Davika Ravinder Case Scenario

After working as an equity research analyst for five years at Staple Asset Advisers,
Davika Ravinder, CFA, receives a promotion to a junior asset manager position. She
is given 20 relatively small portfolios, all involving middle-income clients who are
saving for their children’s university educations and their own retirements. With her
new position, Ravinder is given a higher base salary. Previously, her bonus was
based on annual performance. She is now eligible for a percentage of the quarterly
performance fee earned by the firm for returns higher than the client-negotiated
performance hurdles. For competitive reasons, Staple does not allow any employee
to disclose their compensation packages, including how bonuses are derived.

Once she has reviewed the investment objectives and constraints of each of her new
clients, Ravinder arranges introduction meetings with each client. During a one-hour
meeting with a self-employed client, 60-year-old James Canon, Ravinder discovers
that he is newly divorced and has been ordered by the court to make a large one-
time settlement to his ex-wife. In addition, his son and only child has dropped out of
university and wants the money his father allocated for the son’s university education
as seed capital to start his own business. The funds needed to make both of these
payments are currently in the investment portfolio Ravinder manages for Canon.
This portfolio is also to be used for Canon’s retirement at age 65. Based on what she
learned during her meeting with Canon, Ravinder suggests he take a more
aggressive investment strategy to compensate for the anticipated large withdrawals
from his investment portfolio.

Ravinder receives permission from her supervisor to draft marketing materials to

send out to potential clients with her name and contact information. She asks her
assistant, Jon Obi, to edit the marketing content and design a simple brochure,
ensuring that it complies with all the local regulations and company policies
regarding marketing material. Obi does as requested and upon completion takes the
initiative to send the brochure to potential clients. A week after the marketing
brochure was sent to potential clients, Ravinder notices one of the clauses in the
brochure is in violation of company policies.

While revising the marketing brochure, Ravinder determines it might be worthwhile to

add some performance statistics to prove that her firm’s investment performance is
attractive. She works with the portfolio administration team to create five-year
weighted composites using similar type portfolios and removing client accounts when
terminated. The portfolio administration team works with the compliance officer to
ensure they include all the necessary disclosures but agree that they do not need to
comply with Global Investment Performance Standards (GIPS). Included in the
brochure is a disclosure the company has adopted the CFA Institute Standards of
Professional Conduct.

A colleague in the research department, Koffe Mensah, CFA, approaches Ravinder

seeking advice about a research report he is writing on a listed company. The
majority of Staple’s clients hold this company’s shares in their portfolios. Mensah
explains that his supervisor is pressuring him to make a buy recommendation to
substantiate some positive rumors that the lead dealer heard about the company.
Mensah states that his thorough research leads him to believe the company is
overvalued. Ravinder reminds Mensah that if the share price moves up, Mensah will
likely receive a higher bonus.

Shortly after becoming an asset manager, Ravinder is approached by one of the

directors of Naivasha Cement, a company she used to cover as an equity analyst.
The Naivasha director asks her if she would be interested in joining the board of
directors. He adds, “The Naivasha Cement directors always appreciated your
understanding of the industry and of our company in particular, so we think you
would add value to the company.” After getting approval from her employer,
Ravinder accepts the invitation to become a director.

Q1. With regard to Ravinder’s new compensation package, which of the following
actions would be mostappropriate to ensure she complies with the CFA Institute
Standards of Professional Conduct? She should:
A. ask her clients to renegotiate their contracts with the firm.
B. renegotiate her compensation package.
C. disclose her new compensation package to her clients.

Q2. Under what circumstances would Ravinder’s suggested investment strategy for
Canon most likely meet the requirements of Standard III(C)–Suitability? If Canon:
A. had a different employment status.
B. has numerous other investment portfolios.
C. delays funding his son for at least five years.

Q3. Did Ravinder most likely violate the CFA Standards of Professional Conduct
regarding the error in the marketing brochures sent to prospective clients?
A. No, Ravinder gave proper instructions.
B. Yes.
C. No, Obi made the error.

Q4. Does Staple's approach to their performance statistics most likely reflect
recommendations for complying with Standard III(D)–Performance Presentation?
A. No, concerning the need for GIPS compliance.
B. Yes.
C. No, with regard to terminated accounts.

Jacaranda Asset Management Case Scenario
Most financial services regulatory bodies in East Africa are moving toward risk-based
supervision models. Miriam Bukenya, CFA, is the head of compliance at Jacaranda
Asset Management, a manager of both retail and institutional portfolios. She is
currently revising the company’s compliance policies to address risk in all areas of
Jacaranda’s business and is checking different aspects of the firm to ensure that it
will be able to meet new risk-based supervision regulations when they become
effective in six months. The firm recently adopted the CFA Institute Code of Ethics
and Standards of Professional Conduct as its own code and standards.

While reviewing Jacaranda’s compliance manual, Bukenya realizes it needs a few

changes to comply with the new risk-based regulations. To ensure that she follows
best practice, she consults with Luc Remmy, CFA, the head of compliance at her
former employer, Mercury Advisory Services. Remmy, who now runs an independent
consulting firm, e-mails Bukenya the compliance manual he uses for his own firm.
While reviewing the compliance manual, Bukenya notices that many sections look
familiar. She finds a statement in the document indicating it is for the “sole use of
Mercury Advisory Services.” When questioned, Remmy states that he only used the
table of contents of Mercury’s document but none of the other content in the
document to develop his compliance manual.

