Lind Bridel, CFA, recently accepted a position as Chief Compliance Officer for Troton Investments. She is responsible for the firm’s compliance with the CFA Code of Ethics and Standards of Professional Conduct. She is also responsible for recommending whether the firm should adopt the CFA Institute’s Soft Dollar and Research Objectivity Standards. Her first meeting of the day is with James Waterford, a securities analyst following investment banking stocks. He recently took over the coverage of Snaffel Holdings, which has historically held a buy rating. Waterford’s supervisor has told Waterford that Snaffel Holdings will “always carry a buy rating” as long as he is in charge of the department. Waterford is concerned that he has been compromised and should not cover the stock. Waterford also tells Bridel that he has recently been asked by his supervisor to write a research report on First Leading Management. Waterford will receive a flat fee prior to writing the report and will also receive a bonus based on any new investors that purchase the stock of First Leading based on his report. Karl Kramer is a leading analyst on the Sporting and Athletic Business Goods Industries. Kramer is well-respected and well-known and his comments have been known to have a material impact on the prices of industry stocks. Although he is often asked to join other firms, Kramer stays at Troton because of his lifelong friendship with Ransom Ryder, the founder of Troton. His latest research and overall knowledge of the company and industry lead him to believe that a company named Winner Take All is a sure bet and he plans to change his recommendation from “Hold” to “Strong Buy” later today. That recommendation will later be distributed to the firm’s clients in accordance with Standard III(B) – Fair Dealing. Kramer also follows Athlete Outfitters and is scheduled to do a webcast on the firm for a major financial news network. In preparing for the program, he mentions to a member of the show’s technical staff, Todd Gurth, that they should expect a large volume of traffic to the chat feature of the site as he plans to make the unexpected announcement that he is downgrading the stock. Gurth calls his broker and tells him the news. After speaking to Gurth, the broker, a CFA charterholder, buys a significant volume of puts on Athlete Outfitters stock that end up significantly in-the-money after the program airs. Similar to the practices employed at most other investment companies, Troton offers varying levels of service to clients, based either on fees paid or assets under management. The firm has two versions of marketing materials available for distribution. When investors with assets over a certain threshold amount inquire about services, they are given the “A-Level” marketing/informational packet only. Investors who do not meet the standard are given the “B-Level” marketing/informational packet only. Brit Hunter, a research analyst at Troton and Level 2 CFA candidate, issues an email recommendation to all his clients. Later that morning, he holds a video conference with his three largest clients (who pay an extra fee for the video conference feature) to discuss his recommendation in detail. Ernst Roberts, CFA, a former employee of Troton and the person who referred Bridel to her job, is now a portfolio manager for a large national bank. He receives compensation when he refers sales for other products and assists in generating new assets under management. These assets are invested in proprietary product offerings such as affiliated company index funds. Margaret Eventor, CFA, a supervisor at Troton, notices a high level of trading activity in three stocks that are not on the firm’s recommended list. She learns that a trainee has been consistently trading based on information he has taken from an internet chat room. The trainee has been recommending the stocks despite knowing little about the underlying company fundamentals or the stock’s suitability for the client’s portfolios. Immediately upon learning of the activity, Eventor speaks to the trainee, who agrees to stop the misconduct and divulges the extent of the activities. Eventor also reports the conduct up the chain of command, places limits on the trainee’s activities, and puts measures in place to increase the monitoring of the employee’s activities. Troton uses client brokerage to pay for a Bloomberg terminal that is used by clients to access financial information. The firm also uses client brokerage from principal and agency trades to benefit accounts other than the account that generated the brokerage. The firm discloses the practice and obtains prior consent from the accounts affected. Troton releases an updated recommended list, which includes the stocks of Winner Take All and Street Sense Inc. The next day, Jake Handler, a securities underwriter at Troton, sells some Winner Take All stock to pay for tickets, travel, and accommodations for a family trip to the 2008 World Cup. Troton’s current policy is to update research reports quarterly, or more often if there is significant news or events that might impact the company. When the firm decides to discontinue coverage, whatever the reason, the analyst covering the company places a memorandum in the file as to the reasons for discontinuing coverage. 1. Can Waterford cover Snaffel Holdings and still be in compliance with Standard I(B) – Independence and Objectivity and is his compensation for the First Leading Report in compliance with Standard I(B)? Coverage of Snaffel Holdings | Compensation for First Leading A. Yes | Yes B. Yes | No C. No | Yes D. No | No 2. To comply with Standard II(A) – Material Nonpublic Information, does Troton need to make Kramer’s recommendation on Winner Take All public prior to notifying the firm’s clients and are the actions of the broker a violation of Standard II(A)? Kramer’s Recommendation | Actions of the Broker A. Yes | Yes B. Yes | No C. No | Yes D. No | No 3. Are Troton’s method of distributing the marketing packets and Hunter’s actions in compliance with Standard III(B) – Fair Dealing? Marketing Packets | Hunter’s Actions A. Yes | Yes B. Yes | No C. No | Yes D. No | No 4. According to the Code and Standards, must Roberts disclose his compensation to clients? Are Eventor’s actions with regard to the trainee sufficient to comply with Standard IV© – Responsibilities of Supervisors? Robert’s Compensation | Eventor’s Actions A. Yes | Yes B. Yes | No C. No | Yes D. No | No 5. Is Troton in compliance with the CFA Institute’s Soft Dollar Standards in regards to the Bloomberg Terminal and the use of brokerage related to principal and agency trades? Bloomberg Terminal | Principal & Agency Trades A. Yes | Yes B. Yes | No C. No | Yes D. No | No 6. Are Handler’s actions with regards to the sale of Winner Take All stock and Troton’s policy on research reports in compliance with the CFA Institute’s Research Objectivity Standards? Handler & Winner Take All | Policy on Research Reports A. Yes | Yes B. Yes | No C. No | Yes D. No | No
I dunno, seems like a lot of reading to me…
I’ll throw these out there, I haven’t read ethics yet so this should be fun… DCAAAB
wow that’s hard to follow on a small screen… 1. B 2. C 3. C 4. A? 5. C 6. B?
