a few questions

Which of the following is a possible breach of fiduciary duties by a CFA Institute member who manages assets on behalf of a client? A) None of these breach fiduciary duties. B) Using directed brokerage. C) Voting all proxies of stocks the client owns. D) Obeying the rules of corporate governance.

Nancy Westfall is an individual investment advisor who uses mutual funds for her clients. She typically chooses funds from a list of 40 funds that she has thoroughly researched. The Craigs, a married couple that is a client, asked her to consider the Eligis fund for their portfolio. Westfall had not previously considered the fund because when she first conducted her research three years ago, Eligis was too small to be considered. However, the fund has now grown in value, and after doing thorough research on the fund, she finds the fund has suitable characteristics to be included in her acceptable list of funds. She puts the fund in the Craigs’ portfolio but not in any of her other clients’ portfolios. The fund ends up being the poorest performing fund in the Craigs’ portfolio. Has Westfall violated any Standards? Westfall has: A) violated the Standards by not having a reasonable and adequate basis for making the recommendation. B) not violated the Standards. C) violated the Standards by not maintaining independence and objectivity. D) violated the Standards by not dealing fairly with clients.

A stockbroker who is a member of CFA Institute has a part-time housekeeper who also works for the CEO of Festival, Inc. One day the housekeeper mentions to the broker that she saw the CEO of Festival having a conversation at his home with John Tater, who is a nationally known corporate lawyer and consultant. The stockbroker is restricted from trading on this information: A) only if the broker knows that the meeting is non-public information. B) if the broker is friends with the CEO of Festival. C) if the housekeeper says the meeting concerned a tender offer and the broker knows that it is non-public information. D) for all of the reasons listed here.

Two economists, Pearl Millidge and Byron Forrest, are discussing theories that explain why increased inflation causes nominal interest rates to rise. They offer the following explanations: Millidge: Because businesses expect higher prices for their output in the future, they will expect a greater return on their investments and will increase their demand for financial capital, which will drive interest rates higher. Forrest: Savers expect to pay higher prices for goods and services in the future, so they will be less willing to trade current consumption for future consumption and will therefore supply less financial capital, so interest rates increase. Are these explanations correct? Millidge Forrest A) Correct Incorrect B) Incorrect Correct C) Incorrect Incorrect D) Correct Correct

DWR Services, Ltd., arranges a plain vanilla interest rate swap between RWDY Enterprises (pays fixed) and RED, Inc. (receives fixed). The swap has a notional value of $25,000,000 and 270 days between payments. LIBOR is currently at 7.0%. If at the time of the next payment (due in exactly 270 days), RWDY receives net payments of $93,750, the swap fixed rate is closest to: A) 6.500%. B) 6.625%. C) 7.500%. D) 7.375%.

Not my area of expertise, but I’ll take a stab at them. For the first one D is clearly okay. C is okay, assuming you vote in the best interests of your client. B is poorly worded… if they mean direct brokerage based on client preference its okay, if they mean based on your preference than this may be a breach if you don’t get best cost/execution. My guess is that this is the answer they want. For the second one B is not the answer since it says “after doing thorough research on the fund”, C I don’t see as an issue, and D is the one to focus on here. I can’t come up with a problem. Let’s say Elgis is just another large cap fund, and she already had another one that she recommended. If the client prefers this one and it was vetted and added to her approved list, there is no problem. She doesn’t ahve to move her other clients into it because that would create brokerage costs unnessecarily since this is an alternative, not a replacement. I would go with A Foir the thrid one I’d guess C, since that’s always okay. Being a friend doesn’t restrict you which kncks out B and D, and as for A… CEO talk to lawyers all of the time… the information that the meeting took place (and nothing more) seems trivial to me. is there a takeover, merger, lawsuit, are their kids dating… who knows? i’ll pass on anything involving economists


oops, for the second one above I switched A & B. A is okay since she did the research, thus B is the answer.

  1. I’m not sure of what is meant by directed brokerage, but it sounds suspicious so I chose A) 2. I chose D b/c if she decided th fund was acceptable to be included in her list, chances are it was an appropriate investment for more than one of her clients and she failed to deal with all of her clients fairly in recommending it. 3. I chose C, for the same reasons as Super I. 4. I say B, but thats pretty much a guess. 5. I got A…I don’t feel like showing all the math cuz I’m lazy. You can also automatically eliminate C & D using logic and then work backwards using choices A & B, and A works. I hope I did ok, ha
  1. I’ll go with B on this one 2. I also go with B, because she did her research and because of suitability this may not be a good investment for her other clients 3. I pick A 4. really not sure but C makes sense to me 5. A
  1. C A memer must always consider a cost benefit analysis of voting proxies and not just go and blindly vote for the heck of it. 2. B = No Violation 3. C = tender offer is a non-public information 4. C = Both are bluffing 5. A = 6.5% - Dinesh S

Dinesh you are correct on the “voting all proxies”- it is a violation of the 3A

…hopefully alpenchev, let maratikus get back to us with the real answers. We can never be sure of Ethics :slight_smile: - Dinesh S

  1. C 2. B 3. C 4. B 5. A

I choose, A. B. C. D. A.


I will go for: A) None of these breach fiduciary duties B) not violated the Standards C) if the housekeeper says the meeting concerned a tender offer and the broker knows that it is non-public information. C) Incorrect Incorrect A) 6.500% but as dinesh wrote you can never be sure of ethics questions, so I wouldn’t put money on question answer 1.

Everyone has different answers! What are the correct ones?

1.B … Even if client asks to use directed brokerage, it will be a mandate, and not a fiduciary duty. 2.A … Nancy should have considered the suitability of the fund for Craigs’. 3.C … if the housekeeper says the meeting concerned a tender offer and the broker knows that it is non-public information. 4.C … Incorrect Incorrect 5.A … $93,750 in 270 days, so $125000 in 360 days, which is 0.5% of notional. So answer is 6.5

C B C A (Stumped on this one) A