Bukenya looks at the marketing materials Jacaranda uses to communicate with

existing and prospective clients to ensure that everything mentioned in the material
is factual and complies with the CFA Institute Standards of Professional Conduct.
The following marketing statements are examined:

Statement 1: Jacaranda looks for investments offering intrinsic value through a top-down approa
including a review of forecasts of economic and industry performance. We evaluat
historical and projected company financials, perform extensive financial ratio analy
conduct management interviews, and determine target prices using a variety of va
models.

Statement 2: Jacaranda may, at times, hire outside advisers to manage real estate holdings on
of clients. These advisers have the necessary expertise to manage property asset

Statement 3: Jacaranda has four CFA charterholders among its senior management. Their parti
in the CFA Program has enhanced their investment management skills. All of thes
managers passed the three exams in the shortest time possible.
The new risk-based regulations also require accurate and complete performance
presentations, with all discretionary accounts included in at least one composite.
Bukenya believes Jacaranda’s performance presentation policy meets these new
requirements as well as the CFA Institute Standards of Professional Conduct
because Jacaranda’s single composite includes all current and terminated client
accounts, and presentations include the following statement: “Detailed information
regarding the performance presentation is available on request.” Although Jacaranda
does not currently comply with GIPS standards, Bukenya encourages the firm to do
so within the next few years.
Bukenya then reviews Jacaranda’s record-keeping policy. Currently, the policy
requires retention of hard copies of all supporting documentation for investment
recommendations and decisions made during the last five years. This policy meets
the new risk-based regulations. Client meeting minutes and communication logs are
kept electronically and backed up on a remote server. Fund managers and research
analysts are responsible for maintaining their own personal notes and research
models. This policy also applies to Jacaranda’s independent research contractor,
Mathew Ochieng, who (for security reasons) does not have access to the company’s
server. Ochieng, who only undertakes research for Jacaranda, sends his research
reports to the head of research, who then archives these electronic copies.

While reviewing Jacaranda’s counterparty risk policy, Bukenya discovers that trader
Jackson Gatera recently convinced the back office to override controls designed to
prevent overexposure to specific stockbrokers. This request was in violation of
company rules. The rules state that if the trading allocation to a specific broker is
breached, trading through that broker must be suspended until the exposure drops to
within the exposure limits. The Counterparty Risk Committee predetermines these
limits.

The new risk-based regulations also require companies to gather client information
as part of know-your-client and anti-money-laundering processes. Bukenya creates a
confidentiality policy restricting access to existing and prospective client information.
The information is only available to personnel who are authorized by the existing or
prospective client. The one exception is if the client or prospective client is thought to
be conducting illegal activities. In this circumstance, the information can be released
without authorization if the information is demanded through a court order or other
legal requirement.

Q5. Which marketing statement should Bukenya most likely revise to conform to the
CFA Institute Standards of Professional Conduct?
A. Statement 1
B. Statement 2
C. Statement 3

Q6. Does Jacaranda’s performance presentation policy most likely meet required
procedures for complying with CFA Institute Standards of Professional Conduct?
A. No, because of the structure of the composite.
B. Yes.
C. No, because it is not in compliance with GIPS standards.

Q7. Jacaranda’s record-keeping policy is most likely in violation of Standard V(C)–
Record Retention with regard to the:
A. keeping of hard and electronic copies.
B. retention of personal notes and research models.
C. retention time frame.

Q8. In response to Gatera’s actions, Bukenya should least likely recommend which
of the following actions to prevent violations of the CFA Institute Standards of
Professional Conduct?
A. Investigate further
B. Report Gatera to CFA Institute
C. Increase supervision of Gatera

Q9. Does Bukenya’s confidentiality policy most likely violate Standard III(E)–
Preservation of Confidentiality?
A. No.
B. Yes, with regard to type of information.
C. Yes, with regard to client status

CleanTech Research Fund Case Scenario
Kim Tang, CFA, is a consultant reviewing a hedge fund, CleanTech Research Fund.
CleanTech invests in high-risk and volatile 'clean technology' companies. CleanTech
has adopted the CFA Institute Code of Ethics and Standards of Professional
Conduct.

Tang examines the various forms of advertising used by CleanTech to attract new
clients. In one of its advertising messages, CleanTech states, “We have a very
experienced research team and are proud they are all CFA’s. Several of our
managers serve as volunteers for CFA Institute. CFA Institute recognizes their
expertise, and as a result, you can rely on our team for superior performance
results.”

In reviewing CleanTech’s marketing brochure, Tang reads the following statements:

Statement 1: The share prices of companies in the clean technology sector have
increased recently because of the growing awareness of climate change issues and
the rising cost of energy. There are many risks in this sector, some of which include
new technology that is unproven. Also, the addition or removal of government
incentives can make markets dysfunctional. Nevertheless, it is our opinion that
returns in this area will continue to be above average for several years. In fact, our
proprietary investment analytics software has determined that investments in green
transportation companies are likely to double in value in the next six months based
on a multiple factor regression analysis. Key risks associated with analytics software
include the fact that they rely on historical data and that a set of unknown factors
could interfere with the anticipated results. We will earn a 200% return over the next
year on one of our solar power company investments based on sales projections we
prepared, assuming that last year’s generous tax incentives stay in place.
Statement 2: The CleanTech fund invests in publicly traded and highly liquid
companies and is recommended only for investors who are able to assume a high
level of risk. Last month, we invested in EnergyAlgae, a “green energy” company
that partnered with a global energy firm early last year to create oil from algae.
EnergyAlgae’s market capitalization quadrupled shortly after the partnership was
formed. Recently, EnergyAlgae also patented a waste plastic-to-oil process that
produces oil at less than $30 a barrel. One of the founders of CleanTech is on the
board of EnergyAlgae, and information he gave us on the company’s patent process
led us to purchase additional stock in EnergyAlgae before the patent became widely
publicized with the release of the company’s semiannual financial report.*
(*Information supporting the statements made in this communication is available
upon request.)
When Tang asks CleanTech’s founders for supporting documents related to their
investment in EnergyAlgae, she is told that this information is based on third-party
research from Slar Brokerage (Slar), who maintains all necessary records. Tang
completes a due diligence exercise on this research and learns that Slar has used
sound assumptions and rigor in its analysis of EnergyAlgae. In particular, Tang
learned that Slar used, at a minimum, the following attributes to form the basis of the
recommendation: the company’s past three years of operational history, current
stage of the industry’s business cycle, an annual research update, a historical
financial analysis, and a one-year earnings forecast.

Tang also learns that the founders of CleanTech are majority shareholders of Slar,
which underwrote the public offering of EnergyAlgae. Additionally, CleanTech’s
analysts inform Tang that they did not need to look at the quality of Slar’s research
because one of their former colleagues recently left CleanTech and established the
research department at the brokerage firm.

In researching EnergyAlgae, Tang finds that potential customers and suppliers of

EnergyAlgae are highly skeptical of the claims made regarding the company’s
respective products. She also contacts several energy companies and is unable to
locate anyone who has even heard of EnergyAlgae. When Tang reviews
CleanTech’s trading activity in EnergyAlgae shares, she finds that CleanTech
liquidated its position in EnergyAlgae soon after CleanTech’s portfolio managers
presented positive views on EnergyAlgae in a number of media interviews. In
addition, many of CleanTech’s employees also sold their shares in EnergyAlgae
immediately after CleanTech sold its shares of the company. The share price of
EnergyAlgae dropped dramatically after the stock sales made by CleanTech and its
employees.

Q 10. CleanTech’s advertising is least likely in violation of the CFA Institute

Standards of Professional Conduct with respect to:
A. expected performance results.
B. managers’ volunteer activities.
C. use of the CFA designation.



Q11. In Statement 1, CleanTech management most likely violated the CFA Institute
Standards of Professional Conduct with regard to their comments on:
A. investment analytics software.
B. clean technology sector returns.
C. solar power company investment.
Q12. In Statement 2, CleanTech most likely violated which of the following
Standards of Professional Conduct?
A. Material Nonpublic Information
B. Suitability
C. Misrepresentation

Q13. To be in compliance with the CFA Institute Standards of Professional Conduct,
CleanTech should most likely question the validity of Slar’s research on EnergyAlgae
for deficiencies in which of the following areas?
A. Operational analysis
B. Earnings projections
C. Annual research update

Q14. Tang’s most appropriate course of action concerning the relationship between
CleanTech and Slar is to recommend that CleanTech:
A. communicate relevant information to all clients.
B. explain the ownership structure to all clients.
C. sever the relationship immediately.


Q15. The EnergyAlgae trades are least likely to have violated the CFA Institute
Standards of Professional Conduct with regard to:
A. the adverse and skeptical opinions of EnergyAlgae products.
B. the order in which the shares were traded.
C. share price distortion because of positive media presentations.

Jorge Peña Case Scenario
Jorge Peña is a broker at Northwest Securities and a CFA Institute member who
passed Levels I and II of the CFA examination in 2011 and 2012, respectively.
Because of a demanding work schedule, he did not enroll for the 2013 Level III
exam. He hopes to enroll for the 2014 Level III exam.

In January 2013, Peña decides to apply for a broker position with Harvest Financial
and updates his résumé (curriculum vitae). He prominently displays “CFA candidate”
on his resume and states, “I have completed both Level I and Level II of the CFA
Program.” Under the “personal” section of his résumé, Peña lists “referee for regional
football league for the past five years” and “a member of the investment committee
at the Mueller School.”

During an interview with Peter Williams, a partner at Harvest Financial, Peña is

asked about his outside interests. Williams specifically asks about the referee
position. Peña explains that it is a significant time commitment on weekends, but he
enjoys the activity and the fees of $50 per game more than pay for his travel
expenses. Peña and Williams agree that $50 per game is not material.

They then discuss Peña’s role on the investment committee of the Mueller School.
The committee monitors and evaluates the performance of the school’s asset
managers and brokers, including Harvest. It is a volunteer position, but the school
allows all volunteers free use of the school’s athletic facilities. The school recently
started charging non-students and faculty a membership fee of $500 per year to help
recover their investment in new athletic equipment. Peña adds he has been told by
the committee chair that he adds the most value to the committee. Peña and
Williams agree that his investment committee activities will not interfere with his
duties at Harvest.

After lunch, Williams introduces Peña to a former colleague, Gabriella Martinez, who
happens to be a client of Peña’s current employer and who also attended the same
university as Peña, although Peña did not graduate. Martinez asks, “In what area is
your degree?” Peña replies, “I mostly studied finance. I found the coursework to be
helpful preparation for the CFA Program.” Martinez then asks, “Why are you here?”
Peña responds, “There are rumors that Northwest is in trouble, which is why I want
to leave. You should consider moving your account to Harvest.”