D C A A A B T/G
D,C,B,A,A,D For the last one it could also be C, but I think they should notify clients when they discontinue coverage.
I know CFAI recommends issuing a final report disclosing the discontinuing coverage
D A D A B B that was a LOT of reading and way too many 2 parters to get many right!
Item sets sux0rz
3_letters, its time…show me some answers baby!
This was a tricky item set…I got 5/6. How? I never went with my original answer…there is something inherently wrong with that. ------------------------------------------------------- 1. B Waterford can cover Snaffel Holdings and still be in compliance with Standard I(B) as long as he only issues recommendations that reflect his own independent and objective opinion. Following the supervisor’s instructions would be a violation if he determined a buy rating is inappropriate. He can either decline to cover Snaffel or pick up coverage, reach his own independent conclusions, and if they conflict with the buy rating, share the conclusions with his boss or other supervisors so they can make an appropriate recommendation. Waterford’s compensation for the First Leading report is not in compliance with Standard I(B). He should only accept a flat fee that is not tied to the conclusions or recommendations of the report. 2. C The firm does not have to disclose Kramer’s recommendation to the general public. The analyst is not a company insider and does not have access to inside information. We can presume that his hard work (using the mosaic theory) generated the conclusions. Simply because the public in general would find the conclusions material does not mean that they have to be disclosed. The broker’s actions are in violation of Standard II(A) because although he is not a client, he obtained early access to material nonpublic information on Athlete Outfitter and acted on that information. 3. C The way the marketing packets are distributed is a violation of Standard III(B) – Fair Dealing. Standard III(B) allows a firm to offer different levels of service to clients, but those different levels of service should be disclosed to all clients. Hunter has not violated Standard III(B) because he emailed all of his clients prior to meeting with the largest clients. There would likely be a violation if he had met with the largest clients prior to sending the email to all the clients. 4. B Roberts should disclose the compensation arrangement. The key point here is that the funds will be invested in proprietary products. Roberts should not assume that non-sophisticated investors will realize that the referrals to the affiliated companies benefit Roberts and the bank. The portfolio manager must disclose to clients that they are compensated for referring clients to firm products. If Roberts had been selling the bank’s services in general, he would not have to disclose his compensation to be in compliance with Standard VI© – Referral Fees. Eventor is not in compliance with Standard IV© because she should immediately initiate an investigation and she cannot rely on the statements by the trainee. Her other actions were in accordance with Standard IV©. 5. D If the purpose of the Bloomberg terminal is for client use, the firm cannot use client brokerage to pay for it. The firm could perform an analysis and determine what percentage of the use was to assist the firm in the investment decision making process and could pay for that portion with soft dollars. The firm’s policyon principal trades is in compliance with the Soft Dollar Standards, but the policy on agency trades is not. The firm needs to ensure that even if a client is not benefited at a certain point of time, that over a reasonable period of time the client receives the benefit of research paid for by client brokerage. 6. D According to the Research and Objectivity Standards, Section 7.0 - Personal Investments and Trading, employees should not trade contrary to the firm’s most recent, published recommendation or rating, except in the case of extreme financial hardship. Section 8.0 – Timeliness of Research Reports and Recommendations requires that firms that discontinue coverage have to issue a final research report that includes a recommendation and clearly state the reason for the discontinued coverage.
got off to a fast start… then nothing.
0-fer sweet. I think i’m going to demote myself back to the L1 forum or something now.
speaking of 0-fers, atta boy Jon Lester!!! between the sox and the celts, bombing ethics doesn’t seem that bad.
haha way to see the bright side banny!
D, C, C, A, B, B -> 3/6, very helpful questions!
I got 2/6, Jesus
what would jon lester do?
Solid… 2/6… for me… What exam is this from?
It woulda been 3/6, I just realized I read 3 backwards, i thought it was asking if it was in violation, the starbucks noise got the best of me