JUN18L1ETH/C02

Question 1
Oscar Moon is an employee at a credit ratings agency, and has created a computer model for valuation of complex
asset-backed securitized products. The scenarios that Moon uses as the inputs for the model ignore any negative
situations of deteriorating credit conditions, increasing rates, or falling asset prices. Due to the higher ratings that this
model achieves, his valuation model becomes popular with his firm, which is keen to issue positive ratings for
structured products in order to win business. Moon has
a) Violated Standard II(B): Market Manipulation
b) Not violated Standard II(B): Market Manipulation since the scenarios used in the model accurately represent
his views
c) Not violated Standard II(B): Market Manipulation since the Standard only relates to market transactions and
publicly disseminated information
Standard II(B): Market Manipulation applies to manipulating transactions and information, including manipulating the
inputs to a model in order to achieve short-term gain, which is the case with Moon. The second answer is not correct
since it is most likely that the positive inputs to the model represent Moon's desire for higher compensation rather than
genuinely reflecting his view.

Question 2
Shelly recently started at a Texas based institutional consulting firm that provides manager search and selection
services. During the Christmas holiday she received gifts of chocolates, popcorn, and other holiday food items from
numerous investment managers. With respect to Standard 1(B) of the Professional Code of Conduct, what must
Shelly do?
a) Report the gifts.
b) Return the gifts.
c) Do nothing.
Gifts of this nature cannot reasonably be expected to influence Shelly during the manager search and selection
process, especially given the gifts were from numerous, not a select few managers. She is not required to report the
gifts.

Question 3
In the event that local law is in conflict with GIPS, firms must:
a) present two versions of their performance.
b) comply with local law without further disclosure.
c) comply with local law and disclose the nature of the conflict.
When in conflict, GIPS requires that firms conform to applicable laws and to disclose the nature of the conflict.

Question 4
Allison Kinley is an analyst with Insight Research Associations (IRA). Kinley wants to start her own research firm and
is planning to leave IRA. She meets with her supervisor to discuss her resignation, but no documentation of the
meeting is produced. In anticipation of her departure, she copies several of the reports that she authored for IRA and
downloads a forecasting spreadsheet that she and a colleague at IRA had developed. Did Kinley violate the
Standards of Professional Conduct by:
Copying Reports? Downloading Spreadsheets?
A. Yes Yes
B. Yes No
C. No Yes

a) Row A
b) Row B
c) Row C
The reports and spreadsheets that Kinley produced as an employee at IRA belong to the firm. If she wishes to take
them, she must first get her supervisor's consent. Kinley may recreate the reports and spreadsheets from memory
after departing the firm.

Question 5
Royal Insight is a money management firm handling institutional portfolios. Royal recently landed a contract with Mega
Bank to provide investment advisory and portfolio management services. Ken Paine, a research analyst at Royal,
currently has a hold recommendation on Mega's stock. Further research and improving economic conditions have
caused Paine to consider upgrading his recommendation to buy. According to the Standards of Professional Conduct,
Paine must:
 a) maintain the hold rating for the duration of the contract.
b) provide only factual information about Mega Bank.
c) issue a buy rating with disclosure of the client relationship.
The Standard recognizes that conflicts are sometimes unavoidable and, therefore, requires that they be disclosed.

Question 6
Which of the following statements is most accurate regarding the requirements of a member or candidate under
Standard IV(A): Loyalty?
a) A member or candidate cannot ever engage in independent competition with their current employer.
b) A member or candidate can only engage in independent competition with their current employer if they
provide full disclosure to their employer prior to engaging in the activity.
c) A member or candidate can only engage in independent competition with their current employer if they gain
consent from their employer prior to engaging in the activity.
Although Standard IV(A) does not preclude members or candidates from entering into an independent business while
still employed, members and candidates who plan to engage in independent practice for compensation must notify
their employer and describe the types of services they will render to prospective independent clients, the expected
duration of the services, and the compensation for the services. Members and candidates should not render services
until they receive consent from their employer to all the terms of the arrangement.

