Question #1 of 25 Question ID: 1212311

Jack Stevens is employed by a company to provide investment advice to participants in the rm's 401(k)

plan. One of the investment options is a stable value fund run by the company. Stevens' research indicates

that the fund is far riskier and less liquid than the typical stable value fund and has a fundamental asset
value lower than the book value of the assets. He tells Jessica Cox, the head of employee bene ts, about

his research, and indicates that he will advise new employees to not invest in the fund and will advise

employees who already own the fund to reduce their holdings in the fund. Cox points out that the fund is

not in any current danger because there are very few redemptions requested of the fund. Cox also states

that a sell recommendation may become a self ful lling prophecy, causing investors to redeem their

shares and forcing the fund to liquidate, which in turn will cause the remaining investors to receive less

than their promised value. Stevens agrees with this assessment and feels his duciary duty is to all

employees. Stevens should:

A) continue to recommend that new investors do not invest in the fund and existing investors
reduce their holdings.

B) tell investors he cannot give advice on the fund because of a con ict of interest.

C) continue to recommend that new investors do not invest in the fund, but not advise existing
investors to reduce their holdings.

Explanation

The employees to whom Stevens owes duciary duty are the ones who are seeking his advice, even if
acting on that advice hurts other employees who might eventually become clients.

(Study Session 1, Module 2.4, LOS 2.a)

Question #2 of 25 Question ID: 1207877

When a rm seeks to allocate a disproportionate number of shares of a hot IPO to performance-based fee
accounts this constitutes a violation of the Standard concerning:

A) priority of transactions.

B) duciary duty.

C) additional compensation arrangements.

Explanation

The allocation of a disproportionate number of shares to performance-based fee accounts constitutes a

violation of duciary duty, in addition to being a violation of the Standard concerning fair dealing.

(Study Session 1, Module 2.4, LOS 2: III(A))

Question #3 of 25 Question ID: 1207861

All of the following would be e ective components of a formal compliance system EXCEPT:

A) as a duciary under ERISA, the rm will strictly follow pension plan instructions and
restrictions, which may include concentrating portfolios in a few securities or industries.

B) the rm prohibits analysts and portfolio managers from using material nonpublic information
in making investment recommendations or taking investment action.

C) the investor's objectives and constraints should be maintained and reviewed periodically to
re ect any changes in the client's circumstances.

Explanation

According to Standard III(A)—Loyalty, Prudence, and Care, "members shall use particular care in
determining applicable duciary duty." Under ERISA, a duciary has the duty to diversify the plan's
investments in order to protect it from the risk of substantial loss. The rm must follow pension plan
instructions and restrictions unless they con ict with ERISA or other applicable laws and regulations.
Having concentrated portfolios does not constitute e ective diversi cation. An appropriate policy
statement would be: " The rm will follow pension plan documents only to the extent that they are
consistent with applicable laws and regulations. The rm will diversify plan assets to minimize the risk of
loss."

(Study Session 1, Module 2.4, LOS 2.a)

Question #4 of 25 Question ID: 1212322

According to Standard III(A) Loyalty, Prudence and Care, brokerage is an asset of the:

A) client.

B) brokerage rm conducting the trades.

C) managing rm.

Explanation

Brokerage is an asset of the client.

(Study Session 1, Module 2.4, LOS 2: III(A))

Question #5 of 25 Question ID: 1212324

A member would most likely violate the Standard regarding duties to clients by:

A) adding a risky derivative security to the portfolio of a client with moderate risk tolerance.

B) recommending purchase of securities without a reasonable inquiry into the investment

experience of the client.

C) executing a client order for a security the member believes is greatly overvalued.

Explanation
Standard III(A) Loyalty, Prudence, and Care requires members acting as advisors to make a reasonable
inquiry into the client's investment experience, risk and return objectives, and nancial constraints
before making investment recommendations. Investment decisions must be made based on a total
portfolio approach, rather than the quality of an individual investment in isolation. Some members are
not acting as investment advisors and may only have a duty to provide best execution of client orders.

