dealing. The portfolio managers of Trackstar violate Standard IV (B.3) if they give preferential treatment to some of their clients while using the investment recommendation. Constantine, in spreading himself too thin to be able to effectively manage his subordinates and not checking to see if Anabella was violating any securities laws (insider trading in this case) is in violation of Standard III (E) - Responsibilities of Supervisors. In fact, he can be held criminally accountable for not curbing insider trading in his group through sheer negligence.

• Question 3603:

  "Prohibited transactions" are discussed in Standard IV (B.4), Priority of Transactions. Which of the following is NOT suggested as a firm policy?

  A. None of these answers.

  B. Participation by investment personnel in equity should be restricted.

  C. Firms must determine specific requirements relating to blackout period.

  D. All individuals who are involved in the investment decision-making process should be subject to the same restricted period.

  Correct Answer: A

  Under the compliance procedures for Standard IV (B.4), members and their firms should clearly define prohibited transactions so that employees completely understand their obligations to clients and their employer. Participation by investment personnel in equity or equity-based IPOs should be restricted. Also, firm procedures should prevent managers or employees from initiating trades in a security for which their firms have a pending buy or sell order within a 24-hour period. Firms must determine specific requirements relating to such blackout periods. All individuals who are involved in the investment decisionmaking process should be subject to the same restricted period.

• Question 3604:

  Victor Lazquez is an analyst with Amro Investments and follows the optical instrument manufacturers. In this capacity, he has learnt a few trade secrets pertaining to a leading edge firm, Fibroptica. Recently, he was approached by Fibroptica's competitor, Lensmakers Inc., who offered him a 3 month project on the optical industry practices. Victor realizes that such a project could reveal Fibroptica's trade secrets indirectly. However, he decides he will be very careful and accepts Lensmakers' offer. If he does not inform his employer about this project, he will

  A. not have violated any AIMR code since the project does not give rise to a conflict of interest with Amro's business.

  B. have violated Standard III (C) - Disclosure of Conflicts to the Employer.

  C. have violated Standard III (B) - Duty to the Employer.

  D. have violated Standard III (D) - Disclosure of Additional Compensation Arrangements.

  Correct Answer: D

  Victor's knowledge about the trade secrets have arisen in course of his employment with Amro. As such, he has an obligation to get written permission from Amro before he can accept any outside projects. Note that if such a project had been in direct competition with Amro's business, Victor would also have violated Standard III (B) - Duty to the Employer.

• Question 3605:

  According to the Standards of Practice Handbook, how frequently should managers gather information on client circumstances, occupation, investment objectives and risk tolerances?

  A. at least monthly

  B. at least annually

  C. at least every two years

  D. at least every five years

  Correct Answer: B

  Under Standard IV (B.2), members have a responsibility to consider carefully the needs, circumstances and objectives of the client when determining the appropriateness of a given investment action. In order to provide sound advice, members should gather information on client circumstances, occupation, investment objectives and risk tolerances at the inception of any client relationship and such an inquiry should be repeated at least annually. This will ensure that investment recommendations take into account the diversity and changing nature of portfolio and client characteristics.

• Question 3606:

  Which of the following are not required disclosures under the Performance Presentation Standards?

  A. Portfolio size range and percentage of total assets in the same class.

  B. The existence of a minimum asset size for the inclusion in composites.

  C. The inclusion of any non-fee paying portfolios in composites.

  D. Whether balanced portfolio segments are included in single-asset composites.

  Correct Answer: A

  The existence of a minimum asset size below which portfolios are excluded from a composite must be disclosed. Whether balanced portfolio segments are included in single-asset composites and an explanation of how cash has been allocated among segments must be disclosed. The inclusion of any non-fee-paying portfolios in composites and included in the definition of total firm assets must be disclosed. Only the number of portfolios, their description, the amount of assets in a composite, the percentage of the firm's total assets the composite represents need be disclosed. The portfolio size range or percentage of total assets in the same class are only recommended, not required disclosures.

• Question 3607:

  Information is ________ until it has been disseminated to the marketplace in general and investors have had an opportunity to react to the information.

