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

• Question 3651:

  Andrea Anastasio heads the research wing at HiLo Funds, Ltd., an investment advisory and money management firm. Andrea was recently informed by one of her junior analysts, Marcus Cambus, that the investment recommendation on HotPots food chain stock needed an immediate downgrade from hold to sell. This was based on talks with HotPots' management whom revealed that HotPots would be launching an ill-advised expansion plan soon (this information has been discussed in the financial newspapers, too). Andrea checked Marcus' analysis and agreed with the conclusions. Deciding to include this in her research newsletter, Andrea informed a few of the portfolio managers about the change. She did warn them that no action on the news should be taken before the newsletter was out for at least 4 days. However, Cotler, one of her subordinates and an AIMR member, inadvertently and prematurely sold off a large chunk of the holdings of Hotpots stock in one of his larger accounts. A month-end review of accounts DID NOT catch the violation. Which of the following is/are true?

  I. Andrea has not violated any AIMR code but Cotler has violated Standard III (B) - Duty to Employer.

  II. Andrea has violated Standard III (E) - Responsibilities of Supervisors.

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

  IV.

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

  A.

  III and IV only

  B.

  II and IV only

  C.

  I only

  D.

  II, III and IV only

  Correct Answer: B

  Since the information has been discussed in the financial newspapers, it certainly is not non-public information and no violation of Standard V (A) - Prohibition against Use of Non-Public Information has occurred. However, by treating one of his larger accounts differently, Cotler has violated Standard IV (B.3)

  -Fair Dealing which requires him to treat all of his clients fairly, without bias. By ignoring Andrea's admonitions and committing these violations, he has potentially harmed his employer (this is in breach of Standard II (B) - Professional Misconduct, not Standard III (B) - Duty to Employer, which is quite specific about its scope of activities covered). Andrea, on the other hand, has been negligent in not carrying out her supervisory duties. She should have either not revealed the change in investment recommendation to her employees or if she deemed it necessary to do so, should have takenappropriate steps to ensure that violations of her instructions did not occur. Simple verbal or even written warnings are not good enough to absolve her of violating Standard III (E) - Responsibilities of Supervisors. Further, the fact that a month-end review of accounts did not detect Cotler's irresponsible actions implies that stricter or more efficient monitoring is required of Andrea.

• Question 3652:

  Level ________ verification applies to the firm.

  A. II

  B. IV

  C. I

  D. III

  E. 0

  Correct Answer: C

  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 3653:

  ________ investing is investing with a view toward the social or political statements made by such an investment.

  A. None of these answers

  B. Charitable

  C. Political

  D. Social

  Correct Answer: D

  Fiduciaries often feel pressure from various constituencies to engage in social investing - investing with a view toward the social or political statements made by such an investment. Members should keep in mind that although such investment may be benign the fiduciary duty of prudence is paramount and dictates that trustees judge investments according to the criteria of risk and return, asset diversification and cost-conscious investing.

• Question 3654:

  With regard to international portfolios, if net performance is indicated, managers are required to disclose the assumed ________ for the benchmark.

  A. hedge

  B. disclosure

  C. tax rate

  D. differentials

  E. currency effects

  Correct Answer: C

  To be in compliance with the AIMR-PPS, the performance presentation for international portfolios must disclose whether composites and benchmarks are presented gross or net of withholding taxes on dividends, interest and capital gains; if net, the assumed tax rate for both the composite and the benchmark.

• Question 3655:

  Standard I of the Standards of Professional Conduct deals with ________.

  A. None of these answers

  B. Fundamental Responsibilities

  C. Fiduciary Duties

  D. Priority of Transactions

  E. Plagiarism

  Correct Answer: B

  Standard I of the Standards of Professional Conduct deals with Fundamental Responsibilities.

