JUN18L1ETH/E05

Question 1
Clara Parker, one of the employees of Thinkblue Advisory Inc., regularly writes about various investment opportunities
in her personal blog. The clients of Thinkblue are also regular visitors of the blog. In one of her posts, she
recommended buying a stock that Thinkblue had recommended to sell. Which of the following is least accurate?
a) Clara has not violated the standards by expressing her opinion in a personal blog.
b) Clara has not violated the standards by contradicting the opinion of the firm.
c) Clara's supervisor has not violated the standards by allowing the usage of social media.
Clara has violated Standard V(B) pertaining to communication to clients. She is contradicting the opinion of her firm,
which will mislead the clients. Firms can allow communication to clients through social media, but it has to be strictly
regulated to ensure fair treatment of all the clients and fair information dissemination.

Question 2
Andrew Greenback, CFA, is the research analyst responsible for following Brown Appliances Company. This analysis
suggests that the stock should be rated a “sell” because the market outlook for the firm's new products is bleak
compared with that of the closest competition. Greenback lives on the same street as the CFO of Brown Appliances.
During a recent neighborhood gathering, Greenback's wife overheard the wife of the chief financial officer of Brown
Appliances complaining that her husband had been working late due to a hostile takeover threat from a foreign
appliances group. This fact has not yet been made public by Brown Appliances. Upon returning to his office,
Greenback released a strong “buy” recommendation to the public based on this new information. Greenback:
a) Did not violate the Code and Standards because he used mosaic theory to arrive at his recommendation.
b) Violated the Code and Standards by failing to distinguish between facts and opinions in his
recommendation.
c) Violated the Code and Standards because he did not have a reasonable and adequate basis for his
recommendation.
Standard V(A): Diligence and Reasonable Basis states that members must have a reasonable and adequate basis for
a recommendation. Greenback should have reinvestigated the company's situation and not relied only on unofficial
information. This may also be a use of material nonpublic information as stated in Standard II(A): Use of Material
Nonpublic Information.

Question 3
Vincent Allen, CFA, was a stock analyst with a large investment bank. He recently left to start his own research firm.
Based on his memory, he reconstructed a few research reports on companies that he covered during his former
employment. He was able to find all the supporting documents for his report online, except the meeting notes he had
with the management of the covered companies, and then he published the reports. Which of the following is most
likely true?
a) Allen is not in violation of any Standard.
b) Allen is in violation of the Standard relating to duties to employers.
c) Allen is in violation of the Standard relating to record retention.
The first choice is incorrect. Allen violated Standard V (C). The second choice is incorrect. Allen did not violate the
duties to employers because the Standard allows him to reconstruct the reports based on his knowledge and memory,
as long as he did not take the property of the former employer with him. The third choice is correct. Allen violated
Standard V (C) Record Retention because he used the information in the meeting notes for his report, but he did not
have the documentation to support that.

Question 4
According to Standard V (A), which one of the following is least likely to be the compliance procedures for having a
reasonable basis for investment recommendations?
a) Develop measurable criteria for assessing the quality of research, the reasonableness and adequacy of the
basis for any recommendation, and the accuracy of recommendations over time.
b) Develop detailed, written guidance for analysts, supervisory analysts, and review committees that
establishes the due diligence procedures for judging whether a particular recommendation has a reasonable
and adequate basis.
c) Maintain research notes and other documents that support their current investment-related communications.
It is the compliance procedures for having a reasonable basis for investment recommendation.

Question 5
Roman Alonzo, CFA, an investment banker in a country with strict confidentiality laws, was conducting due diligence
on a merger and discovered evidence of illegal activities by his client. Alonzo's best course of action, according to the
Standards of Professional Conduct, is:
a) To contact the appropriate regulatory bodies.
 b) To advise the client to stop the illegal activities.
c) To consult with his Compliance Department.
Members must comply with the applicable law and therefore keep the client confidential even if the information
concerns illegal activities on the part of the client. Alonzo's best course of action would be to consult with his
compliance personnel or outside counsel before disclosing confidential information about clients.