  A. none of these answers

  B. walled

  C. material

  D. inside

  E. nonpublic

  Correct Answer: E

  Standard V (A) deals with the responsibility of members when they are dealing with the receipt and disclosure of material, nonpublic information. Information is "nonpublic" until it has been disseminated to the marketplace in general and investors have had an opportunity to react to the information. Mere possession of material nonpublic information will trigger trading restrictions under Standard V (A).

• Question 3608:

  Armina Stump is a junior portfolio manager on the verge of a promotion at Black Stallion, a strongly bullish fund management firm. Armina reports to Brouster Bragg, who has been with the firm for about 8 years. Brouster has been busy over the past 6 months and has not been able to keep up with account reviews but has complete faith in his subordinate managers. Now that it's time for Armina's promotion, he has been going over her transactions in the past 6 months and has discovered that all her trades are going through Blackwell Brokers. Blackwell is a well-reputed brokerage firm and is known to give extremely competitive prices and speed on trade executions. Due to the bulk transactions that originate with Armina, Blackwell has been providing research reports and investment tips to Armina which she has found extremely useful. Brouster does not find anything wrong with this, though he has now instructed Armina to file her monthly reports in more detail and in a timely fashion. She explained that due to company work and visits to their Los Angeles office, she had not been able to complete the reports for two months but she would take additional care in the future in this regard. Black Stallion has no official policy about filing of account reports. Given this entire sequence of events, your analysis as a student of AIMR ethics code should reveal which of the following?

  I. Armina has violated Standard I - Fundamental Responsibilities by not filing the reports on time.

  II. Brouster has violated Standard III (E) - Responsibilities of Supervisors by failing to enforce proper supervision.

  III.

  Armina has violated Standard IV (B.1) - Fiduciary Duties by routing her orders solely through Blackwell.

  A.

  I and II only

  B.

  II and III only

  C.

  II only

  D.

  I, II and III

  Correct Answer: C

  Since Black Stallion does not require a monthly report from its portfolio managers, Armina has not violated company policy because she is not responsible for monthly reports. However, Brouster still must develop procedures to monitor the actions of his subordinate portfolio managers since he is responsible for their actions. Indeed, the absence of such a policy at Black Stallion makes it incumbent upon Blackwell to be more diligent about monitoring. By failing to regularly review the accounts for 6 months, Blackwell has left open the possibility of manipulation by his subordinates and is thus in violation of Standard III (E) Responsibilities of Supervisors. Finally, since Armina is getting best price execution from Blackwell, she has not violated any Fiduciary duties. The fact that she receives free research advice due to bulk trades does not automatically imply that her client accounts are being hurt or being made to pay for the services. Additionally, it should be noted that if Blackwell were to wine and dine Armina as a symbol of appreciation or send her lavish gifts, Armina may be in violation of the Standard IV (A.3) -Independence and Objectivity

  -because acceptance of such gifts creates an appearance of impropriety even if none is present.

• Question 3609:

  Standard IV (B.4), Priority of Transactions, suggests implementing "________" in certain organizations to limit the number of access persons.

  A. Gag Orders

  B. Limit Orders

  C. Poison Pills

  D. Token Confines

  E. Fences

  F. Fire Walls

  G. Corrals

  Correct Answer: F

  Access or covered persons have knowledge of pending or actual investment recommendations or action. The firm's definition of access (covered) person should be broad enough to cover all people with that knowledge. Implementing "Fire Walls' - physical and procedural barriers to prevent the flow of information from one group to another - may be appropriate in certain organizations to limit the number of persons with such access.

• Question 3610:

  The performance benchmark for a currency overlay portfolio must be calculated in accordance with the portfolio's mandates, unless the benchmark is the ________ on a published benchmark.

  A. tax return

  B. cross hedge

  C. currency return

  D. mean value

  E. standard deviation

  Correct Answer: C

  Two portfolios with the same benchmark may give different mandates to the overlay portfolio managers. For example, when the mandate is based on the underlying assets, the return of the overlay performance benchmark will be different unless the underlying assets of two portfolios imply identical currency exposures. Consequently, the performance benchmark for a currency overlay portfolio must be calculated in accordance with the portfolio's mandates, unless the benchmark is the currency return on a published benchmark.