2016 FRM Quick Sheet

Reading 2 Guidance for Standard I-VII FinQuiz.
com
FinQuiz.com
CFA Level II Item-set – Solution
Study Session 1
June 2018
Copyright © 2010-2018. FinQuiz.com. All rights reserved. Copying, reproduction

or redistribution of this material is strictly prohibited. info@finquiz.com.
FinQuiz.com © 2018 - All rights reserved.

Reading 2 Guidance for Standard I-VII FinQuiz.com
FinQuiz Level II 2018 – Item-sets Solution
Reading 2: Guidance for Standard I-VII
1. Question ID: 10536

Correct Answer: A
Standard II (A) Material Nonpublic Information prohibits members/candidates who possess
material nonpublic information, which could affect the value of the security, from act or
causing others to act/trade on the information. Information is considered to be nonpublic until
it has been publically made available in the marketplace. This standard does not prohibit
members/candidates to use items of non-material or material and public information to form
an opinion regarding a potential corporate action. This holds true even if the
member/candidate’s analysis leads him/her to producing conclusions which comprise of
material nonpublic information. This is termed as the mosaic theory.
By using his observations of Y.T. Automobiles’ production site to produce his conclusion,
Webber has not violated this standard (with the information obtained from the observations
constituting items of material, public information as well as non-material non-public
information). This holds true despite the fact that Webber used the information to conclude
that the manufacturer could be at risk of being acquired in a takeover or could file for
bankruptcy (which itself can be considered material nonpublic information that investors
would like to know). Furthermore the discussions with industry experts and representatives
from different manufactures as well as the industry information used as part of the analysis do
not violate this standard. In short, Webber has used mosaic theory to arrive at his conclusion
and has thus not violated this standard.
Standard V (A) Diligence and Reasonable Basis requires members and candidates to exercise
thoroughness, independence, and diligence when conducting investment analysis, making
investment recommendations and taking investment action. Additionally the standards
require members to have a reasonable and adequate basis supported by an appropriate level of
research and thorough investigation. Webber’s conclusion is backed by thorough research
and investigation and is thus in compliance with this standard.

Correct Answer: C
Standard II (B) Market Manipulation prohibits members and candidates from “engaging in
practices that distort prices or artificially inflate trading volume with the intent to mislead
market participants.” Transactions that artificially distort prices or volume to give the
impression of activity or price movement in a financial instrument reflect violations.
By transferring stocks, possessing a low level of liquidity, from the distressed fund to the
developed equity fund, Bridges has violated this standard. This is because he has transferred
stocks to the latter fund to artificially increase the demand for these stocks. Although this
action has been done to improve the value of stocks which may benefit potential investors,
such an activity deceives potential investors into believing the stocks they are buying are
highly liquid and attractively priced.

Standard III (C) Suitability requires members and candidates, in advisory roles, to make a
reasonable inquiry into the client’s investment experience, risk and return objectives, and
financial constraints and must reassess and update this information regularly. The standard
also requires recommending investments and taking investment actions which are consistent
with the client’s financial constraints, risk and return objectives, constraints, and written
mandates. Additionally members/candidates must judge the suitability of the investment in
the context of the client’s total portfolio.
The process of transferring securities from the former to the latter fund does not violate this
standard as these stocks are not owned by any clients nor recommended at the time of the
transfer.

Correct Answer: A
Webber has described distressed securities as possessing a low level of liquidity. In addition
such stocks of distressed companies are generally highly risky and require a long-term
investment horizon. These securities are suitable for those investors with high risk tolerances;
sufficient liquidity reserves/low liquidity requirements; and an intermediate to long-term
investment horizon making them capable of tolerating the associated risks.
Based on standard III (C) Suitability’s requirements, recommending these stocks to client
categories A, B and E violate this standard. This is because:
• client category A has a short-term time horizon, significant liquidity requirements, and a
low risk tolerance level;
• client category B has significant liquidity requirements;
• client category E has a below average risk tolerance; making such an investment highly
unsuitable for all three categories.
Additionally by sending out the recommendation to existing clients only as opposed to

suitable prospective clients and existing clients, standard III (B) Fair Dealing has been
violated. This standard requires members and candidates to deal fairly with clients when
disseminating investment recommendations and in their professional activities.

Correct Answer: C
All the three client categories to receive the recommendation should not have received such
an investment recommendation (see the solution to Part 3).

Correct Answer: B
Standard III (D) Performance Presentation requires members and candidates to make every
reasonable effort to ensure that the performance they present is fair, accurate, and complete.
Members and candidates should not mislead clients by misrepresenting their past
performance or reasonably expected future performance.
By presenting the performance attained by Emerson at Denver Associates as being attained at

Holler and Brookes Associates, the advertisement has violated this standard.

Standard V (C) Record Retention requires members and candidate to “develop and maintain
appropriate records to support their investment analysis, recommendations actions and other
investment related communications with clients and prospects.” This standard is not relevant
in the context of the advertisement.
Standard VII (B) Reference to CFA Institute, the CFA Designation, and the CFA Program
requires members and candidates to avoid misrepresenting or exaggerating the “meaning or
implications of membership in CFA institute, holding the CFA designation or candidacy in
the CFA Program.” Additionally, there is no such thing as a partial designation.
Forecasting that Emerson will successfully complete and pass the Level III examinations
violates this standard. Additionally indicating that Emerson will achieve the completion
status following the upcoming June examinations violates this standard as there is no such
designation.

Correct Answer: B
The code of ethics requires members and candidates to:
• Act with integrity, competence, diligence, respect, and in an ethical manner with the
public, clients, prospective clients, employers, employees, colleagues in the investment
profession, and other participants in the global capital markets.
• Place the integrity of the investment profession and the interests of clients above their
own personal interests.
• Use reasonable care and exercise independent professional judgment when conducting
investment analysis, making investment recommendations, taking investment actions,
and engaging in other professional activities.
• Practice and encourage others to practice in a professional and ethical manner that will
reflect credit on themselves and the profession.
• Promote the integrity of and uphold the rules governing capital markets.
• Maintain and improve their professional competence and strive to maintain and improve
the competence of other investment professionals.
The requirement that members and candidates/investment professionals must exercise

diligence, independence, thoroughness and independence when analyzing investments,
making recommendations or taking investment actions is covered by the CFA Institute’s
Standards of Professional Conduct [Standard V (A) Diligence and Reasonable Basis].

Correct Answer: B
When managing accounts to a specific mandate, strategy or investment style, the CFA
Institute Standards of Professional Conduct require members and candidates to, “make
investment recommendations or take investment actions that are consistent with the stated
objectives and constraints of the portfolio.’
Based on the investment policy of Grace Incorporated’s pension plan, Peltier will need to
assure he does not make allocations to growth stocks, and chooses securities which bring
industry diversification (belongs to industries distinct from Grace Incorporated) and are
securities of stable companies.

Based on the data provided, Peltier should ignore stock B altogether as it belongs to the same
industry as the surgical manufacturer.
Peltier cannot choose stock A as its high P/E and P/B ratio (11.2 and 13.4, respectively)
indicate it is a growth stock. Similarly the high projected EPS growth further confirm that it is
a growth stock. Thus Peltier should not consider stock B for inclusion to the plan’s
investment account.
Peltier may select stock C for inclusion into the plan’s investment account. The low P/E ratio
and high P/B ratios (3.8 and 13.6, respectively) indicate the stock is a balanced stock.
Additionally, stock C belongs to the automobile manufacturing industry which indicates it
will bring industry diversification to the plan’s account. By allocating stock C to the
investment account, Peltier does not violate the standards.
Thus by selecting stock B for the plan’s investment account, Peltier has violated standard
III(C) Suitability as he has not followed the plan’s mandate pertaining to industry
diversification.