(Study Session 1, Module 2.4, LOS 2: III(A))

Question #6 of 25 Question ID: 1212320

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. Calaveccio places

a trade with Quantco Brokerage. While Calaveccio's part of the transaction was conveyed correctly to
Quantco, there was a trading error made in Calaveccio's account due to a slip up within Quantco.
Calaveccio realizes that the error has taken place, and informs his contact at Quantco. Calaveccio allows
Quantco to cover the error, with no cost to TrustCo. This is:

A) a violation of Calaveccio's duciary duties.

B) a violation of Calaveccio's duty to his employer.

C) permissible under CFA Institute Standards.

Explanation

The issue is similar to an allocation of soft dollars. Clearly, if the broker absorbs the loss, they expect to
make up the di erence in some way. However, since the error was on the part of Quantco Brokerage,
Calaveccio is under no obligation to cover the cost of the trading error. Moreover, no reasonable
observer expects that there exists any implied future allocation of trades to Quantco in return for
correcting their own mistake. There is no violation of Standard III(A), Loyalty, Prudence, and Care.

(Study Session 1, Module 2.4, LOS 2: III(A))

Question #7 of 25 Question ID: 1212310

Which of the following statements about a member's use of client brokerage commissions is NOT correct?
Client brokerage commissions:

A) should be used by the member to ensure that fairness to the client is maintained.

B) should be commensurate with the value of the brokerage and research services received.

C) may be directed to pay for the investment manager's operating expenses.

Explanation

Brokerage commissions are the property of the client and may only be used for client bene t.

(Study Session 1, Module 2.4, LOS 2.a)

Question #8 of 25 Question ID: 1212318

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades
for the fund with River City Brokerage. River City provides Calaveccio with soft dollars to purchase
research. River City also deals in municipal bonds, some of which Calaveccio holds in his personal
portfolio. He periodically uses the soft dollars to request research reports on various small cap stocks and
also on the status of the municipal bond market and issues that he holds. These actions are:

A) not in violation of the Code and Standards.

B) in violation of his duciary duties regarding both the small cap research and the municipal
bond research.

C) in violation of his duciary duties regarding the municipal bond research but not so regarding
the research on the small cap issues.

Explanation

The issue at hand is the member's duciary responsibilities in handling "soft dollars" which are
technically the property of the client. Standard III(A), Loyalty, Prudence, and Care, delineates the
member's duciary responsibilities with regard to soft dollars. Since municipal bond research is clearly
not relevant to the Small Cap Fund holders, he is clearly using the soft dollars to obtain research for his
personal bene t and is in violation of the Standard.

(Study Session 1, Module 2.4, LOS 2: III(A))

Question #9 of 25 Question ID: 1207858

June Bird is a pension consultant asked to advise on the Backwater County Pension Plan. Bird notices that
20 percent of the plan's assets are invested in privately held local businesses. Bird is concerned about the
lack of liquidity and diversi cation caused by such an investment. She learns that state law allows
investing in local businesses and county law requires at least one- fth of the plan's assets to be dedicated
to investing in local businesses. Bird:

A) should le a written complaint to the Department of Labor pointing out that the law is in
con ict with the Employee Retirement Income Security Act (ERISA).

B) can continue to advise the pension plan as best she can with the restrictions.

C) should recommend that the trustees resign or risk being sued for violating the Prudent Expert
Rule.

Explanation

According to Standard III(A), Loyalty, Prudence, and Care, Bird can continue to serve as a consultant to
the plan, but must follow the applicable law.

(Study Session 1, Module 2.4, LOS 2.a)

Question #10 of 25 Question ID: 1207873

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades
for the fund with Canadian Brokerage. Canadian provides Calaveccio with soft dollars to purchase
research. He uses these soft dollars to get research reports from Canadian's research department
regarding the issues currently held in the small cap portfolio, and also for rms he is contemplating adding
to the portfolio. By using soft dollars in this manner, Calaveccio has:

A) violated the Code and Standards by acquiring research on issues that the fund already holds
but not by acquiring research on issues contemplated for purchase.

B) not violated the Code and Standards.

C) violated the Code and Standards by acquiring research on issues contemplated for purchase
but not by acquiring research on currently held issues.

