JUN18L1ETH/C01

Question 1
Bravo Asset Managers handles a variety of institutional, private accounts, and hedge funds. The firm has a policy of
allocating block trades and oversubscribed issues by order of priority. The best priced transactions are first allocated
to the appropriate hedge fund, then institutional accounts, and lastly private accounts. As a result, the hedge funds
usually outperform other accounts, even when they invest in the same assets at the same time. Bravo's new account
documentation spells out this policy and requires the signatory to accept the terms in writing. Does this policy violate
the Standards of Professional Conduct with respect to fair dealing?
a) Yes.
b) No, because the policy is disclosed and accepted by account holders.
c) No, because the policy is applied consistently to all trades.
The Standard does not allow managers to favor certain clients over others with respect to allocating trades. All shares
should be allocated among client accounts at the average price. The Standards do not allow managers to subject
clients to patently unfair policies even if the clients consent.

Question 2
Ricardo Vaughn is a portfolio manager for Brilliant Asset Management (BAM). One of his accounts is owned by his
parents. Vaughn's sister is named as a beneficiary on the account, but Vaughn is not. BAM has an opportunity to
participate in an oversubscribed IPO that is appropriate for his parent's portfolio. According to the Standards of
Professional Conduct, Vaughn's best course of action is to:
a) allocate shares to his parent's account only after other client accounts.
b) allocate shares to his parent's account concurrently with other client accounts.
c) allocate no shares to his parent's account to make them available to other clients.
The Standard defines beneficial interest as accounts owned by the member, his or her spouse, children, and
immediate family members residing with him or her. Family client accounts are any that are owned by family relatives
that do not meet the preceding characteristics. Family client accounts should be neither advantaged nor
disadvantaged because of the familial relationship. Therefore, Vaughn's parent's account should be allocated
concurrently with the rest of his clients.

Question 3
Matthew Dawkins, CFA, is a trader of a brokerage firm. He wants to improve his knowledge on laws, rules, and
regulations applicable to his professional activities. According to the CFA Institute Standards of Professional Conduct,
the following are recommended compliance procedures, except:
a) To follow past practices within his firm.
b) To review the firm's written compliance procedures on a regular basis.
c) To be updated about changes in applicable laws, rules, and regulations by attending technical seminars.
The first choice is correct. Following past practices within the firm is not a recommended compliance procedure under
Standard I (A) Knowledge of the Law because the past practice may not be in compliance with the latest applicable
laws, rules, and regulations. The second choice is incorrect. Per Standard I (A), members should review the firm's
written compliance procedures on a regular basis to ensure that the procedures reflect current law and provide
adequate guidance to employees about what is permissible conduct under the law and/or the Code and Standards.
The third choice is incorrect. Members should be kept informed about any changes in applicable laws, rules, and
regulations, and attending technical seminars is a good way to stay current.

Question 4
Nancy Jenkins holds a large number of shares in Small Tech Corp (STC), a thinly traded stock whose growth
prospects have dimmed. She wants to sell out of her position but is afraid that the order would cause a steep decline
in the share price, adding to her already sizeable losses. In order to sell the shares, she recruits several friends to
discuss rumors of an STC acquisition by a large competitor in online chat rooms and social media sites. Jenkins also
spreads here shares among several accounts and has her friends repeatedly buy and sell shares in the hopes of
attracting other investors to the stock. Over the next few months, Jenkins sells off her position without further price
deterioration. Jenkins violated the Standards of Professional Conduct with respect to intentionally manipulating the
stock's:
Price Volume
A. Yes No
B. No Yes
C. Yes Yes
a) Row A
b) Row B
c) Row C
Jenkins violated Standard II(B) by trying to manipulate both the price and volume of STC shares. Spreading false
rumors that an acquisition is in the offing is an attempt to increase the share price. Having her friends repeatedly trade
the stock is an attempt to give the appearance that the stock is more liquid than it actually is.

Question 5
Richard Pyncus is the sales manager for Longman Asset Management (LAM), which manages a family of mutual
funds. One fund, Rainbow Long-Only I (aka, Rainbow I), recently broadened its mandate to allow for the use of
leverage. Although he knew some were out of date, Pyncus distributed “summary sheets” to his salesmen on all
LAM's funds, including Rainbow I. The sheet for Rainbow I listed its lack of leverage among its characteristics. Did
Pyncus violate the Standards of Professional Conduct?
a) Yes.
b) No, because the salesmen are expected to advise clients about the change.
c) No, as long as the next printing of the summary sheets includes updated information.
Standard I(C) is violated when Pyncus provides information for dissemination to clients that misrepresented the
characteristics of LAM's funds. Misstating the use of leverage in Rainbow I neglects to alert clients to the increased
risk of holding this fund. At the very least, Pyncus must point the discrepancy out to his salesmen and advise them to
explain the change, as well as its significance, to clients and prospects before allowing them to invest in Rainbow I.

