- Nick O’Donnell, CFA, unsuspectingly joins the research team at Wickett & Co., an investment banking firm controlled by organized crime. None of the managers at Wickett are CFA Institute members. Because of his tenuous situation at Wickett, O’Donnell begins making preparations for independent practice. He knows he will be terminated if he informs management at Wickett that he is preparing to leave. Consequently, he determines that “if he can just hang on for one year, he will likely have a client base sufficient for him to strike out on his own.” This action is: A) a violation of his duty to disclose conflicts to his employer. B) a violation of his fiduciary duties. C) not in violation of the Code and Standards as the employer’s violations of the law absolve him from his ordinary duties to this employer under the Code and Standards. D) not a violation of his duty to employer. 2. Bill Fox, CFA, has been preparing a research report on New London Wire and Cable, one of his major investment clients. He had completed much of his analysis and had planned on having his report typed and bound today. Unfortunately, his briefcase was stolen while he ate breakfast, and he lost all his notes and working papers. The lost materials included his notes from management interviews, conversations with suppliers and competitors, dates of company visits, and his computer diskette containing much of his quantitative analysis. Fox’s client needs this report tomorrow. In a panic, Fox called New London’s vice president of finance and was faxed a copy of the company’s most recent financial projections. Fox remembered that his own analysis showed that management’s estimates were too high. He did not remember the exact amount, so he revised New London’s figures downward 10 percent. Fox also incorporated some charts and graphs on New London from a research report he had received last week from a small regional research firm and used some information from a Standard & Poor’s reference work. With the help of his secretary, a Xerox machine, and some creative word processing, Fox got the report done in time for the evening Fedex pick up. On the way home from the office that night, Fox wondered if he had violated any CFA Institute Standards of Professional Conduct. Fox has: A) violated none of the Standards. B) violated the requirement to have a reasonable basis for a recommendation. C) violated the requirement to have a reasonable basis for a recommendation and the prohibition against plagiarism. D) violated the requirement to have a reasonable basis for a recommendation, the prohibition against plagiarism, and the requirement to maintain appropriate records. 3. An analyst meets with a new client. During the meeting, the analyst sees that the new client’s portfolio is heavily invested in one over-the-counter stock. The analyst has been following the stock and thinks it will perform well in the long run. The analyst arranges through a brokerage firm to simultaneously sell a large number of shares of the stock via a series of cross trades from the new client’s portfolio to various existing clients. He arranges the trades to be executed at a price that approximates the current market price. This action is: A) not in violation of the Standards. B) a violation of Standard III(A), Loyalty, Prudence, and Care. C) a violation of Standard III(B), Fair Dealing. D) a violation of Standard V(A), Diligence and Reasonable Basis. 4. In securing the shares for all accounts under her management, Linda Kammel of Northwest Futures purchased three blocks of shares at three different prices. She then allocated these shares by placing shares from the first block in accounts with surnames beginning with A-G. The second was allocated over accounts H-P, and the third over Q-Z. This action is: A) consistent with her responsibilities under the Code and Standards. B) not permissible under the Code and Standards. C) permissible so long as the commissions per share are the same across all accounts. D) permissible only if the clients are informed of the allocation procedure.
I marked 1. A 2. C 3. C 4. D
My answer : 1. B ( he also violated knowledge of law by knowingly participating in llegal activities) 2. D 3. C 4. C
1.B 2.D 3.A 4.D as for the #3 question, I might have seen it in one of the practice exams… cross trades are an appropriate way , that’s wot i recall. could someone please confirm ?
1- B 2- D 3- D 4- B
i got B D C B
Correct answer is : 1. D (not even a single D among the above 4) 2. D (all have mentioned D above) 3. A (Only Darius has mentioned A.) 4. B (2 B’s above) My queries: 1. I don’t understand how D is correct. But explanation from sch is O’Donnell is required to obtain consent from his employer if he is attempting to practice in competition with his employer. Merely undertaking preparations to leave, which do not violate a duty, is not a violation of the Code and Standards. Someone care to comment?? 2. I thought he had diligently collected all info and before he could send it he lost the brief case. So how will that come under violation of “requirement to maintain appropriate records.” ?? I thought he lost the records only and hence required to maintain it is not correct. Plz explain 3. Explanation: There is no violation. It is in the best interest of the client to be diversified and selling via a series of cross trades will likely reduce price impact costs when compared to selling directly into the market. The analyst appears to have reasonable basis for putting the securities in the accounts of other clients 4. I dont understand why D is wrong. He can get a written permission and do the allocation accordingly, however insane it seems? Explanation from schweser Standard III(B) requires a member to deal fairly with all clients when taking investment actions. Since she knew at the outset that she was going to place shares in all accounts, regardless of the first letter of the surname, all accounts must participate on a pro-rata basis in each block in order to conform to the Standard. Her actions constitute a violation of the Standard concerning fair dealing.
Ok, personnally i thought that the correct answers were: B D C D Now, for the first one, even if we can make preparations for leaving, we shouldn’t engage in activities that compete with the employer, which will clearly be the case during the year in which he will “gain a sufficient client base” before leaving. So i don’t agree with Schweser. The second one should be D since record retention means that he should have appropriate records for each recommendation, even if this implies recreating research from the very start. There is no reasonable basis since he lowers the earnings estimate with approximately 10% without remembering the exact amount previously found and why. Nothing to say about the third one, i did hesitate between A and C, but thought it might be C since the client is new and we don’t have evidence that he is following the IPS in his cross trades. As for the final one i agree with Schweser since the recommended procedure for allocation is the pro rata basis, and we can’t allocate different prices based on the first letter (even if disclosed to clients) if we meant to do the entire trade at first place. All clients should be dealt fairly and we must provide similar execution to all of them.
1- A 2- C 3- B 4- B
I have another version for q. 1. I wonder which is the correct answer. Nick O’Donnell, CFA, unsuspectingly joins the research team at Wickett & Co., an investment banking firm controlled by organized crime. None of the managers at Wickett are CFA Institute members. Because of his tenuous situation at Wickett, O’Donnell begins making preparations for independent practice. He knows he will be terminated if he informs management at Wickett that he is preparing to leave. Consequently, he determines that “if he can just hang on for one year, he will likely have a client base sufficient for him to strike out on his own.” This action is: A) a violation of his duty to employer. B) a violation of his duty to disclose conflicts to his employer. C) a violation of his fiduciary duties. D) not in violation of the Code and Standards as the employer’s violations of the law absolve him from his ordinary duties to this employer under the Code and Standards. Your answer: A was correct! O’Donnell is required to obtain consent from his employer if he is attempting to practice in competition with his employer. Merely undertaking preparations to leave, which do not violate a duty, is not a violation of the Code and Standards.
I agree with answer A here since it clearly makes a reference to standard IV (A) duty to employers. In the firs version this answer didn’t appear and i assumed that fiduciary duty is closer to this standard while conflicts of interest are related to standard VI.
@kitty Wow… How is it that 2 versions exist! Funny… Anyway, yours makes more sense. Thanks. 
D, C, A, B