One month later, Peña accepts an offer of employment from Harvest Financial and
formally discloses to their human resources department that he referees football
games and that he sits on the Mueller School investment committee. On the first day
in his new job, he hangs a framed copy of the CFA Institute Code of Ethics on his
wall and places a copy of the Standards of Practice Handbook on his bookshelf for
easy reference. Later that day, Peña uses public records to contact his clients, as
well as Martinez. He informs them of his new position and asks them to transfer their
accounts to Harvest so he can continue acting as their broker.

At Harvest, Peña attends an educational seminar about a new tax-advantaged

investment program available for clients saving for university expenses. The program
offers families the opportunity to obtain growth and distribution of earnings free from
federal and state taxes. For the sake of simplicity, the Harvest supervisor advises
Harvest employees to only provide clients information on a plan with federal tax
benefits. He informs the brokers that the plan is subject to the same compliance and
suitability requirements that apply to the sale of non–tax-advantaged products and
offers similar commission structures as with all other plans. The supervisor then
distributes the paperwork associated with the plan along with the firm’s compliance
and suitability requirements.

Q 16. When describing himself as a CFA candidate on his résumé (curriculum vitae)
and listing the CFA exams he passed, did Peña violate any CFA Institute Standards
of Professional Conduct?
A. No.
B. Yes, with regard to completion level.
C. Yes, with regard to candidacy.

Q17. With respect to the fees he receives as a football referee, has Peña violated
any CFA Institute Standards of Professional Conduct?
A. Yes, he failed to receive written consent from all parties involved.
B. No.
C. Yes, he failed to receive written consent from his employer.
Q18 . According to the CFA Institute Standards of Professional Conduct, after
commencing employment with Harvest, Peña is least likely to have violated which
standard with regard to his relationship with Mueller School?
A. Conflicts of Interest
B. Additional Compensation
C. Misrepresentation

Q19. During Peña’s conversation with Martinez, which of the following Standards
is least likely to have been violated?
A. Misrepresentation
B. Reference to the CFA Program
C. Loyalty

Q20. Did Peña violate any CFA Institute Standards during his first month at Harvest?
A. Yes, because he failed to inform his supervisor in writing of his obligation to
comply with the Code and Standards.
B. Yes, because he solicited clients from his previous employer.
C. No.

Q21. Based on the information provided regarding the tax-advantaged savings plan,
the Harvest supervisor is least likely to have violated the Standard relating to:
A. Responsibilities of Supervisors
B. Suitability
C. Independence and Objectivity




Rayne Brokers Case Scenario
Erin Mutini, CFA, a South African resident, is an employee of Oakwood Asset
Management (OAM), an asset management company based in South Africa. OAM
manages and sells its branded mutual funds and unit trusts through agents across
Africa. Mutini was recently sent to Uganda to oversee OAM’s new agency agreement
with Rayne Brokers, a licensed Ugandan stock brokerage company with a strong
retail customer base.

Part of Mutini’s oversight role is to establish policies and procedures to ensure that
the Ugandan sales force represents OAM in a professional manner. As a condition of
its agency agreement, OAM requires all of Rayne’s sales agents to adhere to South
African financial regulations, generally considered to be stricter than those in
Uganda. OAM also requires all of its sales agents to abide by the CFA Institute Code
of Ethics and Standards of Professional Conduct (Code and Standards). OAM’s
lawyer has indicated that South African laws are stricter than the Code and
Standards.

To inform Rayne sales agents of their responsibilities under the OAM agency
agreement, Mutini holds a meeting with the agents to discuss the financial
regulations of South Africa and the Code and Standards. To conclude the meeting,
Mutini describes OAM’s annual competition among its sales agents, in which the
winner is determined by the value of products sold (assets under management), fees
generated, and the number of new clients brought in. The competition prize is an all-
expense-paid two-week holiday for two to Mauritius. Mutini advises the staff that they
should concentrate their sales efforts on OAM’s front-end load funds because they
earn the highest fees. She adds that staff should not disclose this competition to
clients.

Mutini next meets with Rayne supervisors to specifically discuss their roles in
upholding the Code and Standards. She informs them that they are responsible for
the prevention of any violations of laws, rules, regulations, or the Code and
Standards by the staff directly under their supervision. To make their job easier,
instead of focusing equally on all of the requirements, Mutini suggests that the
supervisors should concentrate on the following:

§ communicating compliance policies and procedures to all covered staff,

§ undertaking periodic reviews to ensure procedures are followed, and
§ enforcing investment-related policies.
Later that day, Mutini scrutinizes Rayne’s marketing material with Rayne’s most
successful sales agent, Tom Okello, another CFA charterholder. They are preparing
for a sales meeting to introduce OAM products to a potential client. Mutini notices
that Rayne’s responsibility to uphold the Code and Standards is not mentioned
anywhere in the marketing material. Neither does the material mention that some of
Rayne’s employees are CFA charterholders. Mutini also notices that Okello does not
use the CFA designation on his business card. When Mutini asks him why, he
responds, “If I use it, people will think I have a duty to Rayne’s clients. I do not have
a duty to clients because stockbrokers in Uganda are not required to uphold a
fiduciary duty. I do not want to mislead our clients by using the CFA designation.”