Explanation

"Soft dollars" are the property of the client (in this case the holders of the shares of the Small Cap
Venture Fund). Standard III(A) Loyalty, Prudence, and Care delineates the member's responsibilities.
Since he is clearly using the soft dollars to obtain research that is directly applicable to his professional
duties, there is no violation of the Standard.

(Study Session 1, Module 2.4, LOS 2: III(A))

Question #11 of 25 Question ID: 1207857

Which of the following statements about soft dollars is least accurate?

A) Soft dollars are assets of the client.

B) Directed brokerage are soft dollars to be used for research that bene ts the investment rm.

C) Soft dollars are third party research arrangements.

Explanation

Directed brokerage are soft dollars directed by the client to the investment manager to pay for goods
and services that bene ts the client only and not the rm.

(Study Session 1, Module 2.4, LOS 2.a)

Question #12 of 25 Question ID: 1212312

A company has a de ned bene t plan that is currently under-funded. The plan sponsor has instructed the
portfolio manager of the plan to invest more aggressively to bring the funding level up to an adequate

amount. Which of the following statements best describes the course of action the portfolio manager
should take? The portfolio manager should:

A) not invest more aggressively since this may expose the plan to too much risk and may not be
in the best interest of the plan's bene ciaries.

B) not invest more aggressively because this is not the method used to increase the funding level
of a plan.
C) invest more aggressively because his duciary duties lie with the plan sponsor.

Explanation

Standard III(A), Loyalty, Prudence, and Care, applies in this situation. According to this Standard,
investment actions should be carried out for the sole bene t of the client and in a manner the manager
believes to be in the best interest of the client. Here, the client is the plan bene ciaries, not the manager
or the entity that hired the manager.

(Study Session 1, Module 2.4, LOS 2.b)

Question #13 of 25 Question ID: 1212325

An independent analyst has only one client. One of the client's largest holdings is a brokerage rm.
Because of the large holding by his client, the brokerage rm recently began allowing the analyst to tap
into the rm's computer network to use the rm's research facilities. This is allowable as long as the
analyst:

A) does both of the actions listed here.

B) uses the resources to help manage the client's account.

C) discloses the relationship to the client.

Explanation

According to Standard III(A), Loyalty, Prudence, and Care, the analyst must put the client rst and inform
the client of any possible con icts of interest. The analyst must channel any bene ts derived from his
service to the client, back to the client, and inform the client of the bene ts.

(Study Session 1, Module 2.4, LOS 2: III(A))

Question #14 of 25 Question ID: 1207867

Which of the following would be the least important proxy issue?

A) Election of internal auditors.

B) Compensation plans for o cers.

C) Takeover defense and related actions.

Explanation

Election of internal auditors is not a major proxy issue.

(Study Session 1, Module 2.4, LOS 2.c)

Question #15 of 25 Question ID: 1212317

Sharon Pope has been asked by the Chief Investment O cer to develop a rm-wide policy for proxy
voting. Which of the following would NOT be acceptable to include in the policy statement?

A) Portfolio managers of active funds must vote in all proxies; portfolio managers of index funds
should vote only when they have a de nitive opinion.

B) The value of proxy voting must be maximized.

C) Voting proxies may not be necessary in all instances.

Explanation

Proxies for stocks in passively managed funds must also be voted. A cost-bene t analysis may show that
voting all proxies may not bene t all clients.

(Study Session 1, Module 2.4, LOS 2.c)

Question #16 of 25 Question ID: 1212319

All of the following are required by duciaries under Standard III(A), Loyalty, Prudence, and Care, EXCEPT:

A) act solely in the interest of the ultimate bene ciaries.

B) place the client’s interest before the employer’s interest.

C) support the sponsor's management during proxy ghts.

Explanation

Members are required to act in the interest of their clients. In voting proxies, the client's interest must
prevail over management's interest.

(Study Session 1, Module 2.4, LOS 2: III(A))

Question #17 of 25 Question ID: 1212323

Alan Cramer, CFA, practices in a country that does not regulate the investment of company retirement
plans. He was retained by Bingham Companies to manage their corporate pension plan. Bingham's
management has approached Cramer and requested that Cramer invest the entire plan in Bingham stock.

