Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is
commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant
relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent
market volatility has led Islandwide to incur record-high trading volume and commissions with
Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-
expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her
supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.
While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation
between the president and chief financial officer (CFO) of Progressive Industries. The president
informs the CFO that Progressive's board of directors has just approved dropping the company's cash
dividend, despite its record of paying dividends for the past 46 quarters. The company plans to
announce this information in about a week. Harris owns Progressive's common stock and
immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue
serving on the board of directors of Landmark Enterprises, a private company owned by her brother-
in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local
symphony on investing their large endowment and receives four season tickets to the symphony
performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great
performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris
two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following
year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark
participates in a conference call for several analysts in which the chief executive officer at Dex says
his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy
Dex at a 40% premium over the market price. Clark contacts a friend and relates the information
about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's
stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a
buy program for a client. This buy program has driven up the price of a small-cap stock, in which
Islandwide owns shares, by approximately 5% because the orders were large in relation to the
average daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm to
market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will
create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids
and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an
oversubscribed IPO. One of his clients has been complaining about the execution price of a trade
Park made for her last month, but Park knows from researching it that the trade received the best
possible execution. In order to calm the client down. Park increases her allocation of shares in the
IPO above what it would be if he allocated them to all suitable client accounts based on account size.
He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which
his brother-in-law is the primary beneficiary.
According to Standard IV Duties to Employers, which of the following is most likely required of
Swamy? Swamy must:
A
Explanation:
According co Standard IV Duties to Employers, Swamy must secure written permission before
undertaking the investment advisory work for the symphony because this work competes with her
employer and could create a conflict of interest, as she is receiving compensation in the form of
season tickets. Her service on her brother-in-law's board may be subject to employer rules about
outside employment but is not covered by the Standard since there is no likely competition or
potential conflict with her employer. The question says most likely, so it is important to focus on rhe
key difference between the two outside activities. Both are compensated; the fact that one is cash
and the other tickets is irrelevant. The key difference is that for the symphony, Swamy is acting as an
investment advisor for a large endowment, which clearly competes with her employer's business.
(Study Session 1, LOS 2.a)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is
commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant
relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent
market volatility has led Islandwide to incur record-high trading volume and commissions with
Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-
expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her
supervisor and compliance officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.
While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation
between the president and chief financial officer (CFO) of Progressive Industries. The president
informs the CFO that Progressive's board of directors has just approved dropping the company's cash
dividend, despite its record of paying dividends for the past 46 quarters. The company plans to
announce this information in about a week. Harris owns Progressive's common stock and
immediately calls her broker to sell her shares in anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue
serving on the board of directors of Landmark Enterprises, a private company owned by her brother-
in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local
symphony on investing their large endowment and receives four season tickets to the symphony
performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great
performance of her account over the previous quarter. Bert Baker, also a client, has offered Harris
two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following
year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark
participates in a conference call for several analysts in which the chief executive officer at Dex says
his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy
Dex at a 40% premium over the market price. Clark contacts a friend and relates the information
about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's
stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a
buy program for a client. This buy program has driven up the price of a small-cap stock, in which
Islandwide owns shares, by approximately 5% because the orders were large in relation to the
average daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm to
market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will
create additional liquidity in the stock over its first 90 days of trading by committing to minimum bids
and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an
oversubscribed IPO. One of his clients has been complaining about the execution price of a trade
Park made for her last month, but Park knows from researching it that the trade received the best
possible execution. In order to calm the client down. Park increases her allocation of shares in the
IPO above what it would be if he allocated them to all suitable client accounts based on account size.
He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which
his brother-in-law is the primary beneficiary.
According to Standard IV Duties to Employers, which of the following is most likely required of
Swamy? Swamy must:
Which action by Park violated Standard III(B) Duties to Clients: Fair Dealing?
