Ethics and Professional Standards - 2

10 questions

1. 1. Jim Leyland, a current client of Car City Investments solicits Regan, an analyst working with Car city, with an offer to perform a valuation of Vestibule, an engine maker. This stock is not currently covered by Car City as part of Regan’s industry segment. Leyland offers Regan US $1,000 if he can complete the valuation in one week. Regan uses non-work hours to complete the valuation and designs a new valuation model on his personal computer to perform the analysis. Regan most likely:
   Violated the additional compensation standard.Violated the misconduct standard.Committed no violated because the work was done outside of Car City business hours and on Regan’s own personal computer.
2. 2. Lolita Bengal is a portfolio manager at Queen City Boutique (QCB), and investment advisory firm and a CFA charterholder. Bruce Jaye is a significant client of QCB. Bruce happens to be a significant holder of Longitude, a local small-cap medical technology company (publicly traded equity valuation of less than US $500 million). Bruce instructs Lolita to sell all of his shares, which amount to 7% of the total shares outstanding. Bruce informs Lolita that the decision has no financial basis, but rather he has had a falling out with Longitude's CEO, who was formerly a personal friend and he now wishes to cut all ties with the individual for matters not related to business.

   Within the next day or two, Lolita will execute Bruce's request to sell all shares of Longitude. Given the company's market cap and average trading volume this trade is expected to have negative impact on the share price. Which of the following would likely not be a violation of the standards?

   After the trade has been executed, Lolita encounters the CFO for a company whose pension fund QCB manages which holds a material amount of Longitude shares. The CFO expresses concern over Longitude and Lolita indicates that there was heavy trading recently that may have driven the price down.Prior to executing Bruce’s trade, selling near the money call options in the accounts of QCB clients who hold Longitude in order to collect premium while the stock is temporarily depressed from the large trade.A week after the trade has been made, Lolita meets with an old college friend. The friend manages the portfolio for a trust that holds a significant amount of Longitude shares. The friend mentions that she noticed a price drop on heavy volume. Lolita says not to worry, that was a non-financially motivated trade executed at the request of Bruce Jaye. Lolita goes on to explain that the trade was personally motivated and did not reflect future prospects for Longitude.
3. 3. The Brewers Trust is managed by Quantum Leaps Investments. Chris Clark, CFA, who works as an investment analyst with Quantum leaps feels that the trust's portfolio weighting of 70% fixed income and 30% equities fails to adequately protect against inflation.

   Chris has decided that the trust's portfolio could reduce risk by adding a small amount of exposure to precious metal commodities, such as gold and silver. With this in mind he allocates 10% of the portfolio to precious metal commodities. Is this a violation of the Code and Standards?

   No because Chris changed the asset allocation to reduce the risk of the client’s portfolio.No because he was about to update the Investor Policy Statement and present it to the client.Yes, because Chris did not discuss the potential diversification benefits of adding precious metals assets to a portfolio with trust’s board.
4. 4. Julian, CFA is a Citizen of Country A and works at the branch office of a U.S. based investment firm in Country B. In country A, a portfolio manager is not required to disclose referral fees. The law of country B does not allow referral fees for portfolio managers. Julian has been offered a deal that involves a referral fee. Julian should:
   Follow the requirements of Country B and decline the fee.Follow the full disclosure requirements of CFA Institute.Follow Country A’s requirements and accept the offer.
5. 5. Jean Parker, CFA is an investment analyst at Tarmez, an investment advisory firm. He primarily covers pharmaceutical companies. Recently he was at a convention of large pharmaceutical companies where he overhears some other analysts discussing that Medisoft is a strong ‘Buy’. Later he goes back to his office and issues a ‘Buy’ recommendation for Medisoft to his clients. Jean has most likely violated the following standard:
   II (A) Material public informationV (A) Diligence and reasonable basisI (C) Misrepresentation
6. 6. Sergi Lopez, CFA works as a research analyst with Cooper Corp., a financial institution that offers investment management and investment banking services. While reading an investment journal Sergi comes across a research paper about a technical analysis model developed by a professor at a renowned university. Sergi takes the details of this model and recreates it with some modifications to suit his requirements. He then takes the stock data from Bloomberg and tests the model. The results of the model are impressive and he presents it to his portfolio manager. Sergi and the portfolio manager decide to include this model in their fund’s prospectus along with the test results. In order to be in compliance with Standard I (C) Misrepresentation, Sergi must:
   Cite the source of the original model in the prospectusCite the source of data used to test the modelCite both these information in the prospectus.
7. 7. Stephanie, CFA works as a money manager in a wealth advisory firm. From time to time her clients need to consult a tax advisor. She meets John Smith, a tax consultant who she thinks is very good in his work, and enters into an arrangement with him. Under the agreement, Stephanie will refer her clients for any tax work to John and in return John will pay her a referral fee. She discloses this arrangement to her employer but not to her clients. Is this a violation of the Code and Standards?
   No, because she has disclosed the arrangement to her employer.No, because Stephanie has reasonable evidence to believe that John is a good tax consultant and she is in fact doing a service to her clients.Yes, it is a violation of the Code and Standards.
8. 8. Sarah Mitchell, CFA recently resigned from her job at a large Wall Street firm and started her own investment boutique. In her previous job, she had researched and recommended a strong ‘Buy’ on AutoCorp., and automobile parts company. In her new role, she recreates the research report using the publicly available information, and recommends AutoCorp, to her clients. Has Sarah violated any standards?
   Yes, because she originally prepared the research during her previous employment.Yes, because she gained the knowledge about this stock in her previous employment.No, there is no violation of any standard.
9. 9. Spike Lee, CFA, works with a large Wall Street brokerage firm. The firm is selling an IPO of a stock issue which is oversubscribed. In order to be compliant with the Standards, Spike should:
   Offer the stock to all clients for whom the stock is appropriate on a pro-rata basis. Offer the stock to all clients for whom the stock is appropriate on a first come first serve basis.Allocate the issue to only those clients that generate more than $10,000 in brokerage commissions.
10. 10. Buddy Baker, CFA works for First Source Capital, and manages its client accounts. Buddy's parents are also a client for First Source Capital. In a new IPO, Buddy first allocates to all his clients and then any remaining shares to his parents accounts.

    Has Buddy Baker violated an CFA Institute Standards of Professional Conduct?

    Yes, because his parents are also his clients and he should have treated his parents account just like other client accounts.No, because investment transactions for his clients should take priority over his personal investment transactions.Yes, because he is not allowed to trade in his family accounts.