Question 7
Material nonpublic information, as a matter of course in business, circulates within an investment banking department.
If the investment bank has an equity brokerage division, it may create considerable value by using the information in
advising the brokerage clients. In order to help conform to the Code and Standards, which of the following is the best
policy for the brokerage firm to follow?
a) Ensure that all transactions executed by the brokerage division that result from access to material nonpublic
information are fully documented.
b) Prohibit making buy and sell recommendations on the stocks of the investment banking clients until the
transactions with the clients are officially completed and the material information becomes public.
c) Prohibit purchase recommendations because of the unfair advantage that the information may create, but
allow the sale of current holdings until transactions with the investment banking clients are officially
completed and the material information becomes public.
The procedures in applying Standard II(A) are aimed to eliminate the possibility of dissemination of material nonpublic
information. The most common ways are to establish a firewall and to create a restricted list of securities if a firm has
access to material nonpublic information.

Question 8
Lyle Kent is a broker at Jackson & Phax (J&P), a discount brokerage firm that is expanding into research and asset
management services. In an effort to generate business for the new units, J&P is offering an employee incentive of
$500 for each new client referral from the brokerage unit that signs on with the asset management group. Kent has
made several successful referrals in the first month without disclosing the incentive program. Did Kent violate the
Standards of Professional Conduct?
a) Yes.
b) No, because the referral was directed toward his own firm.
c) No, because the bonus is part of his employment compensation.
The Standard does not prohibit referral fees or arrangements but requires that they be disclosed before entering into a
service agreement so that the client can make an informed judgment as to the motivations of the providers.

Question 9
Frank Clotti is an investment analyst working for a credit rating agency. Clotti has been told by his immediate
supervisor that structured products issued by a certain client should not receive a rating that is below investment
grade, as it might affect the advisory relationship that the credit rating agency has with the client. Clotti has already
conducted his analysis and concluded that several of the structured products issued by the client should be rated as
below investment grade. According to the Standards, Clotti should:
a) Adhere to the instructions of his supervisor
b) Assign the structured products the lowest possible investment grade
c) Refuse to associate with research that assigns a rating of investment grade to the structured products he
has concluded should be rated below investment grade
Clotti would be in violation of Standard I(B):Independence and Objectivity if he is associated with research that
assigns a higher credit rating to the structured products than that he has calculated as fair in his research.

Question 10
Jayden Murphy, CFO of Zinc Corp., which is a client of Winzee Financial Services, requests a manager to sell the
stocks of Zinc's competitor so that the stock price of the competitor falls, and buy Zinc's stocks to increase its stock
price. The manager of Winzee agrees to the CFO's request. Which of the following is most accurate?
a) Winzee's manager has complied with duties toward his client, so he has not violated any standard.
b) Both Winzee's manager and Jayden have violated Standard II(B).
c) Only Jayden has violated the standards related to market manipulation.
Both Winzee's manager and Jayden are attempting to manipulate the market by creating artificial demand-supply of
stocks. Preservation of market integrity is more important than implementing the client's request. They have violated
Standard II (B) pertaining to market manipulation.

Question 11
Misty Ash, CFA, is a stock analyst for ABC bank, and 50% of her compensation is based on the performance of the
bank's investment banking business. Ash was tasked to prepare a research report on one of ABC's investment
banking client, IMPEX Co., which is a power generation company in China. Despite reading numerous industry reports
suggesting oversupply and potential slowdown in the power sector in China, Ash issued a buy recommendation. Ash
least likely violated:
a) Standard IV (A) Loyalty.
b) Standard III (A) Loyalty, Prudence, and Care.
c) Standard I (B) Independence and Objectivity.
The first choice is correct. Ash's conduct least likely violated Standard IV (A) regarding loyalty to her employer, but she
did violate Standards III (A) and I (A).
The second choice is incorrect. Ash violated Standard III (A) by issuing a biased recommendation against her client's
interest, which in this case, are the subscribers of his report.
The third choice is incorrect. Ash did not exercise independence and objectivity when issuing her recommendation
and therefore is in violation of Standard I (B).

Question 12
Paula Nye, CFA, is an investment banker in the corporate finance division of a larger brokerage firm. As part of her
sales presentation to Omega Consolidated seeking to underwrite their next securities issue, she provides assurance
that her firm's research department will provide full coverage of the company. Has Nye violated the Standards of
Professional Conduct by making such a pledge?
a) Yes, provided that the research reflects favorably on the company.
b) No, provided that the research is unbiased and reflects the analyst's true opinion.
c) No, provided that the research presents only factual information.
Nye may assure a company that it will provide coverage for the new issue, but she cannot guarantee that the research
will reflect positively on the company.