Cramer may:

A) not invest any of Bingham Company's retirement plan in its own stock regardless of the
stock's prospects and in spite of management's request.

B) invest all of the retirement plan assets in Bingham Company stock according to
management's request only if Cramer can document that the investment is more prudent
h h i i h d
C) invest a portion of the retirement plan in Bingham Company stock if the investment is
prudent and if he keeps the overall portfolio properly diversi ed.

Explanation
Standard III(A), Loyalty, Prudence, and Care, requires members to comply with their duciary duty.
Retirement plan managers owe their duty to the plan participants, not to the management of the
company sponsoring the plan. The duciary duty includes the obligation to diversify the plan's
investments, regardless of the quality of the sponsoring company's stock. Investing in the company's
stock is not prohibited.

(Study Session 1, Module 2.4, LOS 2: III(A))

Question #18 of 25 Question ID: 1207855

Perley & Sons is an investment advisor company that just signed a contract with full discretionary power
for the management of assets for Bright Future, a charitable fund. Without consultation, portfolio
manager Martin Brown, CFA, decides to trade the funds' assets through a brokerage rm that provides, as
an additional bene t, research reports for companies in the microchip industry. These companies
represent the main investment interest for most of the Perley & Sons clients. The Bright Future portfolio
does not hold any equities in the microchip industry, and, because of its risk pro le, is unlikely to ever do
so. Which of the following activities represents a possible breach with the CFA Institute standards?

A) Accepting research reports from the brokerage rm that do not bene t client portfolios.

B) Lack of action in consulting with the client before choosing the brokerage rm.

C) Exercising a selection principle that does not comply with the idea of best trade price and
execution.

Explanation

The problem refers to the duciary duties of the analyst and brokerage contracts involving soft money.
Trades placed with a broker that provides the rm with research are implicitly paying for the research.
In a competitive marketplace, it is probable that the trades could have been as e ectively placed with a
broker that was able to provide research that would apply to the holdings of Bright Future. According to
Standard III(A) Loyalty, Prudence, and Care, it is permissible to direct trades of the client portfolio
through a broker who provides research that does not directly bene t the client portfolio, but the client
should be informed about the situation.

(Study Session 1, Module 2.4, LOS 2.a)

Question #19 of 25 Question ID: 1207878

Mohawk Asset Management buys on-the-run Treasuries at auction for its standard fee accounts. When
these move o -the-run, they are placed in performance-based accounts via in-house cross-trades at

prevailing market prices, and replaced in the standard fee accounts with new on-the-run issues. Which
standard is violated, if any?

A) The Standard concerning Fiduciary Duty.

B) The Standard concerning Priority of Transactions.

C) No Standard is violated.

Explanation
In addition to being a violation of the Standard concerning Fair Dealing, this constitutes a violation of
Mohawk's Fiduciary Duty. Why? Because the on-the-run issues are benchmarks and trade at lower yields
than the o -the-run issues. In essence, the o -the-run issues have marginally higher returns, and this
will boost the returns in the performance-based fee accounts. Mohawk is allocating trades based upon
compensation arrangements, and this is not permissible under the Code and Standards.

(Study Session 1, Module 2.4, LOS 2: III(A))

Question #20 of 25 Question ID: 1207860

Jordan Conomos is the new trustee for the Grant Trust, which has both current bene ciaries and
remaindermen. Up until now, the trust has been entirely invested in long-term tax-free municipal bonds.
Conomos decides to put 30 percent of the assets in common stocks, with the justi cation that taxes
should be the concern of the trust bene ciaries and not the trust, and the trust needs some diversi cation
and growth. Conomos is:

A) violating his duciary duty by not considering taxes.

B) not violating his duciary duty.

C) violating his duciary duty by not investing solely for the purposes of the current bene ciaries.

Explanation

The trustee must consider tax liabilities of bene ciaries. However, he should also provide diversi cation
and be concerned with the desires of the remaindermen. (Remaindermen refers to the group that is to
receive the remainder of the trust once its term is complete. Of course, some trusts never expire so not
every trust has remaindermen.)

