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

• Question 3681:

  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. ensure that procedures will be enforced.

  B. contain disciplinary procedures.

  C. limit the number of access persons.

  D. establish reporting and prior-clearance requirements.

  E. define personal transactions, investment and prohibited transactions.

  F. maintain a list of clients and their holdings.

  G. consider special situations.

  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. A reporting system for all employees' personal transactions should be established, as well as procedures for special situations. Authority should be given to a compliance officer to enforce the procedures, which should include disciplinary action. Maintaining lists of client holdings is NOT a compliance procedure under Standard IV (B.4), but Standard IV (B.3).

• Question 3682:

  Which of the following AIMR Standards pertains to the use of professional designation?

  A. II (A)

  B. I

  C. III (A)

  D. III (B)

  Correct Answer: A

  Standard II (A) - Use of Professional Designation - states the responsibility of AIMR members, CFA charterholders and candidates for the CFA designation to use their professional designations, or their candidacies for the designation, properly and in a manner that does not mislead the investing public or others.

• Question 3683:

  In reference to AIMR-PPS, which of the following is/are true?

  I. The PPS are explicitly incorporated in the AIMR Code of Ethics and Standards of Professional Conduct.

  II. In case of system incompatibilities, the firm can claim compliance for only those assets that are measured and monitored on compatible systems.

  III.

  Plan sponsors, consultants and software vendors cannot claim compliance with the PPS; they can only endorse or require their clients to be in compliance.

  A.

  I, II and III

  B.

  III only

  C.

  II and III only

  D.

  I only

  Correct Answer: B

  The PPS are an adjunct to the AIMR Code of Ethics and Standards of Professional Conduct and not explicitly incorporated in that framework. Compliance with PPS is voluntary, not required.

• Question 3684:

  Grazelle Garbo has decided to change the recommendation on one of the firms she is following from hold to buy. She has communicated her research report to her senior manager, who is reviewing it. If the recommendation passes muster, it will be released three days from now. In the meanwhile, Grazelle has decided to follow her research and purchase the stock for several of her clients' accounts for which the stock is an appropriate investment and for which she has discretionary investment powers. In the course of the luncheon meeting that same day, she mentioned that she had bought the stocks for some client accounts to one of her prospective clients and described her research which caused her to change her recommendation. Grazelle has

  I. violated Standard IV (B.3) - Fair Dealing - by revealing the change in recommendation.

  II. violated Standard IV (B.5) - Preservation of Confidentiality - by revealing the information about stock purchase.

  III.

  did not violate the Ethics code.

  A.

  I and II only

  B.

  II only

  C.

  III only

  D.

  I only

  Correct Answer: D

  Since Grazelle has not revealed any information about the specific client accounts or any confidential information, she is not in violation of Standard IV (B.5) - Preservation of Confidentiality. However, by revealing the information on the change in recommendation prematurely to one of her prospective clients, she has violated Standard IV (B.3) - Fair Dealing. The information is potentially quite valuable and giving to one client before another in a partisan fashion is a violation of the AIMR code of Ethics.

• Question 3685:

  Regarding beneficiaries and remaindermen, current life-income beneficiaries prefer to receive ________; remaindermen would rather have ________.

  A. a minimal current income; a high rate of current income

  B. a high rate of current income; growth and stability of principal

  C. growth and stability of principal; a high rate of current income

  D. small incremental principal repayments; predictable current income

  E. none of these answers

  Correct Answer: B

  Trustees recognize a conflict of interests often exists between the primary or current beneficiaries of a trust and the remaindermen (secondary or later beneficiaries of the trust). Current life-income beneficiaries would prefer to receive a high rate of current income; remaindermen would rather have growth and stability of principal. Trustees thus have a duty to exercise their best skill and care to serve all beneficiaries impartially and with equal consideration of their needs.

