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

• Question 3621:

  Level ________ verification applies to specific composites.

  A. II

  B. III

  C. I

  D. 0

  E. IV

  Correct Answer: A

  Level I verification applies to all firm composites. Level II verification requires a Level I verification at least on the specific composites being verified at Level II. (Note: There are only two levels of verification.)

• Question 3622:

  Which of the following is/are true about corporate pension plans?

  I. The plan manager owes a fiduciary duty to the plan sponsor.

  II. The plan manager is held to the "Prudent Man Rule."

  III.

  The plan manager is restricted by a legal list of statutes which limit investments to a specified set of securities.

  A.

  II and III only

  B.

  II only

  C.

  none of them

  D.

  I and II only

  Correct Answer: C

  Corporate pension plan managers are governed by ERISA (Employee Retirement Security Act, 1974). Under this, fiduciaries are held to the "Prudent Expert Rule" and are expected to conduct investments using appropriate analysis and expertise. They owe fiduciary loyalty solely to the plan beneficiaries and not to the plan sponsor or any other party whom may be involved. ERISA allows the plan manager to consider investments in a portfolio context rather than on an individual basis. Thus, it provides far more latitude and is much more sensible than the old rules that relied on legal lists of securities for investments. Standard IV

  (B.1) - Fiduciary Duties - and the Topical Study "Fiduciary Duty."

• Question 3623:

  Rebecca Dustin, a freelance research analyst, is currently working on a research study on the pharmaceutical industry for KLM Brokerage. She has been using KLM's research facilities in this endeavor. There has been no written agreement between Rebecca and KLM about the project, though there was a verbal agreement that KLM would provide reasonable support for the research. In return, KLM would pay for the final report in case she uncovers something worthwhile. Rebecca is now interviewing with Jacob and Associates, another brokerage firm, for a project and is considering submitting a rough draft of her KLM study to them. If she does this without KLM's permission, she would

  A. not be violating the AIMR code, because she is the owner of the study.

  B. be violating Standard III (B) - Duty to Employer - because KLM has property rights over the study.

  C. be violating Standard III (B) - Duty to Employer - because KLM has first rights over the study.

  D. not be violating the AIMR code, since she is not under any written obligation to KLM.

  Correct Answer: C

  Since Rebecca is acting as a freelance analyst under no written contractual agreement with KLM, the study does not belong to KLM. However, the verbal agreement and the support received from KLM make the first right to use the report a KLM property. Hence, Rebecca must allow KLM sufficient time to act upon her study before using it for any other purpose. Without KLM's permission, Rebecca cannot release the report without violating Standard III (B).

• Question 3624:

  Standard IV (A) is known as ________.

  A. Interactions with Clients and Prospects

  B. Preservation of Confidentiality

  C. Professional Misconduct

  D. Prohibition against Use of Material Nonpublic Information

  E. Duty to Employer

  F. Fair Dealing

  G. None of these answers

  H. Investment Process

  Correct Answer: H

  Standard IV (A) deals with the Investment Process. Standard III (B) deals with Duty to Employer. Standard IV (B.3) deals with Fair Dealing. Standard IV (B) deals with Interactions with Clients and Prospects. Standard V (A) deals with Prohibition against Use of Material Nonpublic Information. Standard IV (B.5) deals with Preservation of Confidentiality. Standard II (B) deals with Professional Misconduct.

• Question 3625:

  If the senior members of an investment advisory firm are unwilling to disseminate negative information about a firm, the advisory should

  A. none of these answers.

  B. refrain from making an investment recommendation citing proprietary reasons.

  C. disseminate only factual information about the firm and refrain from making any research comments.

  D. release the report without the negative information.

  Correct Answer: C

  "Procedures for Compliance," Standard IV (A.3)

• Question 3626:

  According to the AIMR-PPS, account portfolios must be grouped into composites

  A. based on similar investment strategy or objective.

  B. all of these answers are correct.

  C. based on the date the portfolios were initiated.

  D. based on the individual account manager's clientele.

  Correct Answer: A

  For the defined firm, all fee-paying accounts with investment discretion must be included in one or more composites. The account portfolios must be grouped into composites based on similar investment strategy or objective. Compliance cannot be met on a per composite or per product basis but can only be met on a firmwide basis.

• Question 3627:

  According to the AIMR-PPS, subsectors or carve-outs of larger international composites

  A. may be used to create stand-alone composites only if the subsectors are actually managed as separate entities, they need not have their own cash allocations or currency management.

  B. may be used to create stand-alone composites only if the subsectors are actually managed as separate entities with their own cash allocations and currency management.

  C. may never be included in the composite with the parent company.

  D. may never be used to create stand-alone composites under any circumstances.

  Correct Answer: B

  Subsectors or carve-outs of larger international composites may be used to create stand-alone composites only if the subsectors are actually managed as separate entities with their own cash allocations and currency management. Portfolios must not be switched from one composite to another unless documented changes in client guidelines make switching appropriate. This is a requirement for creation and maintenance of composites.

• Question 3628:

  Parts of the standards that are ________ must be observed.

  A. restraining

  B. mandatory

  C. recommended

  D. suggested

  E. inhibiting

  Correct Answer: B

  Some aspects of the Performance Presentation Standards are mandatory and must be observed, while other aspects are recommended.

• Question 3629:

  Standard III (B) deals with ________.

  A. Use of Professional Designation

  B. Fundamental Responsibilities

  C. Professional Misconduct

  D. Disclosure of Conflicts to Employer

  E. None of these answers

  F. Duty to Employer

  G. Obligation to Inform Employer of Code and Standards

  H. Plagiarism

  Correct Answer: F

  Standard I deals with Fundamental Responsibilities. Standard II (A) deals with Use of Professional Designation. Standard II (B) deals with Professional Misconduct. Standard II (C) deals with Plagiarism. Standard III (A) deals with the Obligation to Inform Employer of Codes and Standards. Standard III (B) deals with the Duty to Employer. Standard III (C) deals with Disclosure of Conflicts to Employer.

• Question 3630:

  When a manager is responsible for the portfolios of pension plans or trusts, the duty of loyalty is owed to the ________.

  A. entity who hires the manager

  B. corporation

  C. none of these answers

  D. manager's supervisor(s)

  E. stockholders of the firm

  F. board of directors

  G. investing public

  Correct Answer: C

  The first step in fulfilling a fiduciary duty is to determine what the responsibility is and to who it is owed. Members should take particular care in determining the identity of the "client" to whom the duty of loyalty is owed. In the context of an investment manager managing the portfolios of pension plans or trusts, the client is not the person or entity who hires the manager but, rather, the beneficiaries of the plan or trust. The duty of loyalty is owed to the beneficiaries.