CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 3761:

  A manager who pays a higher commission than would normally be paid to purchase the goods or services is said to be ________ services.

  A. exploiting

  B. undercharged for

  C. paying up for

  D. fee-bound for

  E. none of these answers

  Correct Answer: C

  A manager who pays a higher commission than would normally be paid to purchase the goods or services is said to be paying up for services. This practice is a violation of fiduciary duties to the client. However, various countries' securities laws permit a manager to pay up for goods and services without violating the manager's fiduciary duty so long as the requirements of the law are followed.

• Question 3762:

  "Prohibited transactions" are discussed in Standard IV (B.4), Priority of Transactions. Which of the following is NOT suggested as a prohibited transaction for investment personnel?

  A. equity-based IPOs

  B. private placements

  C. equity securities

  D. none of these answers

  E. municipal bonds

  Correct Answer: E

  Under the compliance procedures for Standard IV (B.4), members and their firms should clearly define prohibited transactions so that employees completely understand their obligations to clients and their employer. Participation by investment personnel in equity or equity-based IPOs should be restricted. Members' firms should, for example, impose strict limits on investment personnel acquiring securities in private placements. Managers should not be prevented, however, from purchasing government issues, such as municipal bonds and/or other government securities.

• Question 3763:

  Institutional Investments is a fund management firm that provides investment advice as well as investment management to large client accounts. I.I.'s senior portfolio manager, Richard Fineman's cousin, Alberto Onestone, runs a small brokerage firm. Fineman has directed all of his junior portfolio managers to execute their trades with Alberto. Alberto's fees are higher than those available from discount brokers but Alberto provides Fineman and his managers a wealth of investment tips that he hears on the street. This helps Fineman in producing a successful investment newsletter. This helps enhance I.I.'s reputation, attracting new clients and allowing lower fees on all the accounts. Since the client accounts benefit from this arrangement, Fineman's managers do not think the practice is unethical. The relationship between Fineman and Onestone is not explicitly disclosed to the clients. You are currently interviewing with them for the position of a portfolio analyst. As a CFA Level I candidate, they portray the above situation as a hypothetical case and ask you if there are any violations of the AIMR code of Ethics that they have heard about. Your response should be which of the following?

  I. Fineman and his managers are violating Standard IV (B.1) - Fiduciary Duties since they are not executing the trades at the lowest price available.

  II. Fineman and his managers are violating Standard IV (B.1) - Fiduciary Duties since they are using client brokerage to pay for services that do not directly benefit them.

  III. Fineman and his managers are violating Standard IV (B.7) - Disclosure of Conflicts to Clients and Prospects.

  IV.

  Fineman and his managers are not violating the Code as far as you can tell from the details given.

  A.

  I, II and III

  B.

  IV only

  C.

  II only

  D.

  II and III only

  Correct Answer: D

  By not revealing the relationship between Fineman and Onestone - which is clearly a source of conflict of interest - the managers of Institutional Investors are in violation of Standard IV (B.7) - Disclosure of Conflicts to Clients and Prospects. Further, while there is a symbiotic relationship between I.I. and Onestone to the extent that both the parties gain, the clients who pay higher brokerage lose. Even though the practice leads to lower fees, it is not clear that the clients get benefits worth the cost incurred on their accounts. Further, there is a clear sense of impropriety in the setup. Unless the excess brokerage directly benefits the client accounts, this case is a violation of Standard IV (B.1) - Fiduciary Duties.

• Question 3764:

  Standard III (D) - Disclosure of Additional Compensation Arrangements - requires members to provide complete disclosure to their employer about any additional compensation arrangements. In order to abide by this, you must:

  A. Inform the legal department in writing.

  B. Inform your immediate supervisor in writing or by email.

  C. Inform senior management orally or in writing.

  D. Inform your supervisor in writing, by email or orally.

  Correct Answer: B

  Standard III (D) requires written notification to the employer. This includes any form of communication that can be documented.

• Question 3765:

  Which of the following is true about Standard III (B) - Duty to Employer?

  A. It prohibits a departing employee from making arrangements to enter independent practice prior to leaving current employment.