During the sales meeting with the potential client, Okello makes the following
statements:

Statement 1: Before making an investment for any of our mutual funds or unit trusts, Rayne follo
extensive due diligence process and research analysis. We will only invest in the
company if that investment meets the investment criteria that I have outlined to you

Statement 2: Every six months, you will be mailed an itemized investment statement with cash f
that you can see if your portfolio is meeting your investment objectives. In addition
can obtain other information about our firm and investment process from our webs
which is updated on a regular basis to ensure the integrity of the site as well as off
confidentiality and security to our clients. For your security, we do not post client
statements on the website.

Q22. According to the Code and Standards, if there is a conflict, Mutini should most
likely adhere to:
A. South Africa’s laws and regulations.
B. the Code and Standards.
C. Uganda’s laws and regulations.

Q23. By participating in OAM’s annual competition, Rayne employees least
likely violate which of the following CFA Institute Standards of Professional Conduct?
A. Additional Compensation Arrangements
B. Independence and Objectivity
C. Misrepresentation


Q24. In her meeting with Rayne supervisors, Mutini is least likely correct with regard
to:
A. communicating with staff.
B. undertaking periodic reviews.
C. enforcing investment-related policies.


Q25. Given Okello’s comment regarding his reason for not using the CFA
designation, he will most likelyviolate which of the following CFA Institute Standards
of Professional Conduct?
A. Misrepresentation
B. Duties to Clients
C. Reference to CFA Institute, the CFA designation, and the CFA Program

Q26. Which CFA Institute Standards of Professional Conduct did Okello most
likely violate in his Statement 1?
A. Misrepresentation
B. Suitability
C. Diligence and Reasonable Basis

Q27. Does Okello’s Statement 2 most likely meet the recommended procedures for
compliance with the CFA Institute Standards of Professional Conduct?
A. Yes.
B. No, with regard to investment statements.
C. No, with regard to the company's website.


Ashraf Omar Case Scenario
Ashraf Omar, CFA, recently joined the Sahara Manufacturing Company (Sahara) as
its chief financial officer (CFO). The company is planning an initial public offering
(IPO). The proceeds of the IPO will be used to finance the purchase of plant and
machinery. Omar was recruited on the basis of his extensive investment banking
background, having successfully supervised 10 IPOs over the last five years at
Falcon Investment Bank.

Sahara, a family-owned company, had a very good reputation until recently when an
ongoing tax dispute became public. The dispute may lead the tax authority to
impound plant assets. Furthermore, outdated plant equipment is causing production
disruption and declining profit margins. The CEO is looking to retire because he is
not able to manage the current challenges.
Omar creates a detailed plan to help manage the IPO process. He plans on using an
extensive checklist and numerous templates that he developed while at Falcon.
Omar decides to employ the same external service providers he used at Falcon to
handle the legal, accounting, and marketing aspects required for a successful IPO.
He considers these external providers the best in the industry, and their fees are
competitive. He will also work with his previous contacts at the regulatory authority
during the approval process.

As part of the due diligence process, Omar discovers a letter from a well-known
credit rating agency indicating an imminent downgrade of Sahara to below
investment grade. But Omar recalls that a private placement document being used to
pitch the debt issue to investors shows a pending investment-grade rating. He notes
that the outstanding debt is being paid according to schedule. Omar also finds
among the firm’s documents court filings relating to the successful defense of a
wrongful dismissal suit by a former employee fired for theft. In addition, Omar learns
Sahara had been penalized previously for harmful plant emissions and warned about
any reoccurrence.

In the “Investment Risk” section of the draft prospectus, Omar includes Exhibit 1.

EXHIBIT 1

INVESTMENT RISKS

Risk Risk Details Possible Business Impact

Management There is the possibility that Any delay in finding a

Sahara will not find a suitable replacement could negatively
candidate to replace the affect Sahara’s ability to
retiring CEO in a timely implement its strategy for
fashion. improving investor returns.

Corporate Sahara is disputing Sahara may be subject to

tax underpayment of taxes. additional tax payments,
penalties, and fines.

Profitability Sahara faces declining profit New equipment may not help
margins. improve profit margins.
Knowing that a third-party research firm can add value to the IPO marketing process
by giving an independent opinion, Omar hires Miriam Halawi, CFA. She is a former
colleague who started her own research firm two years ago. Halawi allows Omar to
use her research report in all Sahara marketing material with proper
acknowledgement. After extensive research, Halawi makes a long-term buy
recommendation of Sahara. But she qualifies the recommendation with a high-risk
rating, knowing the IPO targets retail investors along with institutional investors.
Omar invites Halawi to travel across the region with him to promote the IPO. Halawi
agrees but only if she is paid a flat fee.
Omar works with the marketing specialists to create an advertisement targeting retail
investors to be published in newspapers across the nation. Institutional investors will
be invited to an investor briefing to kick off the offer period. The final copy reads, in
part, as follows:

Invest in the Sahara Manufacturing Company to be assured of a good return.

The company offers the potential for long-term growth with reasonable levels of
risk. Miriam Halawi, CFA, a third-party research analyst, affirms that Sahara
Manufacturing Company is a “long-term buy”!

One week prior to the IPO, Sahara’s board of directors approves and implements an
employee share option plan (ESOP). Existing staff members are allocated 10% of
the upcoming IPO at a 25% discount to the IPO price. Omar acquires his allocation
with the intention of selling his shares at a profit after trading commences. The
details of the ESOP are highlighted in the IPO prospectus.

Q28. Omar’s plan for the IPO most likely violates the CFA Institute Standards of
Professional Conduct because of his intended use of:
A. external service providers.
B. regulatory contacts.
C. checklists and templates.