Question 13
Steve Michael, CFA is having lunch with one of his friends at a local restaurant and overhears someone talking about
a pending merger for Pharmotech stock. Michael walks over to this person because he follows this stock as well and
knows nothing of a merger, only to find out it is the company's CEO making these statements. Which of the following
Standards of Professional Conduct applies to this situation?
a) Standard II(A)
b) Standard IV(A)
c) Standard V(A)
Standard II(A) covers the ethical guidelines for disclosing material nonpublic information.

Question 14
Which of the following is a violation to Standard I (D) Misconduct?
a) A member's investment recommendation on a few stocks has been wrong, and it has caused clients' losses.
b) A member negotiates with his employer for a salary increase based on a job offer by a rival firm.
c) An intoxicated CFA Level I candidate is removed from a restaurant for disturbing other customers.
The first choice is incorrect. If the member's recommendation was made with a reasonable and adequate basis, he
would not violate any standards by being wrong.
The second choice is incorrect. Requesting a salary increase does not affect his loyalty to the employer as long as the
member did not follow the Standard IV Duties to Employers.
The third choice is correct. Public intoxication and disturbing other customers are considered activities that reflect
adversely on a member's professional reputation, integrity, or competence and therefore violate Standard I (D)
Misconduct.

Question 15
The minimum number of years for retention of records according to CFA Institute, in the absence of any local
guidance is:
a) Five years.
b) Seven years.
c) Ten years.
The minimum number of years for retention of records according to CFA, in the absence of any local guidance is
seven years.

Question 16
Toby Green, CFA, works in an equity brokerage department at Mulberry Securities. Green has reviewed a report from
the firm's research department that suggests Crown Appliances is rated a “buy” because the sales figures for the
firm's new products have been better than those of the closest competition. Green lives on the same street as the
CFO of Crown Appliances. While waiting for the train to work, Green accidentally overheard the chief financial officer
of Crown Appliances report to his colleague on a mobile phone about an announcement in the morning newspaper
that a competitor has just launched a website for appliance distribution over the Internet. Upon returning to his office,
Green tipped his father to sell his holding based on this new information, but he still recommends a “buy” to all
Mulberry's clients. Green:
a) Was in full compliance with the Code and Standards.
b) Violated the Code and Standards because he gave a recommendation based on material nonpublic
information.
c) Violated the Code and Standards because he failed to maintain priority of transactions for his firm's clients.
Green did not violate Standard II(A): Material Nonpublic Information because the announcement appears in the
morning newspaper. His “buy” recommendation is consistent with that of his firm's research department and no
violation of Priority of Transactions occurs here.

Question 17
Ken James, CFA, is an economist at a large bank and he has never made direct investment decisions. James is the
latest winner of a well-publicized portfolio management competition in a national newspaper. Following this success,
he is launching an investment fund. In the prospectus he tells the prospective clients, “The fund has no long-term track
record, but the investment manager has shown considerable skills in managing hypothetical portfolios. In a
competition the manager has demonstrated a portfolio total return above 26% per year annualized, and that is more
than 12% above the benchmark for the same period.” He managed to raise a significant amount of money from retail
investors who are interested in investing in the fund. Has James violated the Code and Standards?
a) Yes, because the statement misrepresents James's track record.
b) Yes, because he should not quote performance for a hypothetical portfolio.
c) No, because the statement is a true and accurate description of James's track record.
Although James's experience in managing investments is based only on his winning a hypothetical portfolio
management competition, he does not misrepresent his capabilities and experience as described in Standard III(D):
Performance Presentation.

Question 18
Which of the following is/are transaction-based manipulation?
I: Spreading false rumors to induce trading by others.
II: Transactions that artificially distort prices or volume to give the impression of activity or price movement in a
financial instrument.
III: Securing a controlling position in a financial instrument to exploit and manipulate the price of the underlying asset.
a) I only
b) II and III
c) I, II, and III
The first choice is incorrect. I is information-based manipulation.
The second choice is correct. Only II and III are transaction-based manipulation.
The third choice is incorrect. I is information-based manipulation.

Question 19
Swankit Inc., an investment firm, hires business graduates for its internship program. The hired interns work on
emerging markets and prepare research report at the end of their internship tenure. Swankit publishes these reports
as its own research developed by its full-time employees. Which of the following statements is most accurate?
a) Swankit has violated Standard III(D) and not violated Standard I(C).
b) Swankit has violated Standard III(D) pertaining to misrepresentation only in publishing a third-party research
as its own.
c) Swankit has violated Standard I(C) pertaining to misrepresentation only in publishing a third-party research
as its own.
Swankit has violated Standard I(C) pertaining to misrepresentation only in publishing a third-party research as its own.
Firms can use a third-party research but it cannot publish the report under different authors.

