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

• Question 3901:

  Smith, a research analyst with a brokerage firm, decides to change his recommendation on the common stock of Green company, Inc., from a buy to a sell. He mails this change in investment advice to all the firm's clients on Wednesday. The day after the mailing, a client calls with a buy for 500 shares of Green Company. In this circumstance, Smith should:

  A. accept the order.

  B. advise the customer of the change in recommendation before accepting the order.

  C. not accept the order because it is contrary to the firm's recommendation.

  D. not accept the order until five days have elapsed after the communication of the change in recommendation.

  Correct Answer: B

  Under Standard IV (B.3), investment recommendations must be disseminated to all clients at the same time, so that all clients are treated fairly. The client's request is contrary to Smith's latest recommendation which he has not yet received. Smith must now make sure that the client receives the changed recommendation. If the client still wants to place a buy order for the shares, only then is Smith obligated to comply with the client's directive.

• Question 3902:

  When an analyst reaches conclusions about a firm's impending announcements before the actual release of information, using non-material, non-public information in conjunction with public information, insider trading charges cannot be leveled against her. This arises from a legal defense against insider trading charges known as:

  A. the Shingles Theory.

  B. the question is based on false premise. The analyst can be held responsible for insider trading if she uses any inside information in her conclusions.

  C. the Insider Legal Statute.

  D. the Mosaic Theory.

  Correct Answer: D

  Insider trading charges arise only when the inside information used is material and non-public. Analysts who use non-material inside information in conjunction with publicly available data to draw conclusions which happen to be the same as those that would be derived given material inside information are shielded from insider trading charges under the "Mosaic Theory." The logic behind the defense is that investment analysts are exposed to a wide variety of public information (i.e., a "mosaic of information") and already have a good idea about what the information means. Further, the inside information, when non-material, cannot (by definition) have been the primary shaper of the final conclusions. Hence, the possession of the inside information makes only marginal contribution to the conclusions and as such, should not trigger insider trading violations.

• Question 3903:

  Which of the following AIMR Standards states that additional compensation agreements must be disclosed to the employer?

  A. IV

  B. III (D)

  C. V

  D. VI (B)

  Correct Answer: B

  Standard III (D) - Disclosure of Additional Compensation Arrangements states: "Members shall disclose to their employer in writing all monetary compensation or other benefits that they receive for their services that are in addition to compensation or benefits conferred by a member's employer."

• Question 3904:

  Susan Jackson, with HRS Investments, is appearing in court as an expert witness. She will have to use research done at HRS, to which she did not contribute directly, during her testimony. Which of the following is true, in relation to Jackson's need to comply with Standard II (C)?

  A. Jackson is representing herself and may or may not attribute any of HRS's research.

  B. Jackson is representing HRS and must attribute any of HRS's research.

  C. Jackson is representing herself and must attribute any of HRS's research.

  D. There is not enough information given to answer this question.

  E. Jackson is representing HRS and may or may not attribute any of HRS's research.

  Correct Answer: C

  Expert witnesses represent themselves, not organizations. Thus, Susan must attribute any of HRS's research to HRS and the team that conducted the research.

• Question 3905:

  Level I verification requires independent attestation that the requirements of the AIMR-PPS have been met on a(n) ________ basis.

  A. international

  B. attainable

  C. nationwide

  D. firmwide

  Correct Answer: D

  This is a requirement under Level I verification procedures.

• Question 3906:

  Carmina Aburana is a sales assistant to Drew Door, a sales manager at Hicost Brokerage. Hicost has a policy of requiring at least 20% margin on stocks that are deemed illiquid or extremely risky. For these purposes, it creates and updates a list of such stocks on a weekly basis. Yoddly Yoo, Inc. is an up and coming internet firm whose stock has been on this list for some time now. One of Carmina's "blue chip" clients, Amadeus, has been speculating on Yoddly's stock for the past two weeks, repeatedly going in and out of the market. In this process, he has unfortunately generated significant losses and his margin on the account has fallen to 12%. To make up for the shortfall, Amadeus calls up Carmina and requests a "borrowing on the account" of 10% for the next 2 weeks, promising to pay a hefty interest rate of 38%on an annualized basis. Since Amadeus has never been in default, Carmina agrees to the arrangement and moves some funds from another client's account. There is no explicit rule at Hicost that prohibits such an arrangement, though it is clearly an oversight on part of the Compliance department. Drew notices this transaction and calls Carmina for an explanation. On hearing the explanation, he tells Carmina that such arrangements are in violation of the company rules and should not be repeated. After 2 weeks, Amadeus supplies the necessary margin for his account.