Correct Answer: A
Standard III (B) Fair Dealing requires members and candidates “to deal fairly and objectively
with all clients when providing investment analysis, making investment recommendations,
taking investment action, or engaging in other professional activities.” By allocating 80% of
the purchased shares to suitable client accounts, Lawson has not violated this standard.
However by not allocating the 20% portion to interested clients and holding them back for an
eight-month period, Lawson has violated this standard as she has denied the interest clients of
these oversubscribed corporation shares.
Standard III (C) Suitability requires members and candidates to make a reasonable inquiry
into the client’s circumstances, risk and return objectives and financial constraints prior to
making any investment recommendation or taking investment action, determining whether
the investment is suitable to the client’s financial situation and consistent with the client’s
written objectives, and judging the suitability of investments in the context of the client’s
total portfolio. There is nothing in the case which indicates Lawson has violated the standard.
There is nothing to indicate that standard III (A) Loyalty, Prudence and Care has been
violated.
Additionally standard VI (B) Priority of Transactions requires members and candidates to

place investment transactions of clients and employers ahead of transactions in which a
member and candidate is the beneficial owner. By depositing 20% of the oversubscribed
corporation’s shares in her account for a period of eight months, instead of the investment
accounts of interest clients, Lawson is benefitting from any potential increase in the stock’s
value.

Correct Answer: C
Should Lawson accept the round trip cruise offer, Lawson will be violating standard I (B)
Independence and Objectivity which requires members and candidates not to “accept any gift,
benefit, compensation or consideration that reasonably could be expected to compromise

their independence and objectivity.” The condition (to allocate 40% of the shares to
Schmidt’s account in exchange for a reward) attached the cruise trip will itself impair
Lawson’s independence and objectivity since, after accepting the offer, she will favor
Schmidt and allocate a portion of the corporation’s shares to his account only rather to the
accounts of other individuals who have expressed an interest in the shares.
The allocation of the 40% shares solely to Schmidt’s account additionally suggests that
Lawson has violated the standard, III (B) Fair Dealing. Schmidt should have allocated the
shares proportionally to those accounts expressing an interest, for which the investment is
suitable, as well as distribute amongst suitable accounts on a pro-rata basis.
Standard IV (B) Additional Compensation Arrangements requires members and candidates

not to accept any gifts, benefits, compensation or consideration that competes with, or might
reasonably be expected to create a conflict of interest with their employer’s interest unless
they obtain written consent from all parties involved. Unless Lawson does not obtain consent
for the trip, she will violate this standard. She has informed her employer, MIA, of the offer
and thus does not violate this standard.

Correct Answer: A
Standard II (A) Material Nonpublic information prohibits members and candidates from
trading on material non-public information or causing others to trade on such information.
A problem with the source code of a software development corporation’s major product line
is a piece of material information. However it is not necessary that the problem may lead to
the discontinuation of the corporation’s major product line and result in a drop in forecasted
product revenues. The two retirees are merely speculating and sharing this information with
others (either with his friend or fellow portfolio manager) does not result in Brewer violating
this standard.

Correct Answer: C
Standard III (C) Suitability requires members and candidates to make investment
recommendations and take investment actions which are consistent with the client’s
investment account and risk and return objectives as well as constraints. However members
and candidates can only make suitable investment recommendations or take investment
actions provided clients are forthcoming in providing the relevant information to their
portfolio managers.
The chief investment officer's claims are not valid. This is because the officer has not
prohibited the portfolio manager from avoiding emerging market stocks. Additionally, the
chosen stocks meet the socially responsible criteria. Thus by including such stocks, Brewer
has not violated this standard.
Additionally, Brewer has not violated III (B) Fair Dealing.


Correct Answer: C
Standard IV (C) Responsibility of Supervisors requires members and candidates to prevent
and detect any violations of the codes and standards, laws, rules and/or regulations by anyone
subject to their supervision or authority.
As the portfolio manager of The Senior Citizen Endowment’s portfolio, Brewer has not
violated any standards (See the solution to Part 5). Thus there are no violations which Peltier
need to prevent and/or detect. Thus as supervisor he has not violated this standard.
Standard III (C) Suitability is not relevant in this context.

Correct Answer: C
Standard II (A) Material Nonpublic Information prohibits members and candidates, “who
possess material nonpublic information that could affect the value of the security, from taking
action on it or causing others to take action on the information.” Although the information on
the G&J’s expansion plans may be material and nonpublic, the discussion between Sutton
and Mullins does not violate this standard as no effort was made to act or cause someone to
act on the information.
Standard III (E) Preservation of Confidentiality requires members and candidates to keep
information about current, former, and/or prospective clients confidential unless the client
permits disclosure; disclosure is required by law; or the information concerns illegal activities
on part of the client. As the investment banker of G&J, Sutton has the obligation to preserve
the confidentiality of any information received on his client’s expansion plans, which he has
exclusively received. Thus by sharing these plans with Mullins, he has violated this standard.
Standard IV (C) Responsibility of Supervisors requires members and candidates to make

reasonable efforts to prevent and detect any violations of any applicable laws, codes and
standards, rules and regulations by anyone subject to their supervision or authority. This
responsibility includes implementing adequate compliance procedures, making reasonable
efforts to ensure these procedures are monitored and enforced. By implementing a structure
to control the interaction between the two departments (investment banking and investment
counseling/management departments) and not monitoring the effectiveness of the structure
nor ensuring the flow of information between the departments is limited, Herrera as a senior
compliance officer has violated this standard.

Correct Answer: A
Standard I (B) Independence and Objectivity requires members and candidates to use
reasonable care and judgment to achieve and maintain independence and objectivity in their
professional activities. Any recommendations should be independently arrived at. If
investment recommendations are made following instructions, which conflict with the
member/candidate’s recommendations, the member or candidate is in violation of this
standard.
The best action for Mullins to undertake would be to develop a research report and conclude
it with a recommendation solely based on his analysis of G&J’s future prospects. Since

Mullins believes G&J’s expansion plans may not succeed, he will probably produce a
different recommendation to the buy recommendation instructed by Herrera.

Correct Answer: B
Standard III (A) Loyalty, Prudence and Care requires members and candidates to act for the
benefit of their clients and place client interests first. The standard also requires members and
candidates to maintain their duty of loyalty to their clients, act with reasonable care, and
exercise prudent judgment. In the course of their duty to their clients members and candidates
should seek best price and execution.
Although Mace Brokerage charges fees higher than the existing broker, the access to global
and local research as well as higher execution speed (relative to the current broker) justify the
fees. Thus by appointing Mace Brokerage, Delgado will not be violating this standard but
instead will be providing Mighty-You Inc. with greater benefits (i.e. execution).
Although Harold and Haroon Associates charges fees lower than the existing broker the
execution speeds are relatively slower. Additionally the firm provides access to local research
only. Thus the relatively slow execution speed makes this broker unsuitable for Mighty-You
Inc. Thus the appointment of this broker-candidate will violate the standard in question as
Delgado will not be providing its client with best execution.

Correct Answer: B
Standard III (C) Suitability requires members and candidates, in an advisory relationship, to
make investment recommendations which are suitable to the individual client’s financial
situation, risk and return objectives, and written investment mandates. Additionally, members
and candidates must judge the suitability of the investment in the context of the total client
portfolio.
There is a lack of sufficient evidence which may suggest that the firm may have conducted a
suitability analysis prior to implementing the derivative strategy on a portion of the client
portfolios. It is possible that such a strategy may not be suitable for or may be expressly
prohibited by some clients. Thus by implementing a derivative strategy, the firm has violated
this standard.
Standard V (A) Diligence and Reasonable Basis requires members and candidates to “have a
reasonable and adequate basis, supported by appropriate research and investigation, for any
investment analysis, recommendation or action.” The volatility of the national market, which
in turn has substantially increased the risk of several securities in client portfolios, justifies
the use of derivative to offset these risks. Thus this standard has not been violated.
Under Standard V (B) Communication with Clients and Prospective Clients, member and
candidates must disclose to clients the basic format and general principles used to analyze
investments, select securities and construct portfolios and promptly disclose any material
changes to the processes. By delaying the notification to clients (regarding the inclusion of
derivatives in their portfolios) for a period of one month, this standard has been violated.


