CFA

Subject: Ethics
Topic: Full Portion Test
Marks - 60 Time - 120 Min

Q.1 Which of the following is most likely an appropriate goal of using an ethical
decision-making framework?
A) Allow for potential unintended consequences
B) Justify the decision to a broad range of stakeholders
C) Minimize the perspectives included in the decision making process

Q.2 According to CFA Institute, which of the following best describes the motivation
for codifying an investment firm's belief system?
A) Ethical behavior improves customer satisfaction.
B) A firm's conformity to societal expectations benefits all stakeholders.
C) An ethical environment based on altruistic motives attracts more clients.

Q.3 Which of the following situational influences is most likely to challenge ethical
behavior?
A) Loyalty to clients
B) Loyalty to employer
C) Belief in financial market integrity

Q.4 A framework for ethical decision-making will most likely be effective when:
A) external stakeholders are considered.
B) only verifiable information is included.
C) the framework steps are followed in order.

Q.5 If a professional organization has standards of conduct in addition to its code of

ethics, the purpose of the standards is most likely to describe:
A) shared principles.
B) laws and regulations.
C) acceptable behaviors.

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Q.6 To avoid making a decision that has unforeseen ethical consequences, which of
the following tools would most likely be helpful?
A) Code of ethics
B) Standards of conduct
C) Ethical decision-making framework

Q.7 When comparing ethical standards with legal standards, which of the following
statements is most appropriate?
A) Behavior that complies with ethical standards may not always be legal.
B) A code of ethics provides specific rules that exceed legal requirements.
C) Regulations codify ethical standards, so a separate code of ethics is not
needed.

Q.8 Which of the following best describes an illegal but ethical activity?
A) Whistle-blowers alerting authorities of corporate corruption.
B) An analyst acting on a tip from a corporate insider in the United States.
C) Managers sharing the firm's complete fee structure with potential clients
and the public.

Q.9 Which of the following best explains why recognition of investment

management as a profession lags behind other professions? The investment
management profession has not yet:
A) created high entry standards.
B) established a body of knowledge.
C) required membership in a professional body.

Q.10 The investment profession most likely builds and maintains trust by:
A) advocating for increased legal penalties.
B) establishing standards that match those of regulators.
C) having its members accurately convey investment traits to clients.

Q.11 Which of the following best explains a need for trust in the investment
management profession? Investment management professionals are expected
to:
A) maximize client wealth.
B) work in a highly regulated environment.
C) be more aware of risks than their clients.
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Q.12 The most appropriate reason why trust is needed in the investment profession
is so that investment managers can:
A) deliver more value to society.
B) increase the prestige of the investment profession.
C) have greater control over client investment decisions.

Q.13 Which of the following is the least effective way for a professional association
to build trust with clients? The association publicizes that it:
A) administers a difficult qualifying exam.
B) operates in a highly regulated industry.
C) monitors compliance with a code of ethics.

Q.14 An investment professional least likely displays a high level of professionalism

when:
A) maximizing revenue for their employer.
B) working late to help a co-worker finish a project.
C) researching the efficacy of a new analytical model.

Q.15 Which of the following best describes ethical conduct? Ethical conduct balances
concerns for consequences to others with:
A) self-interest.
B) legal outcomes.
C) minimally acceptable behavior.

Q.16 Which of the following is one of the six elements of the CFA Institute's Code of
Ethics? Members and candidates must:
A) judge the suitability of investments in the context of the client's total
portfolio.
B) promote the integrity of the global capital markets for the ultimate benefit
of society.
C) avoid misrepresentations relating to analysis, recommendations, actions,
or other professional activities.

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Q.17 Standard VI(C) of the Standard of Professional Conduct on Conflicts of Interest
most appropriately requires Members and Candidates to:
A) obtain their employers' written approval for outside compensation.
B) notify clients that they may receive a referral fee for recommending a
product.
C) avoid sending more detailed recommendations to clients based on
personal relationships.

Q.18 According to The Code of Ethics, members and candidates are most likely
required to:
A) try to improve the competence of other investment professionals.
B) place clients' interests above the integrity of the investment profession.
C) promote the integrity of the global markets regardless of its effect on
society.