C
Explanation:
Standard III(B) Fair Dealing requires that shares of an oversubscribed IPO be prorated fairly to all
subscribers. Arbitrarily increasing the allocation to the "problem client" is a violation, as is the
resulting underallocation to the remainder of the firm's clients. (Study Session 1, LOS 2.a)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm
that employs three investment professionals and currently has approximately $250 million of assets
under management. The client base of United Partners is varied, and accounts range in size from
small retirement accounts to a $30 million private school endowment. In addition to Burton's
administrative responsibilities as the managing partner at United, he also serves as an investment
advisor to several clients. Because United Partners is a small firm, the company does not employ any
research analysts but instead obtains its investment research products and services from two
national brokerage firms, which in turn execute all client trades for United Partners. The
arrangement with the two brokers has enabled United to assure its clients that the firm will always
seek the best execution for them by having both brokers competitively bid for United's business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal
assets under management from MoneyCorp to United Partners. Burton provides Crossley with a
packet of marketing information that Burton developed himself. The packet contains five years of
historical performance data for the private school endowment, Unitcd's largest client. Burton states
that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in
the information packet are brief bios on each of United's three investment professionals. Crossley
notices that all three of United's investment professionals are described as "CFA charterholders," but
he is not familiar with the designation. In response to Crossley's inquiry. Burton explains the
significance of the program by stating that the designation, which is only awarded after passing three
rigorous exams and obtaining the requisite years of work experience, represents a commitment to
the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be
executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-
based broker/dealer but is not one of the two brokerage firms with which United currently does
business. Burton contacts Crossley's brother-in-law and determines that Security Bank's trade
execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for
directing any of United's clients to Security Bank's retail banking division. To bring Crossley on as a
client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all
of Crossley's trades but will use research materials provided by the other two brokers to assist in the
management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution
Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.
Burton attends the meeting, which is led by two investment bankers and one software industry
research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from
Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to
SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare
equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing
Crossley's order, Burton reads the SolutionWare marketing materials and performs a detailed
analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in
addition to Crossley's portfolio. United Partners, being a small firm, has no formal written policy
regarding trade allocation, employee participation in equity offerings, or established blackout
periods for employee trading. Burton adds his order to Crossley's order and places a purchase order
for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of
shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and his
own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless
pleased to have a position, though smaller than requested, in such a "hot" offering.
Did the marketing materials presented to Crossley by Burton violate Standard III(D) Performance
Presentation or Standard VI 1(B) Reference to CFA Institute, the CFA Designation, and the CFA
Program?
A
Explanation:
By presenting one client account as a representative composite of United's past performance, as well
as implying that it is representative of future performance, Burton is in violation of Standard III(D)
Performance Presentation. A member or candidate should give a fair and complete presentation of
performance and not state or imply that clients will obtain or benefit from a rate of return that was
generated in the past.
Burton's references to the CFA program in his marketing materials were acceptable according
Standard V1I(B) Reference to CFA Institute, the CFA Designation, and the CFA Program. The Standard
states that members and candidates may make references to the rigor of the program and the
commitment of members and candidates to ethical and professional standards. However, statements
must not exaggerate the meaning or implications of the designation, membership in CFA Institute, or
candidacy. {Study Session l, LOS 2.a)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm
that employs three investment professionals and currently has approximately $250 million of assets
under management. The client base of United Partners is varied, and accounts range in size from
small retirement accounts to a $30 million private school endowment. In addition to Burton's
administrative responsibilities as the managing partner at United, he also serves as an investment
advisor to several clients. Because United Partners is a small firm, the company does not employ any
research analysts but instead obtains its investment research products and services from two
national brokerage firms, which in turn execute all client trades for United Partners. The
arrangement with the two brokers has enabled United to assure its clients that the firm will always
seek the best execution for them by having both brokers competitively bid for United's business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal
assets under management from MoneyCorp to United Partners. Burton provides Crossley with a
packet of marketing information that Burton developed himself. The packet contains five years of
historical performance data for the private school endowment, Unitcd's largest client. Burton states
that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in
the information packet are brief bios on each of United's three investment professionals. Crossley
notices that all three of United's investment professionals are described as "CFA charterholders," but
he is not familiar with the designation. In response to Crossley's inquiry. Burton explains the
significance of the program by stating that the designation, which is only awarded after passing three
rigorous exams and obtaining the requisite years of work experience, represents a commitment to
the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be
executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-
based broker/dealer but is not one of the two brokerage firms with which United currently does
business. Burton contacts Crossley's brother-in-law and determines that Security Bank's trade
execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for
directing any of United's clients to Security Bank's retail banking division. To bring Crossley on as a
client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all
of Crossley's trades but will use research materials provided by the other two brokers to assist in the
management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution
Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.