Correct Answer: A
Policy 1:
Standard II (A) Material Nonpublic Information requires members and candidates to establish
a firewall between the investment banking and investment research divisions to prevent the
flow of material nonpublic information. Interdepartmental communication must preferably
pass through a clearance area within the firm in either the compliance or legal department.
Allowing unsupervised communication between the two departments (investment banking
and counseling, in the firm’s case) makes Policy 1 inconsistent with this CFA Institute
Standards of Professional Conduct standard.
Policy 2:
Standard III (A) Loyalty, Prudence and Care requires members and candidates to vote proxies
in the best interests of clients and their ultimate beneficiaries as well as to vote proxies in an
informed and responsible manner. A fiduciary who votes blindly with management on non-
routine governance issues violates this standard. Due to cost and benefits, it is not necessary
to vote all proxies. Policy 2 is not consistent with this standard as it does not call for voting
in the best interests of clients and ultimate beneficiaries. This is because the policy calls for
taking into account any benefits to the firm, in addition to clients’ benefits, and ignores the
benefits to beneficiaries (accruing to them as a result of the votes cast). In addition, the policy
requires votes to be cast in line the firm’s management which hampers the
member/candidate’s ability to cast his or her vote in the best interests of its clients and
ultimate beneficiaries.
Policy 3:
Under Standard V (C) Record Retention members and candidates are required to develop and
maintain appropriate records to support their investment analysis, recommendation, actions
and other investment related communications with clients and prospective clients. In the
absence of any regulatory requirements, the CFA Institute recommends a holding period of at
least seven years. By complying with local record retention regulations, policy 3 is consistent
with this standard.

Correct Answer: A
By allocating highly risky securities to the investment portfolios of his risk-averse clients
(which require less risky securities), Strickland has clearly violated the standard, III (C)
Suitability.
Additionally, Strickland’s statement does not justify the addition of these securities to the
portfolios. The expected decrease in market and securities’ volatility is merely a prediction
which may not materialize after the quoted six-month period. Thus by basing the purchase
decision on a mere prediction of a market factor, Strickland has violated the standard V (A)
Diligence and Reasonable Basis.
There is nothing which may suggest Strickland has been dishonest or engaged in fraudulent
practices adversely affected his professional reputation, integrity or competence. Thus
Strickland has not violated standard I (D) Misconduct.
Strickland has not violated Standard I (C) Misrepresentation nor has he violated standard III
(A) Loyalty, Prudence and Care. The justification statement does not guarantee the volatility

will fall from its current levels, but instead uses the term ‘projected’ which implies Strickland
has not guaranteed any expected performance and thus has not violated standard III (D)
Performance Presentation.

Correct Answer: A
Standard VI (A) Disclosure of Conflicts requires members and candidates “to make full and
fair disclosures of all matters that could reasonably be expected to impair their independence
and objectivity or interfere with their respective duties to their clients, prospective clients, and
their employer.” The disclosures need to be prominent, delivered in plain language and
communicated effectively.
Ideally, to avoid the appearance of any conflicts, Howell should not be asked to cover a
company with which he may be affiliated. Howell’s family relationship with H.O. Zone’s
executive director must be disclosed in his research report as well as to his employer, Trinity
Associates. Without taking any steps to minimize this potential conflict and failing to make
the relevant disclosures to clients, prospective client and to his employer, Howell has violated
this standard.
Standard II (A) Material Nonpublic Information requires members and candidates who
possess material nonpublic information, which has the potential to affect the value of a
security, from acting or causing others to act on the information. There is lack of evidence to
suggest that Howell may have not independently arrived at a buy recommendation or used
insider information to arrive at the recommendation. A mere speculation by Thackeray does
not necessarily mean Howell has used insider information. Additionally by using the
recommendation, Thackeray has not violated this standard (due to the uncertainty of the
information being acquired from insider resources or not).
Standard V (A) Diligence and Reasonable Basis requires members and candidates to “have a
reasonable and adequate basis, supported by appropriate research and investigation, for any
investment analysis, recommendation or action.” Additionally when using secondary
research it is necessary to make reasonable and diligent efforts in evaluating the objectivity
and independence of the recommendations; reviewing the assumptions used, the rigor of
analysis performed, and the date/timeliness of the research.
The question of whether Howell may have arrived at his buy recommendation using insider
sources remains. Without thoroughly evaluating the independence and/or objectivity of the
recommendations and relying on the recommendation Thackeray has violated this standard.

Correct Answer: A
Standard I (C) Misrepresentation prohibits members and candidates from knowingly making
any misrepresentations relating to investment analysis, recommendations, actions or other
professional activities in oral or written communications. The standard requires members and
candidates to identify or acknowledge the source of ideas or material that is not their own.
Additionally it is necessary to cite all sources which are used to develop research reports and
work products (other than those obtained from recognized statistical and financial reporting
sources).

Although Byrd’s model has been considerably modified from the model developed by the
pharmaceutical chief industry executive, Byrd should acknowledge the fact that his model’s
structure was inspired by the latter model and continues to use the same factors as those
employed by the latter model. By not doing so and marketing the model as his own, he has
violated the standard.
According to this standard, Byrd must cite the annual industry forecasts obtained from
discussions with industry experts but not the industry reports published by the local
government agency in his research report.

Correct Answer: B
Standard VII (B) Reference to CFA Institute, the CFA Designation, and the CFA Program
requires members and candidates to avoid misrepresenting or exaggerating the “meaning or
implications of membership in CFA institute, holding the CFA designation or candidacy in
the CFA Program.” Additionally, there is no such thing as a partial designation.
The newsletter has accurately referred to Terry and Sosa as CFA Level III candidates.
However by stating that Terry will attain a ‘Passed Finalist’ status, the newsletter has
incorrectly referenced Terry’s candidacy in the CFA Program and this reflects a violation of
this standard. This is because there is no such status.

Correct Answer: C
Standard I (D) Misconduct prohibits members and candidates from engaging in any
professional conduct involving fraud, deceit, dishonesty or committing any act that reflects
adversely on their professional reputation, integrity or competence. By assuring McFadden
that the financial consultancy department will provide the required tax consultancy services
when the firm outsources such services, Terry has been dishonest with her client and has
violated this standard.
Standard II (B) Market Manipulation prohibits members and candidates from engaging in
practices that distort the prices or artificially inflate trading volume with the intent to mislead
market participants. However the standard does not prohibit transactions done for tax
purposes. Thus the tax-loss harvesting strategy recommended by Terry (selling securities
which have fallen in value to offset the gains on securities which have risen in value) does not
violate this standard.
Standard III (A) Loyalty, Prudence and Care requires members and candidates to act in the
best interests of clients, place client interest before their own, use reasonable care, and
exercise prudent judgment when managing the accounts of their clients. As McFadden’s
financial consultant, Terry has acted in his client’s best interests. Thus she has not violated
this standard.
Standard I (C) Misrepresentation requires members and candidates to have knowledge of all
the services the firm provides and should recommend where a client can obtain the requisite
service should the firm not be able to provide it. By assuring her client that the firm is able to
address her taxation concerns and is able to provide the necessary consultancy services, Terry
has violated his standard. This is because the firm outsources tax consultancy rather than
providing it internally. Additionally, Terry has misrepresented the tax-loss harvesting strategy

by incorrectly stating that it will help to reduce the portfolio’s taxable base in both the current
and future years. In reality, tax-loss harvesting reduces the portfolio’s taxable basis in the
current year to increase it in the future.

Correct Answer: C
Practice 1:
Standard IV (A) Loyalty requires members and candidates, in matters related to their
employment, to act in their employer’s best interest and not deprive them of the advantage of
their skills and abilities or cause any harm to their employers. Members/candidates must
continue to work in their employer’s best interest until resignation is effective.
A buyout of the firm’s financial consultancy department by the firm managers does not
constitute a violation of this standard. This is because the firm may choose how to respond to
such an action. Thus practice 1 does not reflect a violation of this standard.
Based on standard VI (A) Disclosure of Conflict’s requirements (see the solution to Part 1), a
meeting between some of the firm’s managers after office hours does not constitute a
violation of this standard.
Thus practice 1 does not reflect any violations of the CFA Institute Standards of Professional
Conduct.
Practice 2:
The portfolio managers have complied with standard III (A) Loyalty, Prudence and Care by
using the brokerage arrangement to obtain high quality research to directly assist the
managers in managing the client portfolio.
Standard IV (B) Additional Compensation Arrangements prohibits member and candidates

from accepting any gift, benefits, compensation or consideration “that competes with or
might create a conflict of interest with their employer’s interest unless they obtain a written
consent from all the parties involved.” The portfolio managers have not received any
additional compensation which would require disclosure under this standard. Thus this
standard has not been violated.
Standard VI (C) Referral Fees requires members and candidates to disclose to their
employers, current clients, and prospective clients “any compensation, consideration, or
benefit received from, or paid to, others for the recommendation of products or services.” The
firm’s portfolio managers have referred their clients to their respective broker and have
received research in return. This arrangement must be disclosed to their existing clients
and/or any prospects who wish to employ any of these portfolio managers to manage his/her
investment portfolio. By not disclosing the arrangements to their clients, the portfolio
managers have violated this standard.