Q.19 The CFA Institute's Professional Conduct staff identifies a member as the
subject of a written complaint. According to the CFA Institute Bylaws and Rules
of Procedure for Professional Conduct, which of the following is most likely the
Professional Conduct staff's next step?
A) Interview the member's supervisor
B) Issue the member a cautionary letter
C) promote the integrity of the global markets regardless of its effect on
society.

Q.20 The CFA Institute's Professional Conduct staff (PCS) finds that Simon Perret,
CFA, has violated the Standards. Perret rejects the PCS's proposed sanctions.
Which of the following is most likely to occur?
A) The PCS revokes Perret's charter
B) The PCS issues Perret a cautionary letter.
C) The Disciplinary Review Committee reviews the PCS's investigative report.

Q.21 According to Standard IV Duty to Employers, all members and candidates must:
A) judge the suitability of investments on a total portfolio approach.
B) not accept gifts that create conflicts of interest without written consent.
C) not engage in conduct that compromises the reputation of the CFA
Institute.
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Q.22 If a firm elects to verify its compliance with the Global Investment Performance
Standards (GIPS), verification most likely:
A) is required at least annually.
B) must be performed on all the firm's composites.
C) ensures that a composite is accurately presented.

Q.23 A firm is in a jurisdiction where local regulations concerning investment

reporting requirements are very similar to the Global Investment Performance
Standards (GIPS), except that a firm cannot provide performance information
for composites that are in existence for less than five years. If the firm follows
local regulations, can it claim that it is GIPS-compliant?
A) No, since a firm must comply with all the Standards to claim GIPS
compliance.
B) Yes, provided that the firm indicates where GIPS conflicts with local
regulations.
C) Yes, provided that the firm furnishes independent verification that it
follows local regulations.

Q.24 If an investment firm has its GIPS compliance verified, the verifier must attest
that the firm is compliant at the:
A) firm level. B) account level. C) composite level.

Q.25 When constructing a composite, which of the following is least likely a

requirement of GIPS?
A) Each composite must include two or more discretionary portfolios.
B) A portfolio's inclusion in a composite is determined on an ex ante basis.
C) All actual, fee-paying, discretionary portfolios are required to be in at least
one composite.

Q.26 An investment management firm most likely can claim compliance with the
Global Investment Performance Standards (GIPS) if it:
A) includes only discretionary portfolios in its composites.
B) clearly distinguishes composites that do and do not comply with GIPS.
C) excludes composites for which it has less than five years of performance
history.
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Q.27 For Global Investment Performance Standards(GIPS®) compliant firms, which of
the following best describes the purpose of composite construction?
A) Equal trade allocations ensure consistent reporting.
B) Composites' universal asset class definitions improve comparability.
C) Composites bar managers from preparing performance reports using only
the best accounts.

Q.28 According to CFA Institute, which of the following are most likely to be the
main beneficiaries of GIPS-compliant reporting?
A) Investment firms and prospective clients
B) Governmental regulators and investment firms
C) Prospective clients and governmental regulators

Q.29 An investment firm has multiple subsidiaries across countries. The subsidiaries
have different business names but operate under the same brand name. When
defining the firm to claim compliance with GIPS standards, which subsidiaries
should the firm most appropriately include?
A) Any subsidiaries operating under the same brand name
B) Only subsidiaries using the business name of the investment firm
C) Only subsidiaries located in the country the firm is seeking compliance

Q.30 To claim compliance with Global Investment Performance Standards (GIPS), a

firm most likely will state that it:
A) calculates performance in accordance with GIPS.
B) excludes portfolios from composites based on ex ante criteria.
C) omits reporting on composites that have been in existence for fewer than
5 years.

Q.31 Based on the GIPS fundamentals of compliance, a firm must define:

A) the firm and discretion. B) prospective clients and the firm.
C) discretion and prospective clients.

Q.32 Which of the following most accurately describes area son why the Global
Investment Performance Standards were developed?
A) To encourage diversity in performance reporting
B) To set a minimum period for reporting past performance
C) To provide flexibility in how terminated accounts are reported
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Q.33 Parkhurst Investment Advisors (PIA) is a fee-based provider of stock selection
and asset allocation advice to large, defined-benefit pension plans. It does not
manage assets but maintains detailed records on its recommendations. For the
last 12 years, PIA has created composites from the different portfolios that it
has recommended to its clients. In its advertising literature, PIA displays each
year's return for its composites, both gross of and net of a hypothetical 1%
annual fee, as well as the return for each composite's benchmark. Can PIA
claim compliance with the Global Investment Performance Standards (GIPS)?
A) No, since it does not manage assets.
B) No, since GIPS place a 10-year limit on past information.
C) Yes, since it presents the returns for the composites as well as their
benchmarks.

