JUN18L1ETH/E06

Question 1
A recommended compliance procedure under Standard II (A) Material Nonpublic Information excludes:
a) Develop and document trade allocation procedures.
b) Physical separation of department.
c) Record maintenance.
This is a recommended procedure to be in compliance with Standard III (B) Fair Dealing.

Question 2
Kim Li, a CFA candidate, is an independent mutual fund sales agent who receives commission on the funds she sells.
Out of all the funds she promotes, FD funds pay the highest commission because they are new to the market. Li
always discloses to her clients that she is paid a commission as an agent but does not provide details of the
compensation structure. To persuade her clients to invest in FD funds for a higher commission, she always tells her
clients that 50% of her own portfolio is invested in FD Funds. Which Code of Standards VI Conflicts of Interest does Li
least likely violate?
a) Referral Fees
b) Disclosure of Conflicts
c) Priority of Transactions
The first choice is incorrect. Li should have disclosed the details of the commission structure to the clients under
Standard VI (C) Referral Fee. The second choice is incorrect. According to Standard VI (A) Disclosure of Conflicts, Li
should have disclosed the special commission rate offered by FD funds because it affects her objectivity in her
investment recommendation. The third choice is correct. Under Standard VI (B) Priority of Transaction, Li is allowed to
have the same investment as her clients as long as the priority is given to the clients.

Question 3
Which of the following statements is least accurate about the Standards of Professional Conduct?
a) There should not be any firewall between departments to control interdepartmental communications.
b) Companies should issue press releases before discussing any material information with analysts.
c) Analysts should not use social media for research and for sharing information with clients.
Analysts can use social media for research as long as the information is public. They can also use social media to
share information with clients as long as they are aware of the arrangement.

Question 4
Martha Birch, CFA, is a financial analyst at Granders Securities Corporation. Granders has information firewalls
between different departments in compliance with recommendations made in the Code and Standards. Birch is
preparing a purchase recommendation on B&D Corporation. Which of the following situations would be least likely to
present a conflict of interest for Birch and, therefore, needs not be disclosed?
a) Birch has been a member of the board of directors of B&D until three months ago.
b) Granders, through its investment advisory arm, holds for its clients' accounts a substantial holding of
common stock in B&D Corporation.
c) Birch was formerly married to the chief financial officer of B&D and has recently received a significant stock
holding as part of her divorce settlement.
The second choice does not present a potential conflict of interest as stated in Standard VI(A): Disclosure of Conflicts,
as the appropriate firewall between an investment advisory arm and the brokerage operation would be established in
line with the Code and Standards.

Question 5
Marv Asinas, CFA, works as an equity analyst for an investment firm. Rica Sy is the president and founder of
Enlightenment Inc. and is widely recognized as the key driver for the company's growth and success in the past years.
During a site visit at Enlightenment Inc., Asinas overheard a telephone conversation of Sy's personal assistant that Sy
has recently been diagnosed with a terminal illness and may need to resign from his position very soon. What should
Asinas do?
a) Publish a sell recommendation for Enlightenment Inc. as soon as possible.
b) Advise his clients who own Enlightenment shares to sell.
c) Encourage Enlightenment Inc. management to publicize Sy's medical condition.
The first choice is incorrect. Since Sy's health situation is not a confirmed fact, it will be a violation of Standard V (A)
Diligence and Reasonable Basis to issue a sell recommendation based on the “rumor.” The second choice is
incorrect. Advising clients to trade on this news will be a violation of Standard II (A) Material Nonpublic Information.
The third choice is correct. The “news” about Sy's health situation is a material nonpublic information, as it will have an
impact on its stock price, so Marv should make reasonable efforts to achieve public dissemination of material
nonpublic information, as required by Standard II (A) Material Nonpublic Information. Encouraging the issuer to
publicize this information will be an appropriate action.