• Question 3686:

  Abra, a vice-president at Mahogany, Inc., recently revealed - quite inadvertently - information about the tender offer from Mahogany to Kadabra, his friend who works for a rival firm. Kadabra, in turn, shared this information with his trading buddy, Cosmo. Cosmo immediately recognized that in light of this information, he was better off not participating in the offer. He went ahead and shorted the stock of Mahogany and reaped a tidy profit of about a hundred thousand dollars in a month's time when Mahogany tanked. In this case:

  I. Cosmo can be held liable for insider trading under SEC Section 10(b) and Rule 10b-5.

  II. Cosmo can be held liable for insider trading under the Misappropriation Theory.

  III. Cosmo can be held liable for insider trading under SEC Rule 14e-3 which prohibits insider trading based on information about tender offers.

  IV.

  Kadabra has breached his fiduciary duty toward Mahogany.

  A.

  I, II, III and IV.

  B.

  I only.

  C.

  none of these answers.

  D.

  III only.

  E.

  I and IV only.

  F.

  IV only.

  G.

  II and III.

  H.

  II only.

  Correct Answer: C

  This case is similar to the precedent set by United States vs. Chestman. According to the decision in the Chestman case, Kadabra was a "gratuitous recipient" of inside information and as such, had no responsibility to maintain its confidentiality. One party - according to this ruling - cannot unilaterallyimpose a relationship of confidence on another by simply sharing information. Thus, while Kadabra is a tippee, he has no fiduciary duty toward Mahogany. Now, the traditional theory applies only when there is a breach of a direct or inherited fiduciary duty or if the insider trading occurs in a tender offer and the trading is done by an insider or a tippee. So if an outsider - including Cosmo - received and traded based on this information, he could not be held liable under the Traditional Theory or the Misappropriation Theory. However, if Kadabra had traded for his own account, he would be liable under both the theories as well as under Rule 14e-3.

• Question 3687:

  Which of the following statements is NOT true relating to Standard IV (B.3) - Fair Dealing?

  A. This standard covers the conduct of two groups: those who prepare recommendations and those who take investment action.

  B. Members shall deal equally and objectively with all clients.

  C. Only through the fair treatment of all parties can the investment management profession maintain the confidence of the investing public.

  D. None of these answers.

  E. This standard covers investment action such as general purchases, new issues, or secondary offerings.

  Correct Answer: B

  The operative word is "fairly," not "equally." The term "fairly" implies that the member must take care not to discriminate against any customers or clients when disseminating investment recommendations. Members could not possibly reach all clients "equally" (i.e., simultaneously). In addition, each client has unique needs, investment criteria and investment objectives.

• Question 3688:

  ERISA fiduciaries must adhere to the following prudent procedures: -establish a written investment policy for the plan

  -________ plan assets - make investment decisions with the skill and care of aprudent expert

  -monitor investment performance

  -

  control investment expenses - avoid prohibited transactions

  A.

  distribute

  B.

  qualify

  C.

  account for

  D.

  none of these answers

  E.

  diversify

  Correct Answer: E

  These procedures are stipulated under the detailing of ERISA fiduciary duties, to ensure that the fiduciary complies with the duty to act with prudence.

• Question 3689:

  Which of the following is/are true about claims of compliance with the AIMR-PPS?

  I. If a firm is only in partial compliance with PPS, it must use a disclaimer specifying the exact areas of noncompliance.

  II. If the calculation methodology used by a firm follow standard industry practice, it is allowed to claim that the methodology is in compliance with the AIMR-PPS.

  III.

  If a member misuses the claim of compliance with the PPS, AIMR can publicly censure him, suspend his membership and revoke his CFA charter.

  A.

  I, II and III

  B.

  none of them

  C.

  III only

  D.

  I and III only

  Correct Answer: C

  A firm cannot claim partial compliance with the PPS. It is either fully compliant or non-compliant. Further, statements referring to the calculation methodologies being in accordance with the PPS are explicitly prohibited; the PPS are mainly presentation standards, not measurement standards. Violations are punishable by public censure, membership suspension and revocation of CFA charter.

• Question 3690:

  Under the Performance Presentation Standards, asset-weighting of portfolio returns within a composite is required. The ________ of period weightings must be used.

  A. beginning

  B. end

  C. none of these answers

  D. midpoint

  Correct Answer: A

  Composites must be asset weighted using beginning-of-period weightings.