Q.34 Nahiya Salehi, CFA, helps manage the pension fund for Azhar, Inc. One year
ago, Azhar hired Yasir Kassem to lead the pension team, and since then the
returns on Salehi's recommendations have lagged behind those of her
colleagues.
One day, Kassem tells her, "I need you to develop relationships with managers
at other companies for information to trade on.
Your colleagues have made friends with directors at other companies who
provide them with strategic information."Salehi feels that this constitutes
insider trading, which is against local law. She brings the conversation to the
attention of Azhar's compliance manager and chief financial officer, who tell
her not to worry since this is common practice and the pension fund returns
have improved since Kassem joined the team. To comply with Standard IV(A)
Loyalty, Salehi's best course of action is to:
A) do nothing, since no clients are being harmed.
B) develop the relationships as Kassem suggests.
C) disclose the practice to local regulatory authorities.

Q.35 Zheng Dongmei took the Level III CFA exam and is awaiting her results. She
currently works as a financial advisor but wants to transition to research
analysis. Zheng believes that the CFA charter can help her with the transition.
She titles her resume "Zheng Dongmei, CFA Level II," and under education she
writes "Passed CFA Level II exam" and "Candidate for the Level IIICFA exam
(charter pending)."In composing her resume, Zheng most likely violated
Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA
Program:
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 A) only by listing "charter pending."
B) only by listing "Zheng Dongmei, CFA Level II."
C) both by listing "charter pending" and " Zheng Dongmei, CFA Level II."

Q.36 Nancy Bender, CFA, manages multigenerational clientele for Arch Investments,
Inc. Bender hosts a social media page that is exclusively for clients. In January
20X5, she posts her quarterly investment review to the social media page,
which states:
"Wishing everyone a Happy New Year. In 20X5, we expect monetary and fiscal
policies will benefit the overall market and your investments. If you have any
questions, please let us know as we are here to help you. Remember, as we
discussed, do not post confidential information to this social media page."
Leo Faber, one of Bender's clients, responds to Bender's social media review
with the following post:
"Nancy: Martha and I want to set up trusts of $1 million for each of our
grandchildren. Also, please see the attached tax forms detailing our income for
20X4. Please forward this to your taxperson we used last year."
Bender immediately deletes Faber's post after reading it. According to Standard
III(E) Preservation of Confidentiality, does Bender most likely violate the
Standard?
A) No
B) Yes, since Bender should prevent, not delete, Faber's post.
C) Yes, since Bender uses social media pages to communicate with clients.

Q.37 Grace Kim, CFA, has been an adviser to clients at Keund on Investments for 10
years. Kim negotiates with Keund on to cutback her hours to 20 per week (from
50) to allow her to manage her father's care. Kim agrees to give up her advising
role and work in the firm's back office. She will be paid 25% of her usual salary,
but she hopes to eventually return to full-time advising. Kim informs clients of
her new role and that they will have a new adviser at the firm. The next day,
one of her clients offers to pay her to confidentially review any
recommendations he receives from another adviser, as he trusts her judgment.
To comply with Standard IV(B) Additional Compensation Arrangements, which
of the following actions is most likely required of Kim?
A) Refuse the client's offer
B) Accept the offer and inform her employer in writing
C) Obtain written permission from her employer before accepting the offer

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Q.38 Zhang Yong, CFA, is a CFA Institute volunteer who is helping create material for
the upcoming Level III CFA exam. Zhang meets with CFA Institute staff and
other question writers and is assigned to write an essay question about
portfolio management for a college endowment fund. At dinner one night,
Zhang tells his friend, Li Min, CFA, about the question he is working on.
Li manages the endowment fund of a local university, and Zhang believes that
Li can provide helpful insight. Has Zhang most likely violated Standard
VII(A)Conduct as Participants in CFA Institute Programs?
A) Yes.
B) No, since Li is not a Candidate for an upcoming exam.
C) No, since the question is under deliberation and is not finalized.