Q29. To avoid violating any of the Standards of Professional Conduct, Omar
should least likely undertake further analysis of which issues uncovered during the
IPO due diligence process?
A. Letter from credit rating agency
B. Employee lawsuit
C. Plant emissions

Q30. With regard to Exhibit 1, Omar most likely violates the Standards of
Professional Conduct concerning the section on:
A. profitability.
B. management.
C. corporate tax.

Q31. To avoid violating the Standards of Professional Conduct,
Halawi’s most appropriate action with regard to the regional marketing trip is to:
A. act for the benefit of Sahara.
B. not attend any marketing trip.
C. disclose how she is compensated.

Q32. With regard to the IPO advertisement, Omar is least likely in violation of which
of the Standards of Professional Conduct?
A. Misrepresentation
B. Plagiarism
C. Misconduct
Q33. Does Omar’s participation in the ESOP most likely violate any of the Standards
of Professional Conduct?
A. No.
B. Yes, with regard to conflicts of stock ownership.
C. Yes, with regard to priority of transactions.

Sue Kim Case Scenario
Sue Kim, CFA, is a hedge fund manager who specializes in biotechnology stocks.
She has spent many years investing in biotech companies and formerly worked as
an equity portfolio manager for a large bank with substantial research capabilities.
Two years ago, Kim started a hedge fund, Green Note Investments. She also
manages accounts for several wealthy individuals.

Now that she no longer has the bank’s resources to support her research, Kim relies
on a network of experts to help her search for profitable investment opportunities in
the biotechnology area. These experts include legal, business, and political contacts.

Kim purchases information from several biotechnology company employees, none of

whom are officers of their respective companies, who perform work outside their
regular positions as biotechnology consultants or experts. These consultants work
with Kim without the knowledge of their employers, none of which has a prohibition
on outside employment, and provide her with information about quarterly earnings
and other confidential data related to their companies’ performance. Kim bases final
investment decisions on this information and encourages the consultants and
experts she works with to publicly disclose the information that has been passed on
to her.

To spread the news about the positive returns Green Note has achieved, Kim hires a
public relations consultant, Takehiko Akagi, CFA. Akagi tells Kim that for a marketing
campaign to be effective, she needs a five-year return history. Kim tries to retrieve
her performance history from the bank but is denied this request. Searching her
home laptop computer, Kim finds her historical bank performance data. She uses the
bank data to recreate the oldest two years of the requested five-year performance
history. For the third year, she simulates her investment performance by applying
Green Note’s current investment strategy to historical data, which she discloses in a
footnote along with information about whether the performance is gross or net of
fees. For the two most recent years, Kim uses Green Note’s actual performance
history.

Because the marketing campaign takes longer than expected to accomplish its goal
of bringing new clients to the fund, Kim asks Akagi to accept a revised fee
arrangement. Instead of paying Akagi a monthly fee of $10,000 to market the fund,
Kim proposes an investment management fee-sharing arrangement. For each client
Akagi brings to Kim and whom she signs on as an investor in Green Note, Kim will
pay Akagi a fee of 10% of the investment management fee she charges that client
for their first 24 months in the fund. Akagi agrees to this arrangement, and Kim
makes sure to disclose it to prospective clients by verbally telling them that Green
Note compensates Akagi for his efforts to find investors for the fund, which is the first
time clients are made aware of this arrangement. Akagi also discloses to each client
the fee he expects to earn from this arrangement once an investment management
agreement is signed.

Kim’s former university roommate, Donna Miriam, is now a legal expert in mergers
and acquisitions. Miriam has a number of connections to senior associates who
specialize in this area of law at large, well-known law firms. She updates Kim when
she hears a deal is about to be completed. Kim uses this information as part of a
mosaic of information she gathers from her own research and information from other
experts in her network. After Kim has determined that Miriam’s information is likely to
be correct, Kim trades derivative securities of the acquisition target. In the past 18
months, her merger and acquisition investments have resulted in profits of $10
million for the hedge fund. Kim also manages a separate account for Miriam, who
has authorized Kim to replicate the trades in the acquisition targets for her account.
Because Miriam provides this valuable information, Kim makes sure she trades
Miriam’s account before any other client trades.

Julian Huang, a government lobbyist, is another key member of Kim’s expert

network. Huang keeps in constant contact with the many lobbyists involved in
biotechnology issues and has close relationships with many legislators. Recently,
legislators proposed restricting biotechnology research. If the legislation had passed,
it would have reduced valuations across the board for biotech stocks. Kim led the
hedge fund industry’s efforts to successfully fight this change. She personally
donated a large sum of money to support these efforts and raised funds from the
hedge fund community to fight this proposed legislation.

Kim’s efforts to grow her fund result in new clients and rapid growth of assets under
management. To bring specialized experience to her investment decision-making
process, Kim uses her standardized criteria for adviser selection to hire several
competent outside advisers to sit on her investment committee. Kim also subscribes
to several well-known third-party research vendors, which she had not considered
previously because of their high charges. With increased fees earned from additional
assets under management, she can now afford to request from these vendors
information tailored to her specific needs. Because this research is so specialized
and detailed, and because Kim is confident the outside advisers use diligence and a
reasonable basis in their research, she is able to use the reports, with a few minor
changes, as her own. Kim shows her new research reports to all of her clients but
makes no mention of any other changes to her investment process.

Q34. By executing trades based on the information she receives from the
biotechnology consultant employees, Kim least likely violates the CFA Institute
Standards of Professional Conduct concerning:
A. Material Nonpublic Information.
B. Diligence and Reasonable Basis.
C. Market Manipulation.