(Study Session 1, Module 2.4, LOS 2.a)

Question #21 of 25 Question ID: 1212314

Paul Drake is employed by a company to provide investment advice to participants in the rm's 401(k)

plan. Company stock is one of the investment options in the plan. Drake feels that the stock is too risky for
employees to own in their 401(k) plan and starts advising them to pull out of the stock. The Treasurer of
the company calls Drake and tells him that he will be red if he continues making such advice because he
is violating his duciary duty to the company. Drake should:

A) tell employees that he cannot provide advice on company stock because of a con ict of
interest.

B) continue to advise employees to sell their stock.

C) make sell recommendations but point out that the company Treasurer has a di ering and
valid point of view.

Explanation
Although Drake is paid by the company, his duciary duty is to the plan participants. His advice cannot
be compromised by business considerations, otherwise he will be violating the Standard on loyalty,
prudence, and care.

(Study Session 1, Module 2.4, LOS 2.b)

Question #22 of 25 Question ID: 1212321

Regarding (1) not voting all client proxies, and (2) using a directed brokerage arrangement, a member
would violate the Standards by:

A) engaging in neither of these practices.

B) using a directed brokerage arrangement.

C) not voting all proxies for client stocks.

Explanation

Proxies have economic value to the client. To comply with Standard III(A) Loyalty, Prudence, and Care,
the analyst is obligated to vote proxies in an informed and responsible manner. A cost bene t analysis
may show that voting all proxies may not bene t the client, so voting proxies may not be necessary in all
instances. Directed brokerage occurs when the client requests that a portion of the client's brokerage
be used to purchase services that directly bene t the client. Although this may prevent best execution, it
does not violate the Standards as it was directed by the client, not the brokerage rm.

(Study Session 1, Module 2.4, LOS 2: III(A))

Question #23 of 25 Question ID: 1212316

Member compliance on issues relating to corporate governance or to soft dollars is primarily addressed by
the Standard concerning:

A) Loyalty, Prudence, and Care.

B) Disclosure of Con icts to Clients and Prospects.

C) Disclosure of Referral Fees.

Explanation

Fiduciary duty on issues relating to corporate governance or to soft dollars is primarily addressed by
Standard III(A), Loyalty, Prudence, and Care.

(Study Session 1, Module 2.4, LOS 2.b)

Question #24 of 25 Question ID: 1212315

Denise Weaver is a portfolio manager who manages a mutual fund and has pension clients. When Weaver
receives a proxy for stock in the mutual fund, she gives it to Susan Gri th, her administrative assistant, to

complete. When the proxy is for a stock owned in a pension plan, she asks Gri th to send the proxy on to
the sponsor of the pension fund. Weaver has:

A) violated the Standards by her policy on mutual fund proxies, but not her policy on pension
fund proxies.

B) violated the Standards by her policy on mutual fund and pension fund proxies.

C) not violated the Standards.

Explanation

Proxies should be taken seriously, and although it is likely that Gri th can understand some of the
issues, it is likely that she is not capable of making responsible decisions on all potential proxy issues.
Proxies for a pension plan should be voted in the best interests of the bene ciaries, not the plan
sponsor. The sponsor's interests will not always be the same as the bene ciary's interest.

(Study Session 1, Module 2.4, LOS 2.b)

Question #25 of 25 Question ID: 1212313

Brenda Simone is a money manager and the Blue Streets Pension Fund is one of her clients. The director
of the pension fund calls Simone and asks her to use a particular broker so that the fund can obtain some

research services with the soft dollars from that broker. Simone believes that the desired broker will
provide the same price and execution as the normal broker that Simone uses. Simone does as the client

wishes. Simone has:

A) not violated the Standards as long as the research provided by the broker will bene t Blue
Streets.

B) not violated the Standards as long as the research provided by the broker will bene t the plan
bene ciaries.

C) violated the Standards.

Explanation

Simone must ensure that the research bene ts the parties to whom she owes duciary duty, which are
the plan participants.

(Study Session 1, Module 2.4, LOS 2.b)