Q.39 Rahul Agarwal, CFA, is the Chief Investment Officer of Bagh Capital. He is having
lunch with a group of prospective client sand passes out a summary of the
company's performance. The summary mentions that the firm was able to
generate returns of
 25% last year,
 18% annualized over the past three years, and
 15% annualized over the past five years.
The returns exclude several portfolios that Bagh closed last year due to
underperformance. The summary does not mention the exclusions but notes
that it is limited in nature and that a detailed presentation is available upon
request. By distributing this summary to clients, does Agarwal most likely
violate Standard III(D) Performance Presentation?
A) No
B) Yes, by excluding the closed portfolios
C) Yes, by distributing only the summary and not the detailed presentation

Q.40 Vladimir Ivanov, CFA, is the portfolio manager of a separately managed account
(SMA) that invests equally in 20 different large-cap international value stocks.
Most of Ivanov's personal investments are invested in the same strategy. Since
Ivanov's twin daughters are enrolling in college this year, he needs to sell a
portion of his holdings to pay for their tuition. To generate a tax loss, Ivanov
sells the entire position of one holding instead of selling equal portions of all 20
positions in his account. According to Standard VI(B) Priority of Transactions,
did Ivanov most likely comply with the Standard?
A) Yes
B) No, by not informing his clients before the trade
C) No, by entirely divesting from a holding that is still held in client accounts
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Q.41 Haley Jarwin, CFA, lives in Country Z. She recently joined anew investment bank
located in Country X. Country X's securities require that the laws of a client's
home country shall govern if the client is not located in Country X. Jarwin is
assigned to work on a large IPO for a client that is located in Country Y, whose
securities laws are less strict than those of Country X. Jar win believes some of
the client's confidential financial information is fraudulent and may be evidence
of criminal activity. Country X's laws require that she report her suspicions to
securities regulators, but Country Y's laws prohibit reporting unless the client is
first requested to remedy the fraud and refuses to act. Country Z has no laws
that apply to this situation. Under Standard I(A) Knowledge of the Law, Jarwin's
least appropriate course of action is to:
A) report the fraud to the Country X regulators.
B) do nothing since Country Z has no laws that apply.
C) request that the client amend the financial information so that it is not
fraudulent.

Q.42 Five years ago, Marlijn Wijngaards pled guilty to a finance-related felony. She
had previously earned the CFA designation, but her charter was revoked as a
result of the plea. Wijngaards has applied to CFA Institute to reinstate her
charter and membership. Her application is pending. In her résumé, Wijngaards
refers to herself as a "Former CFA Charterholder." Does this reference violate
Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA
Program?
A) No.
B) Yes, since she cannot refer to the CFA designation unless her application is
successful.
C) Yes, since the revocation prohibits her from indicating that she ever held
the designation.

Q.43 Walter Warner, CFA, is a research analyst covering there new able energy
sector. He recently inherited 1,000 shares of Hast Renewal Energy (HRE).
Warner promptly informs his firm of his personal holding, and the firm does not
restrict him from trading the stock. Warner publishes a report with favorable
coverage of the renewable energy industry, including HRE, without disclosing
his ownership of HRE. HRE stock, which Warner continues to hold, increases by
more than 25% after there port's release. With regard to Standard VI(A)
Conflicts of Interest, did Warner's release of the report most likely violate the
Standard?
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 A) Yes, by not disclosing his HRE stock in the report.
B) No, since he informed his employer of his holding.
C) No, since he did not sell the stock and realize a gain.

Q.44 Lena Schmidt, CFA, is preparing an investment report on Fulcrum Industries

while she waits for a plane at the airport. While writing the report, she sees the
CEO of Fulcrum boarding a flight to the city where Keel Manufacturing, one of
Fulcrum's competitors, has its headquarters. Based on her research of the
companies' financial statements, Schmidt knows that Fulcrum and Keel have
significant strategic and geographic overlap. She recalls that, on the company's
latest earnings call, Fulcrum's CEO mentioned he was analyzing acquisition
targets. Based on this information, Schmidt concludes that Fulcrum may be
preparing an offer to purchase Keel. She revises her research report on Fulcrum
to add her theory on the acquisition, citing the above information, and changes
her recommendation from buy to hold. She then sends the report to her
clients. Has Schmidt most likely violated Standard II(A)Material Nonpublic
Information?
A) No
B) Yes, since she shared the information before the CEO announced his trip
C) Yes, since she shared her report only with clients and not the general
public