Question 20
Martha Graham was an investment banker and CFA charterholder for 10 years before she was asked to join a political
campaign. After her team won the election, she joined the administration of the new official. During that period, she
allowed her membership in CFA Institute to lapse. Two years later, she returned to banking. According to the
Standards of Professional Conduct, Graham may resume using the CFA designation:
a) immediately upon her return by sending a dues payment to CFA Institute.
b) only after paying dues and filing her Professional Conduct Statement.
c) only after paying dues and passing CFA Institute's reinstatement exam.
Standard VII(B) stipulates that when a member allows their membership to lapse, they may not use the CFA
designation until they have resumed paying dues, filed their Professional Conduct Statement, and completed the CFA
Institute reinstatement procedures.

Question 21
Kevin Wang is a portfolio manager at A-Plus Advisors. He makes asset allocation decisions based on third-party
economic reports and the investment policy statements of each client. A-Plus maintains client records by scanning
documents into an electronic database and has a policy to purge records after five years. Wang is diligent in ensuring
that client investment policy statements are scanned but relies on third-party vendors to archive economic reports. Did
Wang violate the Standards of Professional Conduct with respect to:
Client Records? Economic Reports?
A. Yes Yes
B. Yes No
C. No Yes

a) Row A
b) Row B
c) Row C
The Standard requires that Wang maintain his own records in support of his investment decisions. By relying on the
vendors to retain the economic reports, he has failed to meet his obligations under the Standard. Storing client records
in electronic forms is acceptable under the Standard. Only in the absence of explicit company policies, does the
Standard recommend that records be retained for seven years.

Question 22
Barbara White is a portfolio manager with Ajax Advisors. Whenever an oversubscribed issue is offered, she instructs
the firm's brokers to purchase shares for her husband's account along with her client accounts. By including an
allocation to her husband's account, the client accounts receive slightly smaller lots in their allocations. Did White
violate the Standards of Professional Conduct?
a) Yes.
b) No, because she did not exclude any client accounts.
c) No, because her husband's account is a family client account.
White's husband's account is, for all intents and purposes, her own. Therefore, she is required to purchase shares for
her clients first and, only if any shares remain after satisfying their demand, then purchase for herself.

Question 23
Kevin Ruhl is a technology savvy broker who has embraced social media as a means of communicating with clients
and prospects. What started out as updates on personnel changes, special events, and articles of interest has drifted
toward solicitations for business and promotion of specific investments. The designated regulatory agency for
brokerage firms issued a new rule effective before Ruhl shifted his usage patterns that strictly limit sales and
marketing to investors via social media. The new rules were not well-publicized in the major media and financial press.
Ruhl's recent activities:
a) do not violate the Standards because the rule change has not been well-publicized.
b) violate the Standards because he is expected to be an expert in compliance.
c) violate the Standards because he is expected to inquire about those regulations prior to use.
If Ruhl is going to use new technology in his business, there is an expectation that he will seek out advice as to what
the rules governing that technology might be and to stay abreast of changes to those rules as the technology evolves.
When technology is new, the rules governing it can change rapidly. Standard I(A) implies that it is the member's
responsibility to be particularly sensitive to staying informed about them.

Question 24
Bob Hadrell, CFA, has recently joined a new firm that is currently reviewing its internal code of ethics. As part of this
review, the firm has asked Hadrell for a summary of the CFA Institute Code of Ethics and Standards of Professional
Conduct. Hadrell makes the following two statements:
Statement 1:”Members of CFA Institute and candidates for the CFA designation must promote the integrity of and
uphold the rules governing capital markets.”
Statement 2:” Integrity of Capital Markets: Market Manipulation.”
Hadrell should describe:
a) Both Statement 1 and Statement 2 as Standards of Professional Conduct
b) Statement 1 as a component of the Code of Ethics and Statement 2 as a Standard of Professional Conduct
c) Statement 1 as a Standard of Professional Conduct and Statement 2 as a component of the Code of Ethics
The Code of Ethics contains six components that address general areas of ethical behavior. The Standards of
Professional Conduct are seven areas of Professional Conduct that deal with specific types of behavior in certain
situations, e.g., Market Manipulation.

