Ethics and Professional Standards - 1

10 questions

1. 1. Tor-Dom is a multi-services financial institution, offering investment management and investment banking services. Its investment banking unit underwrites initial public offerings, advises mergers and acquisitions, and provides corporate financial management consulting. Tor-Dom has been growing rapidly over the past year, in part thanks to the hard work of Joe Carter, CFA.

   Joe has been offered a promotion to the director of equity research. Needless to say, Joe is very excited. He does have one concern, however. Because of staff growth, two junior equity research analysts were recently forced to share space in the investment banking unit's section of the building. Joe senses that Tor-Dom is looking for new office space, but there are no indications that a new lease is imminent.

   With respect to accepting the promotion, Joe's best course of action is to:

   Accept the promotion because he thinks the company is looking for office space that will be sufficient to separate the investment banking and stock research units.Decline the promotion in writing and indicate that he will be happy to reconsider in the future, once the company has created a sufficient physical firewall between the investment banking and stock research units.Report the failure of Tor-Dom to effectively firewall the stock research and investment banking units to CFAI and continue with his current position.
2. 2. Tim Hooper, CFA works as a research analyst with Sterling Corp., a financial institution that offers investment management and investment banking services.

   Tim is finalizing a research report about a company called Can Oil Shale, which deploys new and risky technology to extract natural resources from the earth. During his visit to the company's plant he comes across some information that is non-public. However, none of the information he collected is material.

   After coming back, he uses this information and decides to conclude his research report by giving a 'Sell' recommendation on the stock of the company.

   Is Tim in violation of the Code and Standards?

   No, because the information is non-material, however he should maintain records of facts and other information leading to his conclusionYes, because he should have restrained from issuing the research report till the information was made public.Yes, because once he decides to use the information in his analysis, it becomes material.
3. 3. Kevin Rose, CFA works as a research analyst with Alpha Investments, a large investment banking firm. His analysis and recommendations for the previous year were quite successful and these successes lead to positive word-of-mouth, which in turn generated many new clients. Kevin Rose, CFA, eventually decides that it is in his best professional interests to move on from Alpha Investments. Kevin accepts an offer from a small, but growing asset management company that competes with Alpha Investment's asset management business unit. Kevin gives notice of resignation, completes his final two weeks at Alpha Investments and goes home on Friday, ready to start his new job as senior equity research analyst on Monday.

   The day after Kevin Carter's final workday at Alpha Investments, he wakes up and decides he should begin preparing for his new employer. Kevin starts by recreating one of the equity valuation spreadsheet models he designed at Alpha Investments from memory. Once he has recreated the model, Kevin remembers the names, emails and phone numbers of some clients at Alpha Investments. Kevin writes this information down and makes some conversation notes for a future meeting with the head of business development at his new employer.

   With respect to the 'Loyalty to Employers' standard, which of the following best describes Kevin's compliance?

   Recreating the model used at Alpha Investments and writing down the names of Alpha Investments clients on the day after his last day of employment was a violation of the loyalty standard.Only the writing down of Alpha Investments client contact info was a violation of the loyalty standard.There was no violation of the loyalty standard by Kevin.
4. 4. Tor-Communications has recently awarded its pension fund management contract to Axis Investments, an asset management firm. The executive leadership team at Tor-Communications became incredibly frustrated with the previous asset management firm for the pension fund as the fund consistently under-performed all of its asset appropriate benchmarks and this lack of performance began negatively impacting Tor-Communications financial position.

   Axis Investments is very excited to have garnered the business to manage Tor-Communications pension fund. Axis Investments is eager to increase returns through improved asset management and is very conscious of Tor-Communications need to avoid further balance sheet erosion. Assume the portfolio manager for the pension fund is a CFA charterholder; with respect to the standards, to whom is the fiduciary duty owed?

   Company management, company shareholders, and pension plan participants and beneficiaries.Company shareholders and pension plan participants and beneficiaries.Pension plan participants and beneficiaries.
5. 5. A group of analysts recently broke away from Tor-Dom, an investment banking firm, to start up a long-short equity hedge fund called Royal Equity Opportunities. Dave Stieb, CFA raised the capital to start the hedge fund and will serve as managing director. All of Royal Equity's professional investment staff are CFA charter holders.

   Stieb is deciding how to market Royal Equity Opportunities to prospective clients. Which of the following would not be a violation of the CFA standards?