Burton attends the meeting, which is led by two investment bankers and one software industry
research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from
Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to
SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare
equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing
Crossley's order, Burton reads the SolutionWare marketing materials and performs a detailed
analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in
addition to Crossley's portfolio. United Partners, being a small firm, has no formal written policy
regarding trade allocation, employee participation in equity offerings, or established blackout
periods for employee trading. Burton adds his order to Crossley's order and places a purchase order
for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of
shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and his
own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless
pleased to have a position, though smaller than requested, in such a "hot" offering.
The trading arrangement between Burton and Security Bank is most likely to be a violation of the CFA
Institute Soft Dollar Standards because:
C
Explanation:
According to CFA Institute Soft Dollar Standards, research paid for by client brokerage is the property
of the client, and the research should benefit the client. If the research is for the benefit of other
clients, in this case Crossley, disclosure must be made to the client, and prior permission must be
obtained. (Study Session I, LOS 3.b)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm
that employs three investment professionals and currently has approximately $250 million of assets
under management. The client base of United Partners is varied, and accounts range in size from
small retirement accounts to a $30 million private school endowment. In addition to Burton's
administrative responsibilities as the managing partner at United, he also serves as an investment
advisor to several clients. Because United Partners is a small firm, the company does not employ any
research analysts but instead obtains its investment research products and services from two
national brokerage firms, which in turn execute all client trades for United Partners. The
arrangement with the two brokers has enabled United to assure its clients that the firm will always
seek the best execution for them by having both brokers competitively bid for United's business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal
assets under management from MoneyCorp to United Partners. Burton provides Crossley with a
packet of marketing information that Burton developed himself. The packet contains five years of
historical performance data for the private school endowment, Unitcd's largest client. Burton states
that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in
the information packet are brief bios on each of United's three investment professionals. Crossley
notices that all three of United's investment professionals are described as "CFA charterholders," but
he is not familiar with the designation. In response to Crossley's inquiry. Burton explains the
significance of the program by stating that the designation, which is only awarded after passing three
rigorous exams and obtaining the requisite years of work experience, represents a commitment to
the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be
executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-
based broker/dealer but is not one of the two brokerage firms with which United currently does
business. Burton contacts Crossley's brother-in-law and determines that Security Bank's trade
execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for
directing any of United's clients to Security Bank's retail banking division. To bring Crossley on as a
client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all
of Crossley's trades but will use research materials provided by the other two brokers to assist in the
management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution
Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.
Burton attends the meeting, which is led by two investment bankers and one software industry
research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from
Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to
SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare
equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing
Crossley's order, Burton reads the SolutionWare marketing materials and performs a detailed
analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in
addition to Crossley's portfolio. United Partners, being a small firm, has no formal written policy
regarding trade allocation, employee participation in equity offerings, or established blackout
periods for employee trading. Burton adds his order to Crossley's order and places a purchase order
for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of
shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and his
own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless
pleased to have a position, though smaller than requested, in such a "hot" offering.