Q35. With regard to Green Note’s five-year investment performance history, Kim
is inconsistent with the CFA Institute Standards of Professional Conduct concerning
which of the following?
A. Performance as a hedge fund manager
B. Performance when she was an equity portfolio manager
C. Simulated performance of current strategy

Q36. With regard to Kim’s fee arrangements with Akagi, whose actions
are inconsistent with the CFA Institute Standards of Professional Conduct?
A. Kim’s
B. Both Kim’s and Akagi’s
C. Akagi’s

Q37. Kim’s relationship with Miriam is consistent with the CFA Institute Standards of
Professional Conduct concerning:
A. Priority of Transaction.
B. Fair Dealing.
C. Material Nonpublic Information.

Q38. With regard to biotechnology legislation lobbying, are Kim’s actions consistent
with the CFA Institute Standards of Professional Conduct?
A. Yes.
B. No, because of her efforts to influence the legislation.
C. No, because she donated her own funds to influence the legislation.

Q39. Which of Kim’s changes made as a result of having more assets under
management is consistent with the CFA Institute Standards of Professional
Conduct?
A. Her new research reports
B. Use of an outside adviser
C. Client communications


Frank Litman Case Scenario
Frank Litman, CFA, was recently hired as a portfolio manager by Twain Investments,
a fairly small asset management firm. Since attending graduate school 10 years ago,
Litman has managed a limited number of accounts belonging to friends. All of these
accounts are currently too small to meet Twain’s minimum balance requirement of
$5 million and generate only modest fees for Litman. Litman disclosed the
arrangement to the human resource (HR) manager when he interviewed for his
position with Twain. The HR manager agreed that the accounts were too small and
would probably never be large enough to meet Twain’s minimum size requirement.

After accepting the position with Twain, Litman met with each of the friends for whom
he manages portfolios. He recommended they find another financial adviser.
Litman’s friends argued that a different adviser would undoubtedly charge higher
fees and asked Litman to continue managing their money as a personal favor.
Following the meetings, Litman sent separate letters to both the Twain HR manager
and his friends explaining his employment relationship and that he also manages
some small portfolios for a few of his friends.

The following month, Litman updated the promotional material that he shares with all
of his Twain clients and prospects. The material summarizes the portfolio trading
strategy Litman developed by analyzing 20 years of historical data. In his analysis,
Litman determined that his strategy of investing in large-capitalization US stocks
would have outperformed the S&P 500 Index over the last 20 years with an average
annual return of 8.91% versus 8.22% for the S&P 500. The concluding paragraph of
the brochure states, “We believe long-term use of this trading strategy will lead to
superior performance compared with the S&P 500.” The brochure includes a
footnote in small print stating, “Results are gross before taxes and thus may be
higher than actual results would have been over the given period. Past performance
cannot guarantee future results.”

At Twain, Litman has discretionary authority over 30 individual clients who hold both
stocks and bonds in their portfolios. His 10 largest clients vary widely in age,
occupation, and wealth. For a variety of reasons, each of these accounts requires
significant attention. The remaining two-thirds of Litman’s clients are stable, long-
term investors, all of whom are saving for retirement. Litman performs
comprehensive quarterly reviews with the owners of the 10 largest accounts and
similar annual reviews with the remaining clients. Recently, he made an exception to
this rule when he learned that one of his smaller, less active clients had
unexpectedly inherited $600,000 from an aunt’s estate. Litman met with the client
and performed a comprehensive review of the client’s financial situation even though
only three months had passed since their last meeting.

Twain hires a compliance officer and subsequently experiences significant change

during the following year. The compliance officer immediately begins to update the
firm’s policies and procedures even though Twain adheres to the Asset Manager
Code of Professional Conduct. In addition, after a thorough analysis, Twain senior
management decides to outsource its back-office operations and hires an
independent consultant to review client portfolio information. At the same time, they
add several research and investment staff members and upgrade the information
management system. They also eliminate paper records in favor of electronic copies
and develop a business-continuity plan based on current staffing.

Eighteen months later, the compliance officer resigns. Rather than hire an external
replacement, management designates one of Twain’s senior portfolio managers as
the new compliance officer. The compliance officer reviews both firm and employee
transactions and reports to the CEO rather than to the board of directors.

Q40. According to the CFA Institute Standards of Practice Handbook, which of the
following additional pieces of information would Litman least likely be required to
supply to Twain to comply with his duty to employer? The:
A. duration of the investment management agreements with friends.
B. names of his friends who are his clients.
C. amount and type of compensation received from friends.

Q41. With regard to managing portfolios for Twain as well as for his friends, Litman
should most likelyundertake which of the following to ensure compliance with the
CFA Institute Standards of Professional Conduct? He should:
A. inform his immediate supervisor.
B. obtain written consent from Twain and his friends.
C. do nothing further.

Q42. In the footnote of the promotional material about the performance of his
portfolio trading strategy, Litman is least likely in compliance with the CFA Institute
Standards of Professional Conduct with respect to:
A.taxes.
B.fees.
C.results.

Q43. Did Litman violate any CFA Institute Standards of Professional Conduct in
regard to his performance reviews for Twain clients?
A. Yes, with respect to the frequency of reviews for his 10 largest clients.
B. No.
C. Yes, with respect to his recent review for the client with the inheritance.

