4 Ethics Questions

Here are some questions that I answered incorrectly on the Ethics Test (available on the CFAI Web site). Unfortunately I do not have the answers, so any explanations would be appreciated. Thanks in advance, and sorry if any of these have already been discussed. *********************************** QUESTION #1 Gaines, a financial analyst for Skinner Investment Counseling, is told by the investor relations representative for Firebird Avionics, a major aircraft parts manufacturer, that the firm is in the final stages of building a new fuel efficient jet engine. This information is divulged by Firebird at the most recent quarterly conference call for analysts. Gaines uses this information along with other information he obtained from the company and distributed to the public in a research report that includes a “buy” recommendation for Firebird stock. Which of the following statements is CORRECT: (A) Gaines’ actions did not violate the Code and Standards. (B) Gaines violated the Code and Standards because he used material nonpublic information. © Gaines violated the Code and Standards because he failed to separate opinion from fact. (D) Gaines violated the Code and Standards because he has a material misrepresentation in his report. *********************************** QUESTION #2 Powell is a research analyst with Rossington & Collins a brokerage and investment banking firm. R&C’s mergers and acquisitions department has represented Wilkenson Company in all its investment banking deals. Two of R&C’s senior officers are directors of several Wilkenson subsidiaries. Powell has been asked to write a research report on Wilkenson. What is Powell’s BEST course of action? (A) Powell may write the report if she discloses in the report the officer’s special relationships with the company and the fact that Rossington & Collins has served as Wilkinson’s investment banker. (B) Powell may write a factual report but must refrain from expressing any opinions because of the special relationship between the two companies. © Powell may write the report and ask the officers to review it. (D) Powell should not write the report because the officers are insiders of the company. *********************************** QUESTION #3 Which of the following statements clearly CONFLICTS with the recommended procedures for compliance presented in the Standards of Practice Handbook? (A) For confidentiality reasons, personal transactions should not be compared to those of clients or the employer unless requested by regulatory organizations. (B) Investment recommendations may be changed by an analyst without prior approval of a supervisory analyst. © Personal transactions include transactions in securities owned by the employee and members of his or her immediate family and transactions involving securities in which the employee has a beneficial interest. (D) Prior approval must be obtained for the personal investment transactions of all employees. *********************************** QUESTION #4 Waters is an investment analyst who has accumulated and analyzed several pieces of nonpublic information through her contacts with drug firms. Although none of the information is “material,” Waters correctly concludes that the earnings of one of the drug firms will be unexpectedly high in the coming year. Waters: (A) Should urge the drug firm to make public dissemination of the information immediately. (B) Can use the information to make investment recommendations and decisions. © May use the information, but only after approval from a compliance officer or supervisory analyst. (D) Cannot legally invest or make investment recommendations based on this information. ***********************************

The first question has been discussed before on the board but I would go with the following answers: 1. A 2. A 3. A 4. B

Thanks for your quick response, JP. (So when in doubt, go with “A”… :wink:

1.B 2.A 3.A 4.B I could be wrong with picking B for the first one, especially with the word “divulge” in there.

lol i was thinking about that, like wow I think they are all A. Question 1 has been debated on if a Analyst conference call is considered being made public, so I’m unsure about that one. I’m going on the Mosaic theory for that one. Number 2 is def A Number 3 is either A or B, I just looked thru the text and can’t really find any situation that relates. It does however say that a supervisor should establish a policy regarding reasonable and adequate basis for research reports, with supervisory analyst or review committee approval required prior to release. So I’m unsure about that one. The last one it says the info is not material info so I don’t understand why he wouldn’t be able to write a report on it. The CFAI standard relates to MATERIAL non public info not just non public.

BAAB *edited as to not confuse people with my stupidity

Got answers for us?


I thought #3 would be B). I just don’t see how A) could be in conflict? Could definitely be wrong on this one though…

For confidentiality reasons, personal transactions should not be compared to those of clients or the employer unless requested by regulatory organizations. Well I work in compliance and actually do monitor personal trading, and we compare employee trades to the portfolio managers trades in the company as well as their clients trades to see if they are trying to piggy back or time the market.

Reggie Wrote: ------------------------------------------------------- > I thought #3 would be B). I just don’t see how A) > could be in conflict? Could definitely be wrong on > this one though… Firms should enact practices to compare personal and client/employer transactions to avoid problems with conflicts of interests, priority of transactions, etc. They shouldn’t wait until regulators put pressure to compare these records and keep tabs

So its confirmed? #3 is A)? The only thing I was thinking is in A) “should not” seems like such a subjective term and I think of CFA as sort of a real chain command-type organization, so if a junior analyst changes a recommendation on a stock (in which his supervisor manages dozens of accounts) that’s a big no-no. Anyways I know its been posted before but does anyone have the link to this CFA website ethics test so I can give it a shot, or direction on how to get there? Please and thanks


Thank you Isura