According to CFA Institute Standards of Professional Conduct, which of the following statements best
describes the circumstances under which Burton may enter into the referral agreement with Security
Bank? Burton may enter into the agreement:
C
Explanation:
Standard VI(C) Referral Fees states that members and candidates must disclose to their clients and
prospective clients any compensation or benefit received for the recommendation of services. In this
case. Burton may accept a referral fee if he discloses it to the client so that the client may evaluate
any partiality shown in the recommendation. (Study Session 1, LOS 2.a)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm
that employs three investment professionals and currently has approximately $250 million of assets
under management. The client base of United Partners is varied, and accounts range in size from
small retirement accounts to a $30 million private school endowment. In addition to Burton's
administrative responsibilities as the managing partner at United, he also serves as an investment
advisor to several clients. Because United Partners is a small firm, the company does not employ any
research analysts but instead obtains its investment research products and services from two
national brokerage firms, which in turn execute all client trades for United Partners. The
arrangement with the two brokers has enabled United to assure its clients that the firm will always
seek the best execution for them by having both brokers competitively bid for United's business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal
assets under management from MoneyCorp to United Partners. Burton provides Crossley with a
packet of marketing information that Burton developed himself. The packet contains five years of
historical performance data for the private school endowment, Unitcd's largest client. Burton states
that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in
the information packet are brief bios on each of United's three investment professionals. Crossley
notices that all three of United's investment professionals are described as "CFA charterholders," but
he is not familiar with the designation. In response to Crossley's inquiry. Burton explains the
significance of the program by stating that the designation, which is only awarded after passing three
rigorous exams and obtaining the requisite years of work experience, represents a commitment to
the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be
executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-
based broker/dealer but is not one of the two brokerage firms with which United currently does
business. Burton contacts Crossley's brother-in-law and determines that Security Bank's trade
execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for
directing any of United's clients to Security Bank's retail banking division. To bring Crossley on as a
client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all
of Crossley's trades but will use research materials provided by the other two brokers to assist in the
management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution
Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.
Burton attends the meeting, which is led by two investment bankers and one software industry
research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from
Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to
SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare
equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing
Crossley's order, Burton reads the SolutionWare marketing materials and performs a detailed
analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in
addition to Crossley's portfolio. United Partners, being a small firm, has no formal written policy
regarding trade allocation, employee participation in equity offerings, or established blackout
periods for employee trading. Burton adds his order to Crossley's order and places a purchase order
for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of
shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and his
own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless
pleased to have a position, though smaller than requested, in such a "hot" offering.
With respect to the road show meeting regarding the initial public offering of Solution Ware, did
Security Bank comply with the requirements and recommendations of the CFA Institute Research
Objectivity Standards?
C
Explanation:
According to Requirement 4.0 Investment Banking of the CFA Institute Research Objectivity
Standards, firms must prohibit communication between members of the research and investment
banking divisions. Recommended compliance procedures for Requirement 4.0 include prohibiting
analysts from participating in marketing road shows. Therefore, while Security Bank complies with all
of the requirements of the Standards, it does not comply with all of the recommendations.
Under Requirement 10.0 Disclosure, firms are required to disclose all conflicts of interest to which
the firm or its covered employees are subject, including whether the firm engages in any investment
banking or other corporate finance activities. Therefore, "publicly revealing" the relationship is not a
violation of the client's confidentiality. (Study Session 1, LOS 4.b)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm
that employs three investment professionals and currently has approximately $250 million of assets
under management. The client base of United Partners is varied, and accounts range in size from
small retirement accounts to a $30 million private school endowment. In addition to Burton's
administrative responsibilities as the managing partner at United, he also serves as an investment
advisor to several clients. Because United Partners is a small firm, the company does not employ any
research analysts but instead obtains its investment research products and services from two
national brokerage firms, which in turn execute all client trades for United Partners. The
arrangement with the two brokers has enabled United to assure its clients that the firm will always
seek the best execution for them by having both brokers competitively bid for United's business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal
assets under management from MoneyCorp to United Partners. Burton provides Crossley with a
packet of marketing information that Burton developed himself. The packet contains five years of
historical performance data for the private school endowment, Unitcd's largest client. Burton states
that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in
the information packet are brief bios on each of United's three investment professionals. Crossley
notices that all three of United's investment professionals are described as "CFA charterholders," but
he is not familiar with the designation. In response to Crossley's inquiry. Burton explains the
significance of the program by stating that the designation, which is only awarded after passing three
rigorous exams and obtaining the requisite years of work experience, represents a commitment to
the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be
executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-
based broker/dealer but is not one of the two brokerage firms with which United currently does
business. Burton contacts Crossley's brother-in-law and determines that Security Bank's trade
execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for
directing any of United's clients to Security Bank's retail banking division. To bring Crossley on as a
client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all
of Crossley's trades but will use research materials provided by the other two brokers to assist in the
management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution
Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.