  A. Drew has violated Standard II (B) - Professional Misconduct.

  B. Carmina has not violated any AIMR code but Drew has violated Standard III (E) - Responsibilities of Supervisors.

  C. None of these answers, since the infraction was too minor and inconsequential.

  D. Carmina has violated Standard III (B) - Duty to Employer.

  Correct Answer: B

  Carmina has shown poor judgment in not recognizing the spirit behind Hicost's 20% margin requirement. However, in the absence of any explicit rule in this about fund transfers, she can make a case that she is not in violation of any laws or code of conduct. Drew, on the other hand, has been negligent in his duties. If he understands the import of the margin rule, then he must take steps to unwind the effects of the infraction as soon as possible. In this case, he should have directed Carmina to terminate the arrangement with Amadeus and require that the requisite margin be posted immediately. Further, verbal admonitions are not enough to satisfy supervisory duties when handling a supposed violation of rules. Drew must determine how best to prevent such occurrences in the future and also discuss with the Compliance Department the need for revising the employee rules handbook.

• Question 3907:

  Standard III (D) is ________.

  A. None of these answers

  B. Disclosure of Additional Compensation Arrangements

  C. Disclosure of Conflicts to Employer

  D. Obligation to Inform Employer of Code and Standards

  E. Duty to Employer

  F. Responsibilities of Supervisors

  Correct Answer: B

  Standard III (A) deals with the Obligation to Inform Employer of Code and Standards. Standard III (B) deals with the Duty to Employer. Standard III (C) deals with Disclosure of Conflicts to Employer. Standard III (D) deals with Disclosure of Additional Compensation Arrangements. Standard III (E) deals with Responsibilities of Supervisors.

• Question 3908:

  Grey recommends the purchase of a mutual fund that invests solely in long-term U.S. Treasury bonds. He makes the following statements to his clients:

  I. "The payment of the bond is guaranteed by the U.S. government; therefore, the default risk of the bonds is virtually zero."

  II.

  "If you invest in the mutual fund, you will earn a 15 percent rate of return each year for the next several years." Did Grey's statements violated AIMR's Code and Standards?

  A.

  Neither statement violated the Code and Standards.

  B.

  Statement I and II violated the code and Standards.

  C.

  Only statement I violated the Code and Standards.

  D.

  Only statement II violated the Code and Standards.

  Correct Answer: D

  This question deals with Standard IV (B.6), Prohibition against Misrepresentation. Statement I is a factual statement that discloses to clients and prospects accurate information about the terms of the investment instrument. Statement II, which guarantees a specific rate of return, is an opinion stated as a fact and therefore violates Standard IV (B.6).

• Question 3909:

  Under AIMR Rules of Procedure for the Proceeding Related to Professional Conduct, membership in AIMR and/or the right to hold and to use the CFA designation may be summarily suspended by AIMR's Designated Officer for the following misconduct:

  I. Conviction for a crime that is defined as a felony or its equivalent.

  II. Indefinite bar from registration under the securities laws (even though reapplication may be made after a specific period of time).

  III.

  Failure to complete and return a professional conduct statement for each of two successive years.

  A.

  I only.

  B.

  I and II only.

  C.

  IV only.

  D.

  II only.

  E.

  III only.

  F.

  II and III only.

  G.

  I, II and III.

  Correct Answer: G

  This question relates to AIMR's summary suspension powers as defined in the Bylaws under the Professional Conduct Program. Statements I, II and III describe grounds for summary suspension of membership in AIMR and/or the right to hold and use the CFA designation.

• Question 3910:

  Willier is the research analyst responsible for following Company X. All the information he has accumulated and documented suggest that the outlook for the firm's new products is poor, so the stock should be rated a weak hold. During lunch, however, Willier overhears a financial analyst from another firm offer opinions that conflict with Willier's forecasts and expectations. Upon returning to his office, Willier releases a strong buy recommendation to the public. Willier:

  A. violated the Standards by failing to distinguish between facts and opinions in his recommendation.

  B. was in full compliance with the Standards.

  C. violated the Standards because he did not have a reasonable and adequate basis for his recommendation.

  D. violated the Standards because he did not seek approval of the change from his firm's compliance department.

  Correct Answer: C

  The question deals with Standard IV (A.1), Reasonable Basis and Representations. Willier's actions in changing the recommendation based on the opinion of another financial analyst is not an adequate basis for the recommendation. This question does not illustrate a violation of the need to distinguish between facts and opinions. Seeking approval from the firm for a change in a recommendation is a matter of policy set by the firm, not by the Standards.