• Question 3656:

  One of the discretionary accounts managed by Farnsworth is the Jones Corporation employee profit-sharing plan. Jones, the company president, recently asked Farnsworth to vote the shares in the profit-sharing plan in favor of the company-nominated slate of directors and against the directors sponsored by a dissident stockholder group. Farnsworth does not want to lose this account because he directs all the account's trades to a brokerage firm that provides Farnsworth with useful information about tax-free investments. Although this information is not of value in managing the Jones Corporation account, it does help managing several other accounts. The brokerage firm providing this information also offers the lowest commissions for trades and best execution. Farnsworth investigates the directors' issue, concludes that management's slate is better for the long-run performance of the firm than the dissident group's slate and votes accordingly. Farnsworth:

  A. Did not violate the Standards in voting the share in the manner requested by Jones or in directing the trades to the brokerage firm.

  B. Violated the Standards in directing the trades to the brokerage firm but not in voting the shares as requested by Jones.

  C. Violated the Standard in voting the shares in the manner requested by Jones and in directing trades to the brokerage firm.

  D. Violated the Standards in voting the shares in the manner requested by Jones but not in directing trades to the brokerage firm.

  Correct Answer: A

  This question pertains to Standard IV (B.1) Fiduciary Duties, in particular members' responsibilities for voting proxies and the use of client brokerage. Because Farnsworth investigated the issue and concluded independently the best way to vote, he was not in violation of his fiduciary duties even though the company president asked him to vote the shares of the profit-sharing plan a certain way. Moreover because the brokerage firm provides the lowest commissions and best executions, he has met his fiduciary duties to the client in using this brokerage firm. Since he's not paying any extra money of the client for the information he's receiving from the brokerage firm, it does not matter.

• Question 3657:

  Complete the following: According to The Code of Ethics, members of AIMR shall: "Act with integrity, competence, ________ and in an ethical manner when dealing with the public, clients, prospects, employers, employees and fellow members."

  A. honorability

  B. dignity

  C. morality

  D. none of these answers

  E. virtue

  Correct Answer: B

  According to The Code of Ethics, members of AIMR shall: "Act with integrity, competence, dignity and in an ethical manner when dealing with the public, clients, prospects, employers, employees and fellow members."

• Question 3658:

  If AIMR Members, CFA Charterholders and Candidates do not follow the AIMR Performance Presentation Standards and they make material misrepresentations, they will be in violation of what Standard of Professional Conduct?

  A. Standard V (A)

  B. None of these answers. The PPS are voluntary, thus failure to follow them will result in no violation of the Standards of Professional Conduct.

  C. Standard I

  D. Standard V (B)

  Correct Answer: D

  Although the AIMR-PPS are not explicitly incorporated in the AIMR Standards of Professional Conduct, they should be relied on to help ensure no misrepresentation of performance occurs. Misrepresentation results in violation of Standard V (B) - Performance Presentation.

• Question 3659:

  Edwin Hubble, who works for a respectable investment advisory firm, recently found out that his supervisor has been engaging in "front-running," i.e., executing transactions for personal accounts before client accounts. As an AIMR member, he is required to do all of the following EXCEPT?

  A. Report the illegal activity to the appropriate regulatory authorities.

  B. Dissociate himself from the activity.

  C. Consult with the legal department on the matter.

  D. Inform senior management about the activity with a view of stopping it.

  Correct Answer: A

  Standard I does not require a member to report the illegal activity to the appropriate regulatory authorities, though it may be prudent to do so in many cases if it is evident that the activity is illegal.

• Question 3660:

  Which of the following is NOT true about the responsibilities of a member with supervisory duties, as specified by Standard III (E) - Responsibilities of Supervisors?

  A. Compliance activities must be designed to anticipate the activities most likely to result in misconduct.

  B. Compliance procedures must meet industry and regulatory standards.

  C. The supervisor is always accountable for the violations committed by those who report to him.

  D. If a member cannot discharge supervisory responsibilities due to an absence of compliance system, he or she should decline to accept the duties in writing till such a system is put into effect.

  Correct Answer: C

  Under Standard III (E) - Responsibilities of Supervisors, members must take reasonable care to ensure that their subordinates do not violate any laws or the code of conduct. This includes designing effective procedures to deter fraudulent activity. If such procedures are reasonable, meet industry and regulatory standards, are compatible with the AIMR code and are suitable for the firm in question, then the member cannot be held responsible for criminal activity clever enough to bypass the compliance system. Occurrence of such activity does indicate a need for a revamping of the system, though.