Q.45 Sami Sharifi, CFA, is the portfolio manager for high-net-worth clients at High
Peak Capital. During his quarterly client review, he notices signs of potential tax
fraud by one of his clients, Ibrahim Khan. Local law stipulates that illegal acts be
reported to the authorities. However, Sharifi has only partial access to Khan's
accounts, so he is not certain whether Khan's acts were illegal and so is unable
to confirm any misdeeds. To comply with III(E) Preservation of Confidentiality,
it would be most appropriate for Sharifi to:
A) keep Khan's information confidential but confront him about the
activities.
B) confer with High Peak's compliance officer and legal counsel on next
steps.
C) turn Khan's information over to local authorities on suspicion of illegal
activity.
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Q.46 Frieda Simon, CFA, is a financial adviser at TCT Advisers. One of Simon's clients,
Anton Krause, offers to include her on a trip to his vacation home in Australia
once his portfolio reaches €1million to celebrate the milestone. Krause also
offers to pay her expenses for the trip. Simon accepts both offers and does not
disclose the agreement to TCT since the compensation is not monetary.
Another client, Karla Mayer, proposes a €500 bonus for Simon in any year that
Mayer's portfolio achieves a return of10% or higher. Simon mentions this offer
over lunch with her boss, who says, "That's a great offer. I approve." Based on
this verbal approval, she accepts Mayer's offer. Simon most likely violates
Standard IV(B) Additional Compensation Agreements with respect to:
A) the trip from Krause.
B) the bonus from Mayer.
C) both the trip from Krause and the bonus from Mayer.

Q.47 Joseph Smith, CFA, is the head equity trader for an investment management
firm and is responsible for the firm's soft dollar policies and brokerage
relationships. During a planning session, the investment management team
agrees that the firm will use soft dollars to purchase new economic research
from XYZ Economists, new performance attribution software, and new
computers for the trading desk. According to Standard III(A) Loyalty, Prudence,
and Care, Smith would most likely violate the Standard by using soft dollar
brokerage to purchase the:
A) economic research.
B) computers for the trading desk.
C) performance attribution software.

Q.48 Win Minjun is a CFA candidate preparing for the Level I exam. On the morning
of the exam, before taking the test, Minjun receives an email from a close
friend who already took the test, stating that "I studied so much and still
couldn't pass this ridiculous test. I didn't even finish in the afternoon." After
entering the exam room, Minjun wishes the other candidates good luck. During
the exam, Minjun says aloud, in frustration, "NPV is always better than IRR,"
which is a correct answer. After the exam, Minjun posts on a public blog,
"There were numerous questions regarding Priority of Transactions in the
Ethics section. Make sure to know those topics well."
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 According to Standard VII(A) Responsibilities, as a CFA Institute Member or a
CFA Candidate, Minjun most likely violated the Standard:
A) during and after the exam.
B) before and after the exam.
C) before and during the exam.

Q.49 Tom Smith, CFA, is assigned a new client, Brigitte Duret, who is currently
invested entirely in cash. During a brief phone conversation with Smith, Duret
says: "I'd like to earn a better return, but I don't want to take any risk. I am
going to work in the Amazon rainforest for about three months, so we will
meet when I am back in the US." Smith schedules a meeting with Duret three
months from today. Smith temporarily invests Duret's assets in the firm's
Conservative Portfolio since he does not want Duret to miss out on at least
some of the market's performance before their meeting. Smith is the firm's
leading expert on the Conservative Portfolio (shown in the table below) and
has used it for many client portfolios with good results.

According to Standard III(C) Suitability and based on the Conservative

Portfolio's asset allocation, Smith most likely:
A) violates the Standard since he failed to perform due diligence before
taking investment action.
B) violates the Standard since he invested the client's assets before
understanding the client's risk and return objectives.
C) does not violate the Standard since he spoke to Duret, the investment is
temporary, and it is consistent with what a prudent investor would expect.