   A fund brochure stating that all analysts and investment staff are CFA charterholders.Utilizing company letterhead that reads: “Royal Equity Opportunities – A CFA Inspired Investment Vehicle”.Both “A” and “B” are violations of the CFA standards.
6. 6. Justin Verlander recently passed the Level 1 CFA exam and has joined the staff at Car City Wealth Advisory as a junior equity analyst. Justin will be responsible for evaluating publicly traded stocks of automotive part supply companies.

   Justin is eager to succeed and wants to make a successful investment recommendation on his first attempt; he was assigned to cover Phidel, a recently troubled parts maker for one of the largest auto manufacturers in the U.S. During his first two weeks, Justin works overtime analyzing publicly reported financial statements and trade journals; he builds a valuation model that assesses Phidel's intrinsic value and its value relative to comparable companies. Justin drafts a sell recommendation, as his models have indicated that Phidel is currently over-valued. However, he decides to hold off making his formal recommendation to Car City's investment committee until he attends an industry conference discussing the future of supply chain management. During the conference, Justin learns no new information that would change the sell recommendation that Justin has drafted, based on his valuation models and prior analysis. While leaving the conference Justin overhears the end of a conversation between Phidel executives discussing the company possibly being acquired in the six months by another auto parts maker.

   The next scheduled investment committee meeting takes place a few days after the supply chain management conference ends. If Justin were to change his investment recommendation on Phidel from 'sell' to 'buy' rationalizing that if the company is acquired as the executives discussed, it would be purchased at premium to the current share price, then Justin would be at risk of violating which of the following standards:

   Loyalty, prudence, and care Diligence and reasonable basisIndependence and objectivity
7. 7. Joshua James, CFA is assigned to evaluate Dagban, a tire retailer. Joshua is under a tight deadline and just becoming familiar with the tire segment of the auto parts industry. He decides to draw upon research from three research and data providers that the investment committee considers valid and thorough. Joshua finalizes his report, complete with full reference citations and presents his work to the investment committee.

   Regarding his report and recommendation for Dagban, which situation best describes Joshua’s compliance with the CFA Standards of Professional Conduct:

   Joshua violated the misrepresentation standard and the diligence and reasonable basis standard for his use of third party research to complete the report and as the basis for the investment recommendation.Joshua only violated the diligence and reasonable basis standard.Joshua did not violate either the misrepresentation standard or the diligence and reasonable basis standard.
8. 8. Neil Williams updates his resume upon learning that he passed the Level 2 CFA exam. Which of the following statements would likely not be a violation of the standards?
   Neil places “Neil Williams, CFA Level II” as the header for his resume.Under the “Education” section of his resume, Neil states that because the CFA Level II exam is more rigorous that a local university graduate program in finance, he possess superior investment analysis skills to regional graduates of this finance program.Under the “Professional Development” section of his resume, Neil indicates that he passed the Level II CFA exam on his first attempt and this accomplishment required approximately 300 hours of independent study.
9. 9. Kate Nash, a research analyst covering automobile companies, visits a factory for car door maker Magma, located just outside Car City. Kate pays for her own gas and meal. At the end of the visit, Magma executives distribute company labelled coffee cups and mouse pads to the analysts in attendance.

   How does Justin’s acceptance of a coffee cup and mouse pad at the Magma factory visit interact with the standards?

   Justin is in violation because these gifts could compromise his independence and objectivity for making future analysis and recommendations of Magma.Any future analysis of Magma that is shared with Car City clients must disclose that the reporting analyst received a free coffee cup and mouse pad, otherwise there will be a violation of the disclosure of conflicts standard.There is no violation of either the independence and objectivity standard or the disclosure of conflicts standard.
10. 10. Victor Martinez is a portfolio manager and a direct supervisor of Justin, a research analyst. Victor and Justin have just left the most recent investment committee meeting where the committee accepted Justin's neutral recommendation of transmission maker BogWarmer and the strong buy recommendation of Federation-Modus. Justin's analysis showed that BogWarmer is likely to be in-line with earning per share expectations for the remainder of the year so not much movement is expected in the share price. Intrinsic valuation analysis showed that Federation-Modus is materially undervalued and the share price is expected to appreciate by 20 to 25% in the next six months.

    Utilizing Justin's neutral recommendation on BogWarmer, portfolio manager Victor Martinez immediately places trade orders for covered call options on all discretionary accounts that hold BogWarmer shares in order to generate additional income from the option premium while the stock is expected to trade flat. With respect to the standards, this action:

    Is a potential violation of the fair dealing standard because all clients should be immediately notified that a profit opportunity exists employing a short position on call options for BogWarmer.Is a potential violation because some clients who hold BogWarmer shares may have a no options clause in their investor policy statements.No violation has been made; Victor took the appropriate course of action