Correct Answer: A
With respect to practice 3, Byrd has violated standard I (C) Misrepresentation. This is
because Byrd should have known about the error in his resume as he has been quoting his
experience for several years. By quoting his experience incorrectly, Byrd has misrepresented
his experience with the two industries and has thus violated this standard.

By incorrectly stated his years of experience, Byrd has not violated standard III (D)
Performance Presentation, which requires members and candidates to make reasonable efforts
to ensure that the performance they present is fair, complete, and accurate. Since the error
pertains to his industry experience as opposed to performance information, Byrd has not
Standard V (C) Record Retention is not relevant in this context and there is a lack of
sufficient evidence to conclude that Byrd has not retained records used to develop research
reports and make recommendations.

Correct Answer: B
Standard I (A) Knowledge of the Law requires members and candidates to understand and
comply with all applicable laws, rules and regulations of any government, regulatory
organization, licensing agency, or professional association governing their professional
activities. In the event of any conflict, members and candidates must comply with the stricter
of the two: applicable laws or code and standards.
Standard I (D) Misconduct requires members and candidates to avoid any professional
misconduct that may reflect adversely on their professional reputation, integrity, or
competence and encourages employers to conduct reference checks on potential employees
for any past infractions of laws.
The law which is applicable to Riku Associates is the local Shimautanian law as opposed to
the Japanese law applicable to its parent organization. Because employees with past
infractions of securities and/or trading laws of two or more counts are likely to violate such
laws again, it is advisable to avoid hiring such employees. Thus the requirements of the
Institutes’ codes and standards govern [I (D) Misconduct]. Riku Associates must preferably
hire employees with a clean past record.

Correct Answer: A
Standard IV (C) Responsibility of Supervisors requires members/candidates to make every
reasonable effort to prevent and detect violations of the laws, rules, regulations, and/or codes
and standards by anyone subject to their supervision or authority. It is permissible to delegate
such responsibility but such delegation does not absolve the member/candidate of his/her
responsibilities. By instructing Sayuki to review Smith’s portfolio after every 18 months,
Sayuki has not complied with this standard as his instructions violate the requirements of III
C Suitability (see below). This is because client portfolios need to be reviewed at least
annually and whenever there is a change in client and/or market conditions. Any reason given
to support this review schedule does not justify such a policy.
Standard III (C) Suitability requires members and candidates, who are in an advisory role, to
make a reasonable inquiry into the client’s investment experience, risk and return objectives,
investment constraints and must reassess and update this information regularly. Client
portfolios must be reviewed at least annually and whenever a change in client circumstances
and/or market circumstances occurs. By instructing Lowery to conduct reviews for a period
longer than the minimum 12-month required, for whatever reason, Sayuki has violated this
standard. Additionally, Lowery has also violated this standard as he has conducted the
reviews as instructed.

Standard III (A) Loyalty, Prudence and Care does not address client portfolio reviews has not
been violated.

Correct Answer: C
Standard III (A) Loyalty, Prudence and Care requires members and candidates to act in their
client’s best interests, to exercise prudent judgment, and use reasonable care. The client’s
interests should always have priority over the firm’s and portfolio manager’s interests. By
recommending the sale of a stock which is harming the client’s portfolio, Lowery has
complied with this standard.
Standard III (E) Preservation of Confidentiality requires members and candidates to keep all
information concerning former, current, and prospective clients confidential unless the client
permits disclosure; the disclosure is required by law; or the information pertains to illegal
activities on the part of clients. By sharing information regarding Smith’s portfolio holdings
with his family friend, Lowery has violated this confidentiality standard.

Correct Answer: A
Standard II (A) Material Nonpublic Information prohibits members and candidates who
possess material nonpublic information, that could affect they value of a security, from acting
or causing other to take action on the information.
The fact that such information has not yet been disclosed and pertains to the discontinuation
of a product line provides sufficient evidence that this piece of information is material and
nonpublic. Although Conway may discuss this piece of information with his supervisor,
Sayuki, his first course of action should have been to make reasonable efforts to achieve
public dissemination of the information by encouraging Furniture Ltd to make the
information public. If Furniture Ltd had refused to release the information, his next course of
action should have been to disclose the information to his supervisor or compliance
department.
However Conway has not made any such efforts and thus has violated this standard.
Standard III (E) Preservation of Confidentiality is not relevant here as the standard covers
confidential client information received by portfolio managers as opposed to the information
received by research analysts on the companies they cover.

Correct Answer: C
employment, to act for the benefit of their employer, and not deprive their employer of the
advantage of their skills and abilities, or otherwise cause harm to their employer. Members
and candidates must not take any actions such as appropriating property for themselves, client
lists, or any information or material from their employer without their permission.
Members/candidates must continue to act in their employer’s interest until resignation is
effective.

In Fukui’s case, participating in an online interview does not violate this standard as she is
not disrupting her duties to the firm as an employee. Additionally, since Fukui has not
undertaken the potential job opportunity at Howell S. Erwin Associates, there is no need to
disclose the opportunity to her employer. Thus Fukui has not violated this standard.
Although Gifu has complied with this standard by informing the employer of the job
opportunity before resigning, he has violated this standard with respect to the backups of past
firm information stored on his home computer. In order to avoid violating this standard, he
should have removed the information from his computer before departing Riku Associates or
should have received his employer’s consent to continue to store the information. Even if he
believes the information to be obsolete, Gifu has violated this standard.

Correct Answer: A
Standard I (B) Independence and Objectivity requires members and candidates to strive to
achieve and maintain independence and objectivity in all their professional activities.
Members/candidates must not accept gifts, benefits, compensation or consideration which
could reasonably comprise their independence or someone else’s independence and
objectivity. Gifts must be disclosed to the member’s employer whatever the case. Fukui has
informed her employer of the offer and has thus not violated this standard.
Standard III (D) Performance Presentation requires members and candidates to make every
reasonable effort that the performance they present is fair, accurate and complete. By
intentionally increasing the portfolio return by 0.2% (10.0% – 9.8%) when the portfolio
actually achieved a return of 9.8%, Fukui has clearly violated this standard.

not to accept any gifts, benefits, compensation, or consideration that competes with or might
reasonably be expected to create a conflict of interest with their employer’s interest unless
they obtain written consent from all the parties involved. Furthermore, the standard requires
members/candidates to disclose the nature of the compensation, the approximate amount of
compensation and the duration of the arrangement. A simple description of the location of the
underwater farm is not a disclosure which meets the requirements of this standard. Thus by
not disclosing the required details, Fukui has violated this standard.

Correct Answer: C
Standard I (C) Misrepresentation requires members and candidates to avoid knowingly
making any misrepresentations when analyzing, making investment recommendations, and/or
taking investment action. Among the standard’s requirements is the prohibition imposed on
members and candidates from guaranteeing future investment results. Youssef has not
guaranteed investment results nor has he made any misrepresentations. Thus he has not
Standard V (B) Communication with Clients and Prospective Clients requires members and
candidates, amongst other things, to separate opinion from fact in their research reports and
recommendations. By using terms such as ‘will’, Youssef is implying that the political crisis
in Kenya will definitely intensify as opposed to stating the probabilities of such an event
happening. Thus he has violated this standard.