Burton attends the meeting, which is led by two investment bankers and one software industry
research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from
Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to
SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare
equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing
Crossley's order, Burton reads the SolutionWare marketing materials and performs a detailed
analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in
addition to Crossley's portfolio. United Partners, being a small firm, has no formal written policy
regarding trade allocation, employee participation in equity offerings, or established blackout
periods for employee trading. Burton adds his order to Crossley's order and places a purchase order
for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of
shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and his
own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless
pleased to have a position, though smaller than requested, in such a "hot" offering.
According to CFA Institute Standards of Professional Conduct, Burton's recommendation to Crossley
that he purchase shares of the Solution Ware initial public offering is most likely:
B
Explanation:
Standard V(A) Diligence and Reasonable Basis stares that the member or candidate must exercise
diligence, independence, and thoroughness before making an investment recommendation. The
Standard also requires that members and candidates have a reasonable and adequate basis
supported by research and investigation for any investment recommendations or actions. Burton
made his purchase recommendation to Crossley purely on the basis of the Security Bank road show
and did not perform his own evaluation to determine whether or not the SolutionWarc IPO was a
good investment opportunity. Burton has therefore violated Standard V(A).
Standard Iil(C) Suitability was also violated because there is no indication that Burton made any
effort to determine if the investment was appropriate for Crossley's portfolio. Burton should have
determined that the investment was consistent with Crossley's written objectives and constraints
before he recommended the investment. Even though he later determined that the investment was
suitable, he did not know this was the case before he told Crossley that he should purchase shares in
the IPO. (Study Session 1, LOS 2.a)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm
that employs three investment professionals and currently has approximately $250 million of assets
under management. The client base of United Partners is varied, and accounts range in size from
small retirement accounts to a $30 million private school endowment. In addition to Burton's
administrative responsibilities as the managing partner at United, he also serves as an investment
advisor to several clients. Because United Partners is a small firm, the company does not employ any
research analysts but instead obtains its investment research products and services from two
national brokerage firms, which in turn execute all client trades for United Partners. The
arrangement with the two brokers has enabled United to assure its clients that the firm will always
seek the best execution for them by having both brokers competitively bid for United's business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal
assets under management from MoneyCorp to United Partners. Burton provides Crossley with a
packet of marketing information that Burton developed himself. The packet contains five years of
historical performance data for the private school endowment, Unitcd's largest client. Burton states
that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in
the information packet are brief bios on each of United's three investment professionals. Crossley
notices that all three of United's investment professionals are described as "CFA charterholders," but
he is not familiar with the designation. In response to Crossley's inquiry. Burton explains the
significance of the program by stating that the designation, which is only awarded after passing three
rigorous exams and obtaining the requisite years of work experience, represents a commitment to
the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be
executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-
based broker/dealer but is not one of the two brokerage firms with which United currently does
business. Burton contacts Crossley's brother-in-law and determines that Security Bank's trade
execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for
directing any of United's clients to Security Bank's retail banking division. To bring Crossley on as a
client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all
of Crossley's trades but will use research materials provided by the other two brokers to assist in the
management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution
Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.
Burton attends the meeting, which is led by two investment bankers and one software industry
research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from
Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to
SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare
equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing
Crossley's order, Burton reads the SolutionWare marketing materials and performs a detailed
analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in
addition to Crossley's portfolio. United Partners, being a small firm, has no formal written policy
regarding trade allocation, employee participation in equity offerings, or established blackout
periods for employee trading. Burton adds his order to Crossley's order and places a purchase order
for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of
shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and his
own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless
pleased to have a position, though smaller than requested, in such a "hot" offering.