Question 6
Softech Systems Inc. is an important client of Jacob & Jacob Corp., an investment banking firm. Jacob and Jacob
does not want to release any adverse opinion about Softech, as it does not want to spoil its business relationship with
Softech. Jacob & Jacob should:
a) Include Softech in its restricted list and should disseminate only factual information about the company.
b) Release adverse opinion about Softech Systems.
c) Request another investment banking firm to release reports about Softech Systems, as it has decided not to
release any opinion on Softech Systems.
Jacob & Jacob Corp. should include Softech in its restricted list and should disseminate only factual information about
the company.

Question 7
Chow Lee, CFA, delivers a report to his firm's clients about an option strategy that his firm offers to earn high return
during the period of high short-term interest rate volatility. However, Lee did not include any details of the strategy
because he did not want to share his model, and the report did not consider the risk if the short-term interest rate
volatility actually decreases. In this scenario, how many violations of Standard V (B) did Lee commit?
a) 1
b) 2
c) 3
Lee has committed two violations. First, Lee must include enough details of the strategy so that the clients can follow
and challenge the report's reasoning. Second, the clients should be informed about the principal risk of the strategy.

Question 8
Jonathan Seller, CFA, works for an investment bank that is acting as the principal underwriter for an issue of stock of
a large tire manufacturer. Seller found out that the prospectus has concealed an impending product recall due to a
quality control error. Since the number of items affected is relatively small, the product recall is planned to be a quiet
affair. However, Seller is aware that recently a competitor's product recall received a large amount of adverse
publicity. The preliminary prospectus has been distributed. According to the Code and Standards:
a) Seller should do nothing, as it may jeopardize the success of the issue.
b) Seller should revise the preliminary prospectus to include the omitted information to avoid any possible
misrepresentation.
c) Seller should inform CFA Institute of the violation of the Code and Standards so he can clear himself of the
possible misrepresentation.
Standard V requires that members shall make reasonable and diligent efforts to avoid any material misrepresentation
in any research report or investment recommendation. The second choice is the best answer.

Question 9
Sam Smith, a portfolio manager, has invested in Ken Petrochemicals Corp. He discovers that Clarke Consultancy Inc.,
a leading financial research firm, is planning to give a sell recommendation of Ken's stocks. Sam approaches Jim
Clarke, the head of the research firm, and requests Jim to postpone the publication of the research. Jim agrees to the
request for a deal from Sam. Which of the following statements is most accurate?
 Statement I: Jim has violated Standard III(A).
 Statement II: Both Jim and Sam have violated Standard II(B) related to market manipulation
and Standard I(B) related to independence and objectivity.
 Statement III: Both Jim and Sam have violated Standard V (A).
a) Statement I only.
b) Statements II and III.
c) Statements I and II.
Both Jim and Sam have violated Standard II(B) related to market manipulation and Standard I(B) related to
independence and objectivity. Jim has violated Standard III(A) related to the duties to clients. It cannot be concluded
that they have violated Standard V(A), as the given information does not indicate whether they have compromised
diligence and reasonable basis in their investment recommendation.

Question 10
Henry Mullen is a research analyst who bases his research on a wide variety of sources, including digital media such
as text messages, blog posts, and Twitter posts. There are no local regulations that address the use of digital media
sources in research reports. Which of the following statements best describes the duties imposed on Mullen under
Standard V(C): Record Retention?
a) Mullen is not permitted to use these digital media sources in his research.
b) Mullen is permitted to use these digital sources in his research providing all relevant information is retained.
c) Mullen is permitted to use these digital sources providing he adheres to local regulations.
Members and candidates should understand that although employers and local regulators are developing digital
media retention policies, these policies may lag behind the advent of new communication channels. Such a lag places
greater responsibility on the individual to ensure that all relevant information is retained. Examples of nonprint media
formats that should be retained include, but are not limited to, e-mails, text messages, blog posts, and Twitter posts.