Correct Answer: A
Standard V (C) Record Retention requires members and candidates to maintain records
indicating the nature of their research recommendations, investment analysis, actions, and
other investment related communications with clients and prospects. By maintaining a
database which contains these records, Youssef has complied with this standard.
In addition to requirements presented in the solution to Part 1 standard I (C)

Misrepresentation requires members and candidates to cite all the sources used to generate
work products and research reports (recognized governmental and statistical sources need not
be cited). By not specifically citing the analysts’ reports, surveys, and quotations used and,
instead, making a general statement, Youssef’s statement (included as part of his database)
violates this standard.
Standard III (B) Fair Dealing requires members and candidates to deal fairly with clients
when disseminating investment recommendations, taking investment actions or analyzing
investments. Youssef has discriminated between investors by providing free access to the
database to particular investor categories while charging other investors a nominal fee.

Correct Answer: C
Standard V (B) Communication with Clients and Prospective Clients defines communication
in the form of a recommendation pertaining to an asset allocation, the market, or classes of
investments. However any brief communications must be supported by background reports or
data that can be made available to interested parties on request. By issuing the
recommendation two days prior to the full-length research report, Youssef has not violated
this standard. This is because he intends to make the full-length report available as soon as
the communication problem abates.

Correct Answer: C
Under Standard VII (A) Conduct as Members and Candidates in the CFA Program, members
and candidates must not engage in any conduct that compromises the integrity or reputation
of the CFA Institute, the CFA designation or the integrity, validity or the security of the CFA
examination. Members and candidates are not prohibited from expressing their opinions
concerning the CFA Institute or CFA Program. Hanson’s statement regarding the CFA
Program does not violate this standard.
However, standard VII (B) Reference to the CFA Institute, the CFA designation, and the
CFA Program, requires members and candidates not to exaggerate or misrepresent the
meaning or implication of candidacy in the CFA Program, amongst other requirements. By
implying that individuals with a certain level of intellect (who are ‘apt’ enough) are likely to
succeed in the program, Hanson has violated this standard.

Correct Answer: A
Standard I (B) Independence and Objectivity requires members and candidates to achieve and
maintain independence and objectivity and not to accept gifts, benefits, compensation, or
consideration which could compromise their own or someone else’s independence and

objectivity. Members and candidates should pay for their own commercial transportation and
residence and only use the corporate aircraft offered by a client when commercial
transportation is not available.
By accepting the residential and transportation arrangements offered by the client and not
disclosing these arrangements to his employer, Hanson is in violation of this standard. In the
course of allowing JTL to make these arrangements, Hanson may have compromised his
independence and objectivity. Despite his client’s headquarters being half an hour away,
Hanson did not make any attempts to explore the transportation alternatives available.
Additionally despite the residential accommodation being modest, Hanson should have used
the residential allowances provided by his employer to seek and pay for his own residence
and transportation.
employment, to act for the benefit of their employer and not deprive their employer of the
advantage of their skills and abilities, divulge confidential information or otherwise harm the
employer. During his stay in Malaysia, Hanson has not violated this standard.

Correct Answer: A
Hanson has not violated Standard I (B) Independence and Objectivity as he will be receiving
a flat fee for preparing the research report. This makes the research report independent of
Hanson’s potential recommendation on the steel manufacturer.
By not disclosing the research opportunity offered by the steel manufacturer to Greenwich
Limited and seeking permission prior to beginning the assignment, Hanson has violated the
standard IV (A) Loyalty which requires members and candidates to disclose all aspects of
independent practice and receive employer permission prior to the start of the proposed
independence practice.
Standard VI (A) Disclosure of Conflicts requires members and candidates to make “full and
fair disclosure of all matters that could reasonably be expected to impair their independence
and objectivity or interfere with their respective duties to their clients, prospective clients, and
their employer.” By not disclosing the fact that he is an employed research analyst serving
Greenwich Limited and misleading the steel manufacturer’s executive to believe that he is an
independent research analyst, Hanson has violated this standard.

Correct Answer: C
Standard III (C) Suitability requires members and candidates, in advisory roles, to make a
reasonable inquiry into the client’s investment experience, risk and return objectives,
financial constraints and reassess and update this information regularly. Additionally
members and candidates are required to judge the suitability of the investment in context of
the client’s total portfolio. By instructing portfolio managers to conduct a suitability analysis
prior to allocating the emerging market stocks, Russet has complied with this standard.
Standard III (A) Loyalty, Prudence and Care requires members and candidates to act in their
client’s best interest and exercise prudent judgment and use reasonable care. There is no
evidence that Russet has violated this standard.

Standard IV (C) Responsibility of Supervisors requires members and candidates to make

reasonable efforts to prevent and detect any violations of the laws, rules, codes and standards
by anyone subject to their supervision or authority. There is no information in the case which
may provide evidence that Russet has violated this standard.

Correct Answer: C
Standard III (C) Suitability requires members and candidates to undertake a client portfolio
review on an annual basis (minimal) and whenever client circumstances and/or economic
circumstances change. Rapidly changing economies will require more frequent portfolio
reviews as opposed to stable economies. Thus the portfolio review frequency is in
compliance with this standard’s guidelines.
The factors which Russet instructs her portfolio managers to analyze all are factors which
have been prescribed by the suitability standard. Thus her instructions are in compliance with
the standards.

Correct Answer: A
Standard II (B) Market Manipulations prohibits members and candidates from engaging in
market participants. However, this standard does not prohibit legitimate trading that exploits
a difference in market power, information, or other market inefficiencies.
Green did not intentionally manipulate the prices of the crude oil commodity futures traded.
The heavy futures volume being traded has forced the futures contract prices downward
resulting in a (larger than expected) positive roll return when rolling into new futures
contracts. Thus Green has not violated this standard.
Standard V (B) Communication with Clients and Prospective Clients requires members and
candidates to use reasonable judgment in identifying the factors important to investment
analysis, recommendations, or actions and include those factors in communications with
clients and prospects. Additionally members and candidates must disclose the basic principles
and general format of the investment process used to analyze investments, select securities,
and construct portfolios and disclose any changes materially affecting this process. There are
no changes to the investment process which require communication with clients and/or
prospects. Thus Green has not violated this standard.

Correct Answer: B
Standard III (E) Preservation of Confidentiality requires members and candidates to keep
information concerning present, former and prospective clients confidential unless the client
permits disclosure; information concerns illegal activities on part of the client; or disclosure is
required by law.
By sharing information on Sanchez’s current financial circumstances with the banking

consultant, Russet has not respected the confidentiality of her client’s information and has
thus violated this standard.

Additionally, by not revising Sanchez’s IPS to reflect her changed risk tolerance and liquidity
requirements (which has decreased and increased, respectively following her bankruptcy),
Russet has violated the standard, III (C) Suitability, which calls for revising client
information whenever client circumstances change. Speculative investments in commodity
futures are no longer suitable for Sanchez and thus by not liquidating the holdings Russet has
violated the suitability standard.

Correct Answer: B
Standard III (B) Fair Dealing requires members and candidates to deal fairly with clients and
prospects when disseminating investment recommendations, taking investment actions, and
in their general professional activities. In case of oversubscribed issues, members and
candidates must allocate them to suitable and interested client accounts on a pro-rata basis.
Cooper is in violation of the fair dealing standard on two counts. Firstly, relative to other
accounts, he has allocated a larger proportion of the trade to his aunt's account. Secondly, by
delaying the allocation of the trade to a regular-fee paying client, he has treated his aunt's
account unfairly.
Standard VI (B) Priority of Transactions requires members and candidates to undertake

personal transactions after clients and employers have had a reasonable opportunity to act
upon the recommendation. Family accounts which are client accounts should not be
disadvantaged and must be treated like any other client account.
By allocating the pharmaceutical manufacturer’s stocks to his aunt’s account a day later
following the allocation of the issue to his clients’ accounts, Cooper has unfairly treated his
aunt’s account and has violated this standard.

Correct Answer: C
The portfolio manager has not made any misrepresentations and has not violated the standard,
I (C) Misrepresentation.
Standard VI (B) Priority of Transactions additionally requires members and candidates to

disclose the firm’s personal holding policies upon request. By not fulfilling the client’s
inquiry concerning the firm’s personal trading policies and blackout period established, the
portfolio manager has violated this standard.