  B. It precludes a member from entering into an independent business that is in direct competition with the employer.

  C. It requires the employee to obtain written permission from the employer as well as the outside entity before entering independent practice.

  D. It requires departing employee to give all the details about the independent practice before leaving the current employment.

  Correct Answer: C

  Standard III (B) - Duty to Employer - does not preclude a member from entering into independent practice while still employed. It does require the employee to obtain written permission from the employer as well as the outside entity before doing this. It does not prohibit a departing employee from making arrangements to enter independent practice prior to leaving current employment, as long as such preparations do not constitute a breach of loyalty toward the employer.

• Question 3766:

  Tiarera has just landed a big account for her fund and is in a joyous mood. To celebrate, she decides to go out to a bar with some of her friends and share some drinks. Tiarera, however, has a weak constitution and cannot handle alcohol very well. In fact, many times in the past, she has gotten into drunken altercations at bars. Tonight turns out to be no different; Tiarera and her friends are arrested for disorderly conduct and convicted for misdemeanor. Tiarera has

  A. has violated Standard II (B) - Professional Misconduct - because of a pattern of misconduct.

  B. not violated any AIMR standard since the arrest was for a misdemeanor, an offense not serious enough to trigger sanctions on the first occurrence.

  C. has violated Standard II (B) - Professional Misconduct - because she has been involved in a misdemeanor.

  D. not violated any AIMR standard since the arrest took place due to activities not related to her work.

  Correct Answer: A

  A single instance of misdemeanor is generally not serious enough to constitute a violation of Standard II (B). However, Tiarera has shown a pattern of professional misconduct that reflects poorly on her firm and her profession, thus violating the AIMR standard.

• Question 3767:

  Carlos recently attended a seminar on a new technique in identifying possible relative mispricings amongst stocks. Impressed by the presentation, he used the technique to suggest that two of his biggest clients rebalance their portfolios with a heavier emphasis on the stocks the technique identified as being mispriced. While presenting this suggestion to his clients, Carlos did not mention anything about the source of the ideas used. Before recommending the changes, he did not personally check the results nor did he try to find out if there were any significant caveats or assumptions associated with the methodology. He has:

  I. violated Standard II (B) - Professional Misconduct.

  II. violated Standard II (C) - Prohibition against Plagiarism.

  III. violated Standard IV (A.1) - Reasonable Basis and Representations.

  IV.

  violated Standard IV (B.1) - Fiduciary Duties.

  A.

  I, II and III

  B.

  I and III only

  C.

  I, II, III and IV

  D.

  II and III only

  Correct Answer: D

  By not mentioning the sources of the results used, Carlos violated AIMR Standard II (C) related to Plagiarism. By not exercising reasonable care in verifying the soundness of his recommendations, he violated Standard IV (A.1). However, Standard II (B) - Professional Misconduct - and Standard IV (B.1) Fiduciary duties are not directly relevant to this situation.

• Question 3768:

  According to The Code of Ethics, members of AIMR shall: "Use reasonable care and exercise ________."

  A. each and every day

  B. none of these answers

  C. independent professional judgment

  D. optimal diversification

  E. open communications with clients

  Correct Answer: C

  According to The Code of Ethics, members of AIMR shall: "Use reasonable care and exercise independent professional judgment."

• Question 3769:

  Standard III includes which of the following?

  A. Performance Presentation

  B. All of these answers

  C. None of these answers

  D. Reasonable Basis and Representations

  E. Disclosure of Additional Compensation Arrangements

  F. Use of Professional Designation

  Correct Answer: E

  Standard III deals with Obligation to Inform Employer of Code and Standards, Duty to Employer, Disclosure of Conflicts to Employer, Disclosure of Additional Compensation Arrangements and Responsibilities of Supervisors.

• Question 3770:

  According to the AIMR-PPS, ________ accounting must be used for fixed-income and all other securities that accrue income.

  A. time-weighted

  B. LIFO

  C. accrual

  D. fixed income

  Correct Answer: C

  Accrual accounting must be used for fixed-income and all other securities that accrue income. Accrued income must be included in the market value calculation of the denominator and the numerator. This is a requirement for calculation of returns.