Question 25
A recommended performance presentation procedure is:
a) To indicate clearly whether performance is gross or net of fees.
b) To adhere to prior-year presentation formats when presenting performance to an audience.
c) To report performance of a representative portfolio manager.
The first choice is correct. To meet Standard III (D), members/candidates should include disclosures that fully explain
the performance results being reported, such as gross of fee or net of fee.
The second choice is incorrect.
The third choice is incorrect.

Question 26
Susan Jackson manages the pension fund for Elgin Manufacturing. Elgin's management is concerned about the rising
pension expense of the underfunded plan. The company's CFO suggests that Jackson add riskier assets to the
portfolio in the hopes of increasing the return and reducing the firm's pension expense. Based solely on this request,
should Jackson increase the risk profile of the plan assets?
a) Yes.
b) No, because short-term volatility is bad for pension plans.
c) No, because her fiduciary duty is owed to the plan beneficiaries.
Members must know their fiduciary duties and to whom they are owed. As plan manager, Jackson owes a fiduciary
duty to the plan beneficiaries (employees) and not the plan sponsor (Elgin). Increasing the plan's risk profile might
benefit Elgin in the short-term through lower pension expense, but it might also risk the plan's long-term soundness to
the detriment of the beneficiaries by exacerbating the underfunded status.

Question 27
Muhammad Taqdir, CFA, is an investment manager whose clients are high-net-worth individuals. Taqdir is a member
of a local charity organization that supports children with asthma. During a meeting at the charity, Taqdir recommends
that the organization send a letter to Xara Corporation requesting they make a donation to the charity. Taqdir knows of
Xara Corporation's involvement in this cause from previous discussions with a colleague in the office. The chief
executive and owner of Xara Corporation is a client of the firm. The charity, citing Taqdir's recommendation, sent the
letter and received a substantial donation. According to the CFA Institute Code and Standards:
a) Taqdir should not have disclosed the identity of the chief executive without his prior approval.
b) Taqdir should have informed the chief executive of Xara that he was going to receive a letter from the
organization.
c) If Taqdir had the prior approval of his colleague, it was acceptable to disclose the name of the chief
executive of Xara.
Regardless of the fact that that the organization finally received the substantial donation, Tariq has violated the
preservation of confidentiality under Standard III(E): Preservation of Confidentiality in disclosing the name of the chief
executive and owner of Xara without prior knowledge of both the chief executive and his colleague.

Question 28
Oversight and responsibility for the CFA Institute Professional Conduct Program is maintained by the:
a) Board of Governors
b) CEO
c) Disciplinary Review Committee
The CFA Institute Board of Governors maintains oversight and responsibility for the Professional Conduct Program
(PCP), which, in conjunction with the Disciplinary Review Committee (DRC), is responsible for enforcement of the
Code and Standards.
Question 29
Peter Morris is a senior portfolio manager at Robearn Investments. As part of his role he often makes internal
presentations at Robearn concerning current market conditions and his view on the various companies in the sector
that he covers. Due to his high profile and experience, Morris is approached to make public speeches and
presentations on similar matters at industry dinners and conferences in return for financial compensation. According to
Standard IV(B): Additional Compensation Arrangements, Morris should:
a) Refuse the offer
b) Disclose to Robearn the potential additional compensation from public speaking prior to engaging in the
activity
c) Obtain written consent from all parties involved prior to engaging in any public speaking
Morris delivers his presentations at Robearn as part of his employment, and giving similar speeches in a public
environment can be seen as earning additional compensation from services rendered to the employer. Members and
candidates must obtain permission for additional compensation/benefits because such arrangements may affect
loyalties and objectivity and create potential conflicts of interest. Disclosure allows an employer to consider the outside
arrangements when evaluating the actions and motivations of members and candidates. Moreover, the employer is
entitled to have full knowledge of all compensation/benefit arrangements so as to be able to assess the true cost of
the services members or candidates are providing.

Question 30
Pepper Tibbs is a portfolio manager with Albacor Asset Management. One of her wealthy clients, Walter Parks, offers
to pay Tibbs a bonus if his portfolio outperforms the S&P 500 index return by more than five percent in any given year.
According to the Standards of Professional Conduct, Tibbs may accept the offer if she obtains written consent from:
Albacor All Her Clients
A. Yes Yes
B. Yes No
C. No Yes

a) Row A
b) Row B
c) Row C
Receiving a bonus payment from a client can create a conflict of interest by encouraging preferential treatment.
Members are not prohibited from accepting bonus incentives from clients but must first obtain written consent from
their supervisors.