According to CFA Standards of Professional Conduct, Burton's participation in the Solution Ware
offering most likely:
A
Explanation:
Standard VI(B) Priority of Transactions clearly states that-investment transactions for clients must
have priority over members' and candidates' transactions. Members and candidates can profit from
personal investments as long as the client is not disadvantaged by the trade. By taking a portion of
the IPO shares for his own account, Burton has ensured that Crosslcy's order will not be completely
filled. It does not matter that the trade allocation was done on a pro rata basis; Burton should have
placed his client's transaction ahead of his own. (Study Session 1, LOS 2.a)
Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment
advice and financial planning services globally to institutional and retail clients. Shortly after the
company opened an office in Malaysia, Montpier's supervisor in the New York office. Rick Reynolds,
asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a
source of international investment opportunities for U.S. clients. Montpier's main task is to cover
small-cap stocks in the region and develop a network of contacts with other investment firms in the
region.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of material
nonpublic information is common practice in analyst research reports and recommendations. Such
practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she
recently observed several investment bankers meeting numerous times at an exclusive local country
club with the CEOs of two Malaysian rival companies. It is public information that one of the
companies is searching for potential acquisition targets. She has thought several times about issuing
a recommendation on one of the companies but has not done so for fear of breaking the law. After
learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition
target, which she had already established as a good investment through prior research.
Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements
by investment professionals. It is common for analysts and portfolio managers to maintain ongoing
consulting contracts with entities other than their primary employer. As a result of this, Montpier has
begun financial service consultations for members of a local investment club. The club is developing
an appropriate compensation package for her services, which to date have included financial
planning activities and investment research. When Montpier established the relationship with the
investment club, she informed them that she had a full-time job at World Renowned Advisers, which
offers similar services.
After a year of consulting with the investment club, Malaysian law changed, requiring investment
bankers, securities analysts, and portfolio managers to register with the Malaysian Securities
Commission in order to engage in independent consulting practice. Since she is unaware of the
change, Montpier does not file the proper registration forms and is later investigated, fined, and
temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the
sanction, but not the fine, removed after appealing the Commission's ruling. Montpier's counterpart
in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for
approximately seven years. Taylor researches health care and biotech stocks for the firm and
participates in client meetings when managers are recommending stocks that Taylor covers. Taylor
recently completed Level 1 of the CFA examination and is waiting for his results so he can register for
the Level 2 examination.
In preparation for a client meeting, Taylor's supervisor, Jessica James, asks him to prepare a research
report on attractive companies in the health care industry. Since Taylor is busy preparing for company
conference calls, James tells him to "throw something together from the street." To meet James'
request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has
heard about but has not researched. Taylor takes the original reports he obtains from a third-party,
adds some general industry information, and submits "strong buy" recommendations to James for
the stocks. He does not credit the original authors in the report, which is a violation of copyright law.
Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA
Program." Although written procedures require James to review all analyst reports prior to release,
time constraints often prevent her from reviewing the reports prior to distribution. James
recommends the stocks to her clients, who then purchase them. Several months later, the clients are
able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21%
and 17%, respectively. James informs Taylor of the clients' successful investments and requests that
he begin investigating potential biotech investments for the same group of investors.
To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and
others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor
indicates that he has the appropriate medical condition for the study and signs a confidentiality
agreement, but he leaves the question about his occupation blank. During the study, Taylor learns
that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have
serious negative side effects in patient testing. This information confirms existing research that Taylor
has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail
to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next
Breakthrough releases information that the drugs in question have been held up by a regulatory
agency pending additional investigation. The stock plunges over 30% on the news.
Has Montpier likely violated any CFA Standards of Professional Conduct by recommending the stock
of the acquisition target company?