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Q.50 Beau Chamberlain, CFA, a manager at Flex Securities, is responsible for
revamping Flex's compliance system. His supervisor tells him, "The best way to
eliminate conflicts of interest is to thoroughly review personal trades."
According to Standard VI(B) Priority of Transactions, which of the following is
most likely a recommended practice? Flex should:
A) receive duplicate trade confirmations from employees.
B) identify all employee client accounts to ensure nonemployee client
accounts trade first.
C) disseminate notice of the blackout period to prevent client trades in
restricted securities.

Q.51 Vanessa Van Eeden, CFA, is the director of investments at Consensus

Investments (CI) and is responsible for equity management. CI's specialty is
small-cap stocks. Due to the departure of several key employees, Van Eeden
decides to make the following operational adjustments in the firm:
 The large-cap strategy will change from active to passive management.
 Management of the mid-cap strategy will be outsourced to an external
manager.
 CI will continue its focus on actively managing small-cap stocks.
To comply with Standard V(B) Communication with Clients and Prospective
Clients, which of the following investment strategies must Van Eeden fully
disclose to current and prospective clients?
A) The mid-cap strategy
B) The mid-cap and large-cap strategies
C) The mid-cap, large-cap, and small-cap strategies

Q.52 Meiling Huang, CFA, is a well-respected independent real estate sell-side

analyst. The investor relations manager of MNCP Properties, a real estate
company that went public this year, reaches out to Huang to see if she will
write a report on MNC. MNC does not have significant cash on hand, so Huang
agrees to be paid in stock options. After evaluating MNC, Huang believes that
the company is undervalued and worthy of a "buy" rating. Huang writes her
report on MNC and discloses that she was compensated by MNC but does not
indicate the type of compensation. Does Huang most likely violate Standard
I(B)Independence and Objectivity?
A) Yes
B) No, since her report's conclusion reflected her opinion
C) No, since she disclosed that she was compensated for her report
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Q.53 Karl Mahler, CFA, creates a mutual fund in Country A, where he is a resident.
Mahler intends to sell the security in both Country A and Country B. The laws of
Country A are more strict than the laws of Country B, and the laws of both
countries are more strict than the Code and Standards. When selling the
mutual fund in Country B, Mahler must adhere to the:
A) laws of Country A. B) laws of Country B.
C) Code and Standards.

Q.54 Seth Farleigh, CFA, manages the Australian Mid-Cap Fund. After conducting his
review, Farleigh prepares a shareholder report for current and prospective
clients. The report is dated December 31, 20X7, and Farleigh believes he has
identified all risks to which investors are exposed. On January 31, 20X8, one
country changes its tax code, which significantly benefits Australian companies,
and causes the fund to experience a significant gain. Despite the gain, however,
Farleigh believes this event creates a new risk for the fund. To comply with the
Standard V(B) Communication with Clients and Prospective Clients, Farleigh
most likely is:
A) required to communicate the new risk to clients immediately.
B) not required to communicate the new risk to clients since they benefited
C) required to communicate the new risk to clients in the future if the clients
are harmed.

Q.55 Tony Fernandez, CFA, is an analyst who provides investment recommendations

to clients of Johan Investment Management (JIM). Mercedes Chevela, CFA,
president of JIM, gives freedom to each analyst to develop diverse
recommendations. Chevela's philosophy is to be the first with new ideas, so she
streamlined JIM's research operations and eliminated her review of the
analysts' work. All analysts deliver their recommendations to clients the same
day they are made and are solely responsible for its content. As part of
Fernandez's research efforts, he sometimes checks certain websites to get a
sense of how "hot" a stock currently is. He also examines the company's
financial statements, third-party research, and quantitative forecasts, which he
believes cover all important issues. Over the last year, most of his sell
recommendations have proven to be wrong. To ensure compliance with
Standard V(A) Diligence and Reasonable Basis, the most appropriate
recommended action is that:

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 A) Fernandez should exclude internet rumors as part of his research.
B) Chevela should reinstate a review process to ensure diligence when
making investment recommendations.
C) Fernandez should redesign his analysis since it lacks a reasonable basis, as
proven by his consistently inaccurate recommendations.