Correct Answer: A
Armstrong has violated best practice. Best practice is for analysts to accept only a flat fee for
their work prior to writing the report, without regard to their conclusions or the report’s
recommendations. Direct compensation; payment based on the conclusions of the report, or
indirect compensation, such as warrants that could increase in value based on positive
coverage in the report are fraught with potential conflicts. Since Armstrong will receive the
warrants after the report is completed, it most likely will depend on the conclusions of the
report. In addition, Armstrong needs to fully disclose potential conflicts, including the nature
of the compensation (although here disclosing the nature of the compensation is not sufficient
to meet the Code and Standards).


Correct Answer: C
Keeling is not in violation of the Standard. In this case, the trip is strictly for business and
Keeling is not accepting irrelevant or lavish hospitality. The itinerary required chartered
flights, for which analysts are not expected to pay, and Green Motels is the only
accommodation in the area. These arrangements, hence, did not violate the standard, since
they most likely do not impinge on Keeling’s independence and objectivity. The policy of
Salkey’s firm complies closely with Standard 1(B) by avoiding the appearance of a conflict
of interest, but Keeling and other analysts do not necessarily violate the Standard.

Correct Answer: B
RIM is in accordance with the CFA Institute Standards of Professional Conduct with regards
to the guarantee. Standard 1(C), misrepresentation, does not prohibit members and candidates
from providing clients with information on investment products that have guarantees built
into the structure of the product itself or for which an institution has agreed to cover any
losses. In this case, the securities are backed by the U.S. government and in case of any
losses, RIM has agreed to cover them.
As long as RIM describes the concepts in its own words, it does not need to cite the source.
However, for the concepts of price multiples, RIM quotes the words of another author, so it
needs to cite the source from which the descriptions are quoted (even though these are
general concepts).

Correct Answer: A
Armstrong is not in violation of the Standard. Since Armstrong has obtained the information
directly from the original source, he does not need to report how she found out about the
information. In fact, best practice is to obtain the study from the original author (CFA
Institute in this case), and cite only that author (this will eliminate the risk of relying on
second hand information that may misstate the source). If Armstrong used the study provided
by Charles in his report, he would need to cite both sources.

Correct Answer: C
The information about the sale is both material and non-public. Craven has violated the
Standard by communicating the inside information to her broker. Roy has violated the
standard by initiating a transaction to buy the shares based on material nonpublic information.
Pettit is in violation of the standard relating to material nonpublic information because as the
firm's CEO she knew the information was both material and nonpublic and by disclosing the
information to her daughter, she is in violation.

Correct Answer: A
Drewry did not violate any Standards. He used information available to the public, and used
his own expertise to interpret the information. Simply because the public in general finds the
conclusions material does not require that Drewry make his or her work public. Investors who

are not his clients can either do the work themselves or become his client if they want access
to his expertise.

Correct Answer: B
Mayer has violated Standard 3(A), Loyalty, Prudence and Care, because he is using the assets
of his clients to benefit his firm and himself. The trading was carried out solely to reach the
minimum commission level and not to benefit the clients.
Kew has violated Standard 3(A), Loyalty, Prudence and Care, and 3(C), Suitability. The
private equity fund is an illiquid investment since it locks up the fund’s asset for three years.
The IPS clearly states investment in liquid assets. Therefore, private equity is not suitable for
the pension fund.

Correct Answer: A
Kew has violated his duty to his clients by giving priority to the Growth Fund over the Equity
Fund, even though both the funds have the same investment objectives and have similar
portfolios. Also, Kew has violated Standard 3(B) Fair Dealing, by giving priority to the
discretionary accounts over nondiscretionary accounts. In this case, even though disclosure is
made, this would not change the fact that the policy is unfair.

Correct Answer: C
If MMI fully discloses its agreement with members to boost liquidity over the initial eight
months, it does not violate the Standard. MMI may engage in a liquidity-pumping strategy to
give its clients a better service, but it must be disclosed.

Correct Answer: C
Dawe does not violate any of the Standards. He widely disseminated the recommendation and
provided the information to all his clients prior to discussing it with the firm’s largest clients.
Dawe can provide premium service to some clients provided that he properly distributes the
recommendation to all his clients before discussing it with the select few. Also, annual review
of the IPS is reasonable, however, in the case of Morrison, there was a major change in
income that warrants a more frequent review. Hence, Dawe does not violate any Standard.

Correct Answer: A
James has violated the Standard. This is because James must obtain the consent of her
employer before she accepts such a supplemental benefit. Members and candidates must
obtain permission from their employer before accepting additional compensation or other
benefits. James accepted the benefit, and then informed her employer.

Correct Answer: C
Statement 1 is correct. Although a prohibition on all types of proprietary trading when a firm
comes into possession of material nonpublic information is not appropriate, in risk-arbitrage

trading, the case for a trading prohibition is compelling. In such a case, the potential for
illegal profits is great so the most prudent course for firms is to suspend arbitrage activity
when a security is placed on the watch list.
Statement 2 is correct. Adequate compliance procedures are those designed to meet industry
standards, regulatory requirements, the requirements of the Code and Standards, and the
circumstances of the firm.

Correct Answer: A
Orswitz is required to undertake local trading exams in Trotia and Horsha in order to better
comply with the CFA Institute Standards of Professional Conduct.
Standard I (A) Knowledge of the Law requires members and candidates to “understand and
comply with all the applicable laws, rules, and regulations of any government”, amongst
other institutions, “governing their professional activities”. In the event of a conflict, the most
strict law, rule, or regulation applies.
Based on this standard, the strictest law, amongst U.S., Trotia, and Horsha, is the Trotian law,
which requires undertaking local examinations to trade in local and international markets.
However, at the same time, Orswitz can not violate the trading laws of Horsha, which also
requires traders to undertake the local trading exam. Since Orswitz will be trading solely in
Horsha, he will be need to clear Horsha’s trading exam to be granted the country’s trading
license, in addition to Trotia’s, in order to avoid violating the professional conduct standards.

Correct Answer: B
Holly has not violated any standards of professional conduct whereas Earl has violated the
standard, independence and objectivity.
Standard I (B) Independence and Objectivity requires members and candidates to “use
reasonable care and judgment to achieve and maintain independence and objectivity in their
professional activities”. Research analysts frequently work closely with investment-banking
colleagues to help evaluate prospective investment-banking clients. This is appropriate
provided conflicts are adequately and effectively managed and disclosed. Given the close
relationship between Earl and Holly, which enables them to discuss shared clients, the
independence and/or objectivity of the two employees may have been compromised.
Additionally, by discussing his research with Holly, Earl may have compromised his own and
his sister’s independence and objectivity with respect to dealing with Woodline Inc.
However, Holly has not violated this standard.
Standard II (A) Material Nonpublic Information requires that members and candidates who
“possess material nonpublic information that could affect the value of an investment must not
act or cause others to act on the information”. Speculating on a potential takeover offer
involving Woodline Inc. by a larger floorboards manufacturer does not amount to material
nonpublic information. Thus this standard has not been violated.
Standard III (E) Preservation of Confidentiality requires members and candidates to keep all
information acquired on current, potential, or former clients confidential unless the client
permits disclosure; the information concerns illegal activity on the part of the client; or

disclosure is required by the law. Speculations on a potential takeover offer do not amount to
confidential information. Thus this standard has not been violated.

Correct Answer: B
Holly’s best course of immediate action would be to disclose her relationship with Earl to
OA’s senior compliance officer.
Standard VI (A) Disclosure of conflicts requires members and candidates to disclose any
actual and/or potential conflicts of interest which may hinder their duties to their clients and
their employer and impair their independence and objectivity. Her relationship with Earl may
impair her impartiality when serving clients and thus disclosure to a senior compliance officer
may be the optimal solution.
Although asking for a change in assignment is a potential solution, it may not help resolve the
problem in the event the new assignment pertains to a client which is also covered by Earl.

Correct Answer: A
The trading department’s trading practices are in compliance with the CFA Institute’s
Standards.
Standard II (B) Market Manipulation prohibits members and candidates from ‘engaging in
market participants’. The standard, however, does not prohibit transactions that exploit a
difference in market power, information, or other market inefficiencies. Since OA’s trading
division has a significant presence in Horsha’s derivatives markets, any derivative contracts
entered into on behalf of clients may significantly influence contract prices and allow them to
move to the benefit of the firm. Thus this standard has not been violated.
Given the lack of information on clients’ requirements and/or circumstances, the suitability of
derivatives trades to client portfolios is not relevant in this context.