Question 6
Charles Marvel, CFA, is a research analyst covering Ruby Mining Inc., a gold mining company in Africa. Ruby's major
producing mine is located in a remote part of Congo, reachable in 12 hours by car from the nearest airport. However,
Ruby has a corporate helicopter that the company executive normally uses. Marvel contacts Ruby's management to
gather information on the company, and Ruby's CFO, Lily Redfox, invites Marvel to visit its mine in Congo with her.
Redfox offers to send the corporate helicopter to pick up Marvel from the nearest airport and to fly him back in the
evening. Marvel estimates that it would require three days for him to complete the visit using commercial travel. If
Marvel accepts Redfox's offer and makes the trip to Ruby's mine in Congo using a corporate helicopter, Marvel
a) Is in violation of the Standards unless he discloses the use of the corporate helicopter in his report on Ruby.
b) Is in violation of the Standards unless he reimburses Ruby for the use of the corporate helicopter.
c) Is not in violation of the Code and Standards.
The first choice is incorrect. Disclosing the use of the corporate helicopter is not required. The second choice is
incorrect. Reimbursing the use of the corporate helicopter is not necessary. Alhough it is not encouraged, reasonable
travel cost covered by the company is allowed under Standard I (B). The third choice is correct. Standard I (B) states
the responsibility of CFA Institute members to maintain independence and objectivity so that their clients will have the
benefit of their work and opinions unaffected by any potential conflict of interest or other circumstance adversely
affecting their judgment. In this case, since the travel by car is so time consuming and the company CFO is going with
him, the ride on the corporate helicopter is reasonable as long as Marvel can maintain his objectivity.

Question 7
Tom Cobo is a research analyst covering the biotechnology sector. He employs an "expert network" of industry
contacts to stay abreast of current issues in the industry. Cobo arranges a call with a scientist involved in the
preliminary testing of an Alzheimer's disease drug, during which the scientist discloses that it is very likely that the
tests will be successful and the drug will be fast-tracked through the government approval system. Cobo returns to his
firm and discusses this information with his colleagues, before increasing his holding in the company. Cobo has
a) Violated Standard II(A): Material Non-Public Information
b) Not violated Standard II(A): Material Non-Public Information so long as procedures are in place with the
expert network to deter the exchange of material non-public information
c) Not violated Standard II(A): Material Non-Public Information because the information was being publicly
disseminated by the scientist in the expert network
Cobo has violated Standard II(A) by passing along material non-public information concerning the ongoing product
tests, which the fund used to trade in the securities and options of the related company. Cobo cannot simply rely on
the agreements signed by individuals who participate in expert networks that state that he has not received
information that would prohibit his trading activity. He must make his own determination whether information he
received through these arrangements reaches a materiality threshold that would affect his trading abilities.

Question 8
During an official trip, analyst Adrian Lee's laptop was stolen. He had all his clients' confidential information stored in
the laptop. Adrian's employer has a strict policy regarding the storage of client details in electronic medium and gives
employees regular training on the maintenance of data security. As per the policy, Adrian should delete the data in the
laptop remotely, but he did not file a legal complaint about the theft. One month later, Adrian's employer was sued by
a client for leaking confidential information, as Adrian did not file a legal complaint. Which of the following statements
is most accurate?
a) Adrian is not at fault because the laptop was stolen a month back.
b) Adrian is at fault because he did not ensure the data security of the clients.
 c) Adrian is at fault only in not filing a legal complaint as mentioned by the employer.
Adrian is at fault only in not filing a legal complaint as mentioned by the employer. The CFA Institute does not require
the members and candidates to be experts in data security, but they are expected to be well aware of the
organizational policies and procedures regarding data security. In this case, Adrian violated Standard III(E) related to
client confidentiality.

Question 9
Lyndon Price is a financial planner advising private wealth clients. One of his clients, Shaun Mulligan, is a retired
technology entrepreneur with an interest in social causes supporting education. Price sits on the board of a charitable
foundation dedicated to providing computers to underprivileged high school students. As part of the foundation's fund
raising efforts, Price compiles a list of names of potential donors, including Mulligan's, to the outreach chairperson. Did
Price violate the Standards of Professional Conduct?
a) No.
b) Yes, unless he first obtains permission from Mulligan.
c) Yes, even if he first obtains permission from Mulligan.
Price may not disclose any client information to an outside party without first getting his consent. By disseminating lists
of potential donors from his clients' records without their consent, he is violating the Confidentiality Standard.

Question 10
Paula Kester is the controller for a small manufacturing company, Gizmo Mfg., which trades on the pink sheets. One
of the firm's competitors approached Gizmo's CEO with an offer to purchase the company at a substantial premium to
its current market price. Kester mentioned in confidence to her sister, Marie, that she is concerned about losing her
job after the takeover. Marie shared those concerns with Becker, her husband and a stockbroker, who began
accumulating shares of Gizmo stock for himself and advising certain clients to do the same. Did Kester or Becker
violate the Standards of Professional Conduct?
Kester Becker
A. Yes Yes
B. Yes No
C. No Yes
a) Row A
b) Row B
c) Row C
The Standard prohibits members from trading or encouraging others to trade on material, nonpublic information. The
information about the potential acquisition is both material and nonpublic. However, Kester did not share the
information with her sister with the intent to encourage her to trade, only to express concern over her employment
situation. Nor was it reasonable to foresee that it would be shared with anyone else. Becker knew or should have
known that the offer was nonpublic, making his actions a violation of the Standard.