Q.56 Juan Castillo, CFA, is director of research at State Pension Fund (SPF). SPF
invests exclusively through sub advisors to construct the pension's portfolio.
While preparing for SPF's annual strategy session, Castillo contacts Macro
Trade Research Advisors (MTRA) to get its latest research and view son the
financial markets.
MTRA has a correspondent brokerage relationship with Johnson Brothers
Brokerage (JBB) in which JBB directs 50% of commissions to MTRA. Castillo
instructs several sub advisors to send trades to JBB to pay for MTRA's research
services. Do Castillo's actions most likely comply with Standard III(A) Loyalty,
Prudence, and Care?
A) Yes.
B) No, since Castillo cannot direct other firms' trades.
C) No, since Castillo uses pension fund assets to pay for research services.

Q.57 Jesus Martinez, CFA, is a successful real estate analyst at Monument

Associates. He is also a volunteer board member for Casa Mundo, a nonprofit
that finds housing for the homeless. Since Martinez understands the local real
estate market very well, he agrees to negotiate Casa Mundo's purchase of a
new building listed at $875,000. Martinez offers the building's seller $850,000,
which is accepted. His offer includes his legal and customary $5,000
commission, which is paid by the seller. Casa Mundo, unaware of Martinez's
commission, determines that he obtained a fair price of$850,000 and is happy
with his contribution of time and energy. Does Martinez violate Standard I(D)
Misconduct?
A) Yes.
B) No, since the commission is legal and customary.
C) No, since Martinez negotiated a fair market price.

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Q.58 Stuart Grimaldi, CFA, is the compliance officer for a large hedge fund with
several hundred employees. Grimaldi has implemented a comprehensive set of
rules for employees to comply with applicable laws and regulation. He
appropriately updates the rules and communicates all changes to the
employees. He also holds regular meetings to advise employees of different
compliance issues.
The fund permits employees to maintain investment accounts with outside
firms but requires the employees to send Grimaldi duplicate confirmations for
all trades. The rule applies for accounts that the employee establishes in his or
her own name as well as those for immediate family members such as a
spouse, domestic partner, children, or parents. About half of the employees
have outside accounts. Grimaldi does not regularly check the confirmations but
believes that the employees are complying with the rule.
Recently, an employee tried to circumvent the rule by having his neighbor open
an account at another firm, with the employee directing the trades made in the
account. Grimaldi was not aware of this activity until the neighbor who
"owned" the account was charged with insider trading. The neighbor then
implicated the employee who was directing the trades. Of the following, the
most appropriate statement is that Grimaldi violated Standard IV(C)
Responsibilities of Supervisors with respect to:
A) not regularly checking the confirmations.
B) not taking appropriate actions to prevent the employee from
circumventing the rule.
C) both not checking the confirmations and preventing the circumvention of
the rule.

Q.59 Annika and Boris Goncharov are siblings, CFA charterholders, and investors of
Bright Sky Capital (BSC). Annika and Boris hold more than RUB 100 million each
in BSC stock, and each plans to sell 10% to diversify their separate portfolios.
However, BSC is a lightly traded stock, and the siblings agree that large sales
would likely cause the company's stock price to decline.
Annika decides to break up her sales into small batches of limit orders and sell
them over multiple days to minimize the impact on the stock's price. Still,
Annika's sales cause BSC's stock price to decline. Boris similarly decides to sell
his holdings in batches, but he simultaneously purchases half the amount he
sells to ensure the stock price is unaffected by his trades. Standard II(B) Market
Manipulation is most likely violated by:
A) only Boris. B) both Boris and Annika.
C) neither Boris nor Annika.

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Q.60 Rolf Lauer, CFA, an analyst at Ludwig Credit Advisors (LCA), manages a bond
index fund. Per the fund's prospectus, the fund is rebalanced monthly to match
its index. Lauer uses a model to rebalance the fund. During his review of the
model, he identifies an error that causes the weights of some securities in the
fund to deviate from how they are weighted in the index.
However, the error also results in the fund having better performance than the
index over the last year. He immediately corrects the model's flaws to replicate
the index better. One month later, other responsibilities prevent him from
rebalancing the fund to meet the firm's operational deadline. The following day
he completes that task and informs his supervisor of the delay. After further
review, the one-day delay in rebalancing did not cause the fund to deviate
significantly from the index. To comply with Standard V(B)(1), which of the
following should have been disclosed to current and potential clients of the
fund?
A) Only the model's error
B) Only the delay in rebalancing
C) Both the model's error and the delay in rebalancing

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