Correct Answer: C
Red’s first statement, included within his CV, complies with the standards. His second
statement does not comply with the standards. By referring to himself as an employee of R.
Owens, he does not violate any standards. Serving as a full-time paid trainee gives him an
employee status at the brokerage house.
Red’s second statement fails to comply with the standard, VII (B) Reference to CFA Institute,
the CFA Designation, and the CFA Program. The standard requires members and candidates,
amongst other requirements, not to misrepresent the meaning or implications of membership
in CFA Institute, holding the CFA designation, or candidacy of the CFA Program. There is
no violation in stating that he has passed the two levels of the CFA exam program in
consecutive attempts as he has done so. Additionally, there is no violation in stating his
intention to appear for the upcoming Level III examination as he has not cited an expected
completion date and is currently registered for the Level III exam. However by including a
statement pertaining to his educational achievements in the experience section of his CV, Red

has violated this standard. Red should have included this statement in the educational section
of his CV.

Correct Answer: B
Earl has not violated any standard with respect to disclosing the call options purchased to
OA. The independence and objectivity standard has not been violated as the options have not
been granted by Lazline.
The disclosure of conflicts standard requires members and candidates to disclose any actual
and/or potential conflicts of interest which may hinder their duties to their clients and their
employer and impair their independence and objectivity. Earl ought to have disclosed the call
options purchased on Lazline’s stock to his clients. This is because he covers the
pharmaceutical manufacturer and purchasing call options on the manufacturer may impair his
independence and objectivity when preparing a research report. This is a matter which
requires disclosure to clients as well as the employer. Since he has disclosed the purchase to
OA, he has not violated this standard with respect to his employer only. However, by failing
to make appropriate disclosure to clients Earl has violated this standard as opposed to the
communications with clients and prospects standards.
By not sharing the results of his analysis with his employer, Earl has violated the Loyalty
standard. His employer has full rights over the research prepared by any employee and by
denying his employer these rights, he has violated this standard.

Correct Answer: C
not to ‘accept any gifts, benefits, compensation, or consideration that competes with, or might
reasonably, be expected to create a conflict with, their employer’s interest unless they obtain
written consent from all parties involved’.
Ramirez may accept the opera tickets and cash bonus as long as he obtains written consent
from DHFM.

Correct Answer: C
DHFM’s client communications policy is inconsistent with the standards. Standard V (B)
Communications with Clients and Prospects requires members and candidates to use
reasonable judgment to assess what factors are important to their investment analyses,
recommendations or actions and include such factors in their communication with clients and
prospective clients. Additionally, members and candidates should outline the limitations of
their analyses and conclusions contained in their investment analysis.
The assumptions underlying linear and multiple regression models as well as any regression
variables used are important and thus should be disclosed.

Correct Answer: A

Ramirez has violated standard II (A) Material Nonpublic Information. This standard prohibits
members and candidates possessing material nonpublic from acting on the information.
Based on his special relation with the two corn producers, access to information on a
potential unannounced merger between Milanto and Sprout constitutes material nonpublic
information. In the case of risk-arbitrage propriety activity, the most prudent course of action
would be to suspend such activity while a firm possesses material nonpublic information. By
engaging in risk-arbitrage propriety trading based on his access to material nonpublic
information Ramirez has violated this standard.
Standard III (B) Fair Dealing requires members and candidates to deal fairly and objectively
with all their clients when providing investment analysis, making investment
recommendations and taking investment action. Since Ramirez has not taken action on any
client accounts, he has not violated this standard.
Standard VI (B) Priority of Transactions requires members and candidates to place

investment transactions undertaken for clients and their employers ahead of their own
investment transactions. There is no evidence which may indicate that this standard has been
violated.

Correct Answer: A
Cowbell has violated standard I (C) Misrepresentation which prohibits members and
candidates from guaranteeing clients a specific return on an investment. Given that profits
generated on a reverse cash-and-carry arbitrage strategy may contain counterparty risks,
Cowbell has most likely violated this standard.
Standard III (D) Performance Presentation prohibits members and candidates from
misrepresenting past or reasonably expected future performance. This standard has not been
violated.

Correct Answer: A
Standard IV (A) Loyalty requires members and candidates to act for the benefit of their firm
and not deprive the employer of the advantage of their skills and abilities, divulge
confidential information, or otherwise cause harm to their employer.
Cowbell will not violate the loyalty standard if she and the other hedge fund manager form
their hedge fund management firm as they plan to open the firm after leaving their present
employment.
However, contacting clients using client records stored on the employer’s system, without the
employer’s permission, is a violation of the standard. Even though the clients are former,
contacting them using DHFM’s database will constitute a violation of the loyalty standard.
This will hold true even if the managers contact former clients after resigning from their
current positions.

Correct Answer: B

The standards recommend members and candidates consider the following procedures,
amongst others, when devising a written trade allocation policy:
• requiring orders and modifications or cancellations of orders to be in writing and time-

stamped;
• processing and executing orders on a first-in, first-out basis;
• when allocating trades for new issues, obtaining advance indications of interest,
allocating securities by client (rather than portfolio manager) and provide a method for
calculating allocations.

Correct Answer: A
By cheating during his CAIA exam, Watts was in violation of the standard relating to conduct
as members and candidates in the CFA Program. The standard’s function is to hold members
and candidates on a high ethical standard while they are participating in, or involved with, the
CFA Program. The conduct covered includes cheating on the CFA examination or any other
examination.

Correct Answer: B
Watts’ first statement is in compliance with the Code and Standards as he accurately
describes his current candidacy in the Level III examination in an appropriate way.
The second statement is incorrect as Watts has relayed that he is professionally superior to
other candidates due to his current CFA Candidacy status.

Correct Answer: C
Watts and N.M.N Securities did not violate standards relating to fair dealing and suitability as
they communicated the information of a new recommendation to all the relevant clients. They
are allowed to follow up separately with individual clients as long as they do not give favored
clients advanced information when such pre-notification may disadvantage other clients.

Correct Answer: A
The CFA designation should not be given more prominence than the charter holder’s name.
When using the CFA designation, there should be no use of periods.

Correct Answer: A
If an individual is registered for the CFA exam but declines to sit for an exam or otherwise
does not meet the definition of a candidate as described in the CFA Institute bylaws, then that
individual is no longer considered an active candidate. Once that person is enrolled to sit for a
future examination, his or her candidacy resumes.
Addison is no longer an active candidate because she did not appear for the Level I exam.
Therefore, she is correct in stating that she is not a Level I candidate. She may refer to herself
as a Level I candidate when she next enrolls for the Level I exam.



Correct Answer: B
The following procedure will help in the compliance of Standard VI B- Priority of
Transactions:
• Investment personnel involved in investment decision making process should establish

blackout procedures prior to trades with clients so that managers cannot take advantage
of their knowledge of the client activity by ‘front-running’ client trades.

Correct Answer: C
According to the standard relating to Knowledge of Law, if a member has reasonable grounds
to believe that imminent or ongoing client or employee activities are illegal or unethical, the
member or candidate should take appropriate steps which include attempting to stop behavior
by bringing it to the attention of the employer through a supervisor or the compliance
department. The member should also seek legal advice. However, the standard does not
require members and candidates to report violations to the appropriate governmental or
regulatory organizations.

Correct Answer: B
The revised compensation plan is acceptable under the standard related to Conflicts of
Interest, but the company must disclose the plan to its clients.

Correct Answer: A
The CFA Institute standard relating to fair dealing requires that members should not use their
position to disadvantage clients, specifically in the case of IPOs. Since this is a stated policy
of the firm, there is no violation of standard relating to disclosure of conflict of interest.

Correct Answer: A
The following policies improve compliance with the Standards and Codes:
• Members and candidates should maintain a list of all clients and the securities of other
investments each client holds to facilitate notification of clients of a change in investment
recommendation.
• When the full amount of the block order is not executed, partially executed orders will be
allocated amongst the participating client accounts pro rate on the basis of order size.