C
Explanation:
If Montpier uses material, nonpublic information in her research reports and/or recommendations,
she will comply with local industry practice and local law but will violate the Code and Standards
[Standard 1(A) Knowledge of the Law and Standard 11(A) Material Nonpublic Information]. Montpicr
has not used materia! nonpublic information, however. She has merely observed meetings between
investment bankers and the company executives. By assembling this information with the well-
known fact that one of the companies in the meetings is actively trying to acquire other companies,
the information becomes material. This is the mosaic theory. Montpier has come to a conclusion of a
material and nonpublic nature by assembling both public information and nonpublic, non-material
information. Therefore she has not violated the Standards. (Study Session 1, LOS 2.a)
Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investment
advice and financial planning services globally to institutional and retail clients. Shortly after the
company opened an office in Malaysia, Montpier's supervisor in the New York office. Rick Reynolds,
asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as a
source of international investment opportunities for U.S. clients. Montpier's main task is to cover
small-cap stocks in the region and develop a network of contacts with other investment firms in the
region.
Through her interaction with other analysts in Malaysia, Montpier learns that the use of material
nonpublic information is common practice in analyst research reports and recommendations. Such
practice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because she
recently observed several investment bankers meeting numerous times at an exclusive local country
club with the CEOs of two Malaysian rival companies. It is public information that one of the
companies is searching for potential acquisition targets. She has thought several times about issuing
a recommendation on one of the companies but has not done so for fear of breaking the law. After
learning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisition
target, which she had already established as a good investment through prior research.
Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangements
by investment professionals. It is common for analysts and portfolio managers to maintain ongoing
consulting contracts with entities other than their primary employer. As a result of this, Montpier has
begun financial service consultations for members of a local investment club. The club is developing
an appropriate compensation package for her services, which to date have included financial
planning activities and investment research. When Montpier established the relationship with the
investment club, she informed them that she had a full-time job at World Renowned Advisers, which
offers similar services.
After a year of consulting with the investment club, Malaysian law changed, requiring investment
bankers, securities analysts, and portfolio managers to register with the Malaysian Securities
Commission in order to engage in independent consulting practice. Since she is unaware of the
change, Montpier does not file the proper registration forms and is later investigated, fined, and
temporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have the
sanction, but not the fine, removed after appealing the Commission's ruling. Montpier's counterpart
in the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors for
approximately seven years. Taylor researches health care and biotech stocks for the firm and
participates in client meetings when managers are recommending stocks that Taylor covers. Taylor
recently completed Level 1 of the CFA examination and is waiting for his results so he can register for
the Level 2 examination.
In preparation for a client meeting, Taylor's supervisor, Jessica James, asks him to prepare a research
report on attractive companies in the health care industry. Since Taylor is busy preparing for company
conference calls, James tells him to "throw something together from the street." To meet James'
request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he has
heard about but has not researched. Taylor takes the original reports he obtains from a third-party,
adds some general industry information, and submits "strong buy" recommendations to James for
the stocks. He does not credit the original authors in the report, which is a violation of copyright law.
Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFA
Program." Although written procedures require James to review all analyst reports prior to release,
time constraints often prevent her from reviewing the reports prior to distribution. James
recommends the stocks to her clients, who then purchase them. Several months later, the clients are
able to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21%
and 17%, respectively. James informs Taylor of the clients' successful investments and requests that
he begin investigating potential biotech investments for the same group of investors.
To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he and
others will be the subject of testing for the efficacy of several new drugs. On his application, Taylor
indicates that he has the appropriate medical condition for the study and signs a confidentiality
agreement, but he leaves the question about his occupation blank. During the study, Taylor learns
that two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval have
serious negative side effects in patient testing. This information confirms existing research that Taylor
has been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mail
to his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. Next
Breakthrough releases information that the drugs in question have been held up by a regulatory
agency pending additional investigation. The stock plunges over 30% on the news.
By not filing the proper registration forms with the Malaysian Securities Commission, did Montpier
likely violate any CFA Institute Standards of Professional Conduct?
C
Explanation:
Montpier has violated Standard I (A) Knowledge of the Law. It is a good idea for members to meet
the compliance officer when starting a new job and periodically thereafter to keep informed about
appropriate rules and regulations within the organization and in the regulatory environment that
governs the member's job responsibilities. This may be especially important if the member changes
job functions or relocates to another location or jurisdiction. Maintaining current Hies of appropriate
statutes, rules, and regulations, as well as internal policies and procedures, is also effective for
maintaining compliance. (Study Session 1, LOS 2.a)