Q44. Are the significant changes made by Twain’s management most likely in
compliance with the Asset Manager Code of Professional Conduct?
A. No, with respect to back-office operations.
B. Yes.
C. No, with respect to the independent consultant.

Q45. With respect to its current compliance officer, do Twain’s actions and
procedures most likely comply with the recommendations and requirements of the
Asset Manager Code of Professional Conduct?
A. No, with regard to reporting to the CEO.
B. Yes.
C. No, with regard to independence.


Vision 2020 Capital Partners Case Scenario
Vision 2020 Capital Partners (V2020) has operated for the last 10 years originating
and brokering corporate finance deals through private placements in emerging and
frontier markets. Because of slow economic growth globally, investment banking
deals have declined, and V2020 has struggled to generate enough fees to sustain its
business. The board of directors of V2020, composed of corporate finance experts,
has identified opportunities to generate a new revenue stream.

One such opportunity is the creation of a division to manage an Emerging and

Frontier Market Balanced Fund (the Fund). The board has had several inquiries from
clients asking for such a product. The board believes the Fund is an ideal business
line to meet client demand and create monthly asset management fees. The board
thinks the Fund should also be required to act as a buyer of last resort for all its
corporate finance clients’ private placements. The board believes this arrangement
would act as a major incentive for private businesses to use their corporate finance
services, thereby increasing revenues from their primary business activity.

Because none of the V2020 board members or senior managers are experienced in
asset management, the board hires Lauren Akinyi, CFA, an independent consultant
who works with various clients in the asset management industry. She is asked to
undertake a study on an appropriate structure for the Fund to meet both corporate
finance and fund client needs. She is also asked to help V2020 set up policies and
procedures for the new fund to make certain all capital market regulations have been
followed.

The board informs Akinyi that the policies and procedures should also ensure
compliance with the CFA Institute Asset Manager Code of Professional Conduct
(Asset Manager Code).

Subsequently, in a report to the board, Akinyi makes the following recommendations

concerning compliance with the Asset Manager Code:

§ Recommendation 1: V2020 should abide by the following principles of conduct:

Principle 1 Proceed with skill, competence, and diligence;
Principle 2 Act with independence and objectivity; and
Principle 3 Provide client performance within three days after month-end.
§ Recommendation 2: To take advantage of their vast business experience, the
board of directors should implement new policies. Specifically, the board should
Policy 1 take an active daily role in managing the Fund’s assets,
Policy 2 designate an existing employee as a compliance officer, and
Policy 3 disclose any conflicts of interest arising from their business interests.
§ Recommendation 3: To avoid any conflicts of interest between the investment
banking business and the new fund management business, a separate wholly
owned subsidiary should be created to undertake the fund management
business. The Fund would then provide a 100% guarantee to buy the private
placements of the corporate finance clients without having to disclose to all
clients the relationship between the two entities.
§ Recommendation 4: To ensure timely and efficient trades in each of the markets
in which the Fund invests, only one stockbroker in each market should be used.
The board should also consider buying an equity stake in each of the appointed
brokers as an added profit opportunity.
After the Fund completes its first year of operations, V2020 receives a letter from its
regulator. The notification imposes heavy fines for poor disclosures to its fund clients
and mandates the replacement of the senior fund manager as a condition for the
renewal of V2020’s asset management license. The board challenges the ruling in
court, stating that the Fund made the necessary full disclosures. After six months,
not wanting to incur further expensive legal fees or waste more precious time, the
board, without admitting or denying fault, settles out of court, paying a smaller fine.
Subsequently, the senior fund manager is terminated but receives a multimillion-
dollar bonus upon leaving. After the replacement of the senior fund manager, the
license is renewed for a further year. The regulatory body, however, gives a warning
that if the Fund has any future violations, their license will be permanently revoked.
Subsequently, the Fund discloses to its clients that the regulator has renewed its
license for one year after the termination of the senior fund manager, a condition of
the renewal. They also disclose the out-of-court settlement and the fine paid.

Q46. Given the board’s intended purpose for starting the Fund, which of the following
principles of conduct under the Asset Manager Code of Professional Conduct is least
likely violated?
A. Act in a professional and ethical manner at all times.
B. Act for the benefit of clients.
C. Uphold the rules governing capital markets.

Q47. Which of the principles in Akinyi’s Recommendation 1 is least likely sufficient to
meet the principles of the Asset Manager Code of Professional Conduct?
A. Principle 1
B. Principle 2
C. Principle 3

Q48. Which of Akinyi’s policies in Recommendation 2 would least likely comply with
the Asset Manager Code of Professional Conduct and its general principles if
implemented?
A. Policy 1
B. Policy 2
C. Policy 3

Q49. Which of the following would be most effective to prevent any violation of the
Asset Manager Code of Professional Conduct as reflected in Akinyi’s
Recommendation 3?
A. V2020 discloses to all clients the relationship between V2020 and the Fund.
B. The Fund only retains a minority shareholding in V2020.
C. The Fund does not participate in any of V2020’s private placements.

Q50. If Recommendation 4 was implemented, which aspect of the Asset Manager
Code of Professional Conduct would most likely be violated?
A. Priority of transactions
B. Fair dealing
C. Best execution

Q51. Does the Fund’s disclosure to its clients regarding the renewal of the
license most likely comply with the Asset Manager Code of Professional Conduct?
A. No.
B. Yes, the disclosure included the out-of-court settlement and payment of fine.
C. Yes, the disclosure included the termination of the fund manager.