Correct Answer: A
Members who are involved in personal bankruptcy filing are not automatically assumed to be
in violation of the standards because personal bankruptcy may not reflect on the integrity or
trustworthiness of the person declaring bankruptcy. However, if the bankruptcy involved
fraudulent or deceitful business conduct, it may be a violation of this standard.


Correct Answer: C
Members and candidates should document any violations when disassociating from an
activity that violates the Code and Standards.
When attending meetings at client’s headquarters, members and candidates should pay for
commercial transportation and hotel charges.
Standard I does not cover legal transgressions resulting from acts of civil disobedience in
support of personal beliefs because such conduct does not reflect poorly on the member’s or
candidate’s professional reputation, integrity or competence.

Correct Answer: A
The Standard related to fair dealing states that all clients cannot be treated equally because it
is impossible to reach everyone simultaneously and each client has unique needs and
objectives.

Correct Answer: A
The following reporting requirements are recommended for monitoring and enforcing
procedures established to eliminate conflicts of interest related to personal trading:
• Disclosure of personal holdings.

• Disclosure of beneficial ownerships.
• Preclearance procedures.
• Duplicate confirmation of employee transactions.

Correct Answer: A
Chang’s decision to invest is directly correlated with Park’s statement about the successful
quarter at Jeutte and thus violates Standard II.
Park’s information would be considered material as it would influence the share price of
Jeutte Tech and probably influence the price of the entire exchange-traded fund.
Park shared information that was both material and non-public. Company employees
regularly have such information about their firms, which is not a violation. However, sharing
this information, even in a conversation with friends, constitutes a violation.

Correct Answer: A
Chang did not violate any standards in trying to solicit donations from readers. Option B is
incorrect because the clause in the column does not violate Standard III.


Correct Answer: A
According to Standard V, Carmen needed the permission of her employer to maintain the
files at home after her employment ended. Without permission, she should have deleted the
files upon termination. All files created as a part of professional activity are property of the
firm, even those created outside work hours. The Code and Standards do not prohibit using
one’s personal computer to complete work for one’s employer.

Correct Answer: B
Carmen violated Standard III by not disclosing that she was a part of a team of managers that
achieved the performance shown. if she had also included the return of the portion she
directly managed, she would not have violated the standard.

Correct Answer: C
Members are not required to disclose their responsibilities as CFA charter holders to clients.
They are, however, required to disclose all matters that could be expected to impair their
independence or objectivity. Service as directors and their firm’s market-making activities are
examples of such matters.

Correct Answer: B
Wes’ duty to his former employer prohibits him from violating any applicable non-compete
agreement.

Correct Answer: C
It is not evident that Peterson did not disclose any additional compensation arrangements to
her employer as a result of being a relative to a minority shareholder of Perene. However, he
violated Standard IV by not fully disclosing his position as shareholder of Fossil.
Additionally, he also violated Standard I by not avoiding a situation that could cause or be
perceived to cause a loss of objectivity in making investment recommendations.

Correct Answer: A
The Standards of Professional Conduct require members to consider client interests ahead of
the member and employer interests. As Peterson’s compensation was dependant on a ‘buy’
recommendation, he was not reasonably objective in his analysis.

Correct Answer: C
Compensation received for recommendation of any kinds of product or services represents a
conflict of interest. According to the CFA Institute Standard VI C, Peterson must disclose the
referral fee arrangement.


Correct Answer: A
Peterson’s use of astrology as a research methodology violates the Standard of Diligence and
Reasonable Basis. His research methodology and blog may also reflect poorly on his
employer and cause Perene harm.

Correct Answer: C
All clients should be treated fairly and impartially. The flexible trading terms will allow the
hedge fund manager to enrich himself and Is a violation of Standard II, concerning trading on
material non-public information.

Correct Answer: B
According to the CFA Institute Standard on Responsibilities of Supervisors, members are
supposed to take preventive measures in case of suspected violations. Ward failed in his
supervisory role when he accepted Nelson’s explanation for the unusual trading activity. He
should have reviewed the client’s goals and objectives, and correspondence records, to see if
they have, in fact, requested month end trading. Regardless of the information provided, he
should have investigated further.

Correct Answer: A
Nelson has breached his duty to his family by treating them differently from other clients.
They are entitled to the same treatment as any other client of the firm.

Correct Answer: B
Option B is correct as there is no evidence of unfairly treating clients.

Correct Answer: B
According to Standard VII, Andrew cannot claim to have finished the CFA Program or be
eligible for the CFA charter until he officially learns that he has passed the Level III exam.
Until the results for the most recent exam are released, those who sat for the exam continue to
refer to themselves as candidates.

Correct Answer: C
In revealing that questions related to the analysis of inventories and taxes were on the exam,
Andrew has violated Standard VII, by providing information to other candidates and the
public that is considered confidential to the CFA Program.

Correct Answer: B
Option B is correct as companies which disclose information to the public on a limited basis
create the potential for insider-trading violations.


Correct Answer: A
Information relating to a tender offer is material by nature. As this information is non-public,
Graham cannot trade on this information.

Correct Answer: C
Graham is required to disclose all matters and information that impairs or is reasonably
perceived to impair his independence and objectivity.

Correct Answer: C
Graham did not fulfill the duty he owed to his clients by not treating them fairly according to
the priorities approved by the company.

Correct Answer: A
The Standards require Graham to make reasonable efforts to make sure performance
information is fair, accurate and complete.

Correct Answer: C
Graham should not have initiated providing services to his family before receiving written
consent by his employer. Mere informing is not sufficient.

2016 FRM Quick Sheet

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

2016 FRM Quick Sheet

Transféré par

Droits d'auteur :

Formats disponibles

Reading 2 Guidance for Standard I-VII FinQuiz.

Copyright © 2010-2018. FinQuiz.com. All rights reserved. Copying, reproduction

FinQuiz.com © 2018 - All rights reserved.

FinQuiz Level II 2018 – Item-sets Solution

Reading 2: Guidance for Standard I-VII

1. Question ID: 10536

2. Question ID: 10537

FinQuiz.com © 2018 - All rights reserved.

3. Question ID: 10538

Additionally by sending out the recommendation to existing clients only as opposed to

4. Question ID: 10539

5. Question ID: 10540

By presenting the performance attained by Emerson at Denver Associates as being attained at

FinQuiz.com © 2018 - All rights reserved.

6. Question ID: 10541

The requirement that members and candidates/investment professionals must exercise

7. Question ID: 10550

FinQuiz.com © 2018 - All rights reserved.

8. Question ID: 10551

Additionally standard VI (B) Priority of Transactions requires members and candidates to

9. Question ID: 10552

FinQuiz.com © 2018 - All rights reserved.

Standard IV (B) Additional Compensation Arrangements requires members and candidates

10. Question ID: 10553

11. Question ID: 10554

Additionally, Brewer has not violated III (B) Fair Dealing.

FinQuiz.com © 2018 - All rights reserved.

12. Question ID: 10555

13. Question ID: 10564

Standard IV (C) Responsibility of Supervisors requires members and candidates to make

14. Question ID: 10565

FinQuiz.com © 2018 - All rights reserved.

15. Question ID: 10566

16. Question ID: 10567

FinQuiz.com © 2018 - All rights reserved.

17. Question ID: 10568

18. Question ID: 10569

FinQuiz.com © 2018 - All rights reserved.

19. Question ID: 10578

20. Question ID: 10579

FinQuiz.com © 2018 - All rights reserved.

21. Question ID: 10580

22. Question ID: 10581

FinQuiz.com © 2018 - All rights reserved.

23. Question ID: 10582

Standard IV (B) Additional Compensation Arrangements prohibits member and candidates

24. Question ID: 10583

FinQuiz.com © 2018 - All rights reserved.

25. Question ID: 10592

26. Question ID: 10593

FinQuiz.com © 2018 - All rights reserved.

27. Question ID: 10594

28. Question ID: 10595

29. Question ID: 10596

FinQuiz.com © 2018 - All rights reserved.

30. Question ID: 10597

Standard IV (B) Additional Compensation Arrangements requires members and candidates

31. Question ID: 10606

FinQuiz.com © 2018 - All rights reserved.

32. Question ID: 10607

In addition to requirements presented in the solution to Part 1 standard I (C)

33. Question ID: 10608

34. Question ID: 10609