Question 6
James Hans is a CFA charter holder and works for a full-service brokerage firm. One day, an institutional client asked
him to buy a substantial amount of Magenta stocks over 30 days. James's wife, Sarah, is a senior manager of the
audit firm handling Magenta's external audit. Recently, he overheard his wife speaking with the audit partner about the
adverse audit opinion that is to be issued for the company. To avoid violation of the standards, James should:
a) Conduct thorough research on Magenta on his own to ensure the validity of the information and then advise
the client according to the research result.
b) Advise his client to cancel the buy order for Magenta stocks.
c) Do nothing and act as if he did not receive any information regarding the audit opinion.
The first choice is incorrect. This is a violation of Standard II (A) Material Nonpublic Information. The validity of the
information is not the issue in this particular case. The second choice is incorrect. Advising the client based on the
material nonpublic information is a violation of Standard II (A) Material Nonpublic Information. The third choice is
correct. Pending audit opinion is considered material nonpublic information, and disclosing and/or trading on this
information will be a violation of Standard II (A) Material Nonpublic Information. He therefore should not do anything
about it.

Question 7
Which of the following is not a recommended procedure for compliance with Standard IV(C) Responsibilities of
Supervisors according to the Standards of Practice Handbook?
a) Code of ethics or compliance procedures
b) Acceptable compliance procedures
c) Incident reporting procedures
The first and second choice are incorrect. These are a recommended procedure to be in compliance with Standard IV
(C) Responsibilities of Supervisors. The third choice is correct. This is a recommended procedure to be in compliance
with Standard IV (A) Loyalty.

Question 8
Martha Pierpont, CFA, works for the securities custody department of North-South Trust Bank. She makes a
reciprocal referral fee arrangement with Robert Underhill, CFA, an advisor at BestAdvice.com. She does not disclose
the referral arrangement, but Underhill does so by inserting one clause in BestAdvice.com's investment advisory
agreement that includes “… from time to time referral fees may be arranged with a number of selected securities
custodians.” Clients of BestAdvice regularly use North-South's services and pay referral fees. Which of the following is
most accurate?
a) Only Pierpont complies with the Code and Standards.
b) Only Underhill complies with the Code and Standards.
c) Neither Pierpont nor Underhill complies with the Code and Standards.
The third choice is the best answer, since any referral fee arrangement that a client ultimately pays must be disclosed
in terms of the nature of the consideration or the benefit, together with the estimated monetary value, by both the
payer and recipient of the fee. See Standard VI(C): Referral Fees.

Question 9
Josh Gumban, CFA, is the fund manager of Bush Mutual Fund, and the fund's mandate is to invest in blue-chip equity
securities with stable dividend. At the start of the year, Gumban saw a drop in the dividend income from his holding,
so to maintain the dividend yield, he decided to invest 30% of the fund assets in high-yield corporate junk bonds. The
change is noted in the next annual report to fund shareholders. Josh's action least likely violated the CFA Institute
Code of Ethics and Standards of Professional Conduct concerning:
a) Suitability
b) Communication with Clients
c) Diligence and Reasonable Basis
The first choice is incorrect. Josh violated Standard III (C) Suitability because the investment in high-yield corporate
bonds may not be suitable for his clients' risk profile. The second choice is incorrect. Josh violated Standard V(B)
Communication with Clients because change in the investment mix away from the mandate must be disclosed to
clients immediately and not to wait till end of the year. The third choice is correct. Josh did not violate the standard
related to Diligence and Reasonable Basis.

Question 10
Christine Bell, CFA Level II candidate, is the head of marketing for Pixie Technicians Inc. To market Pixie's newly
developed computerized stock selection model, she decided to distribute a monthly newsletter exclusively to its high
net-worth clients covering the five top stock picks from the model. To simplify the newsletter, she leaves out key
details of the analysis, such as valuation and portfolio structuring. Is this a violation of Standard V (B) Communication
with Clients?
a) Yes, because she did not provide a detailed demonstration on the computerized stock selection model.
b) No, because the newsletter is not a formal report.
c) Yes, because she did not disclose to the clients and prospective clients factors that are important to their
investment recommendations.
The first choice is incorrect. A demonstration is not required by Standard V (B). The second choice is incorrect. The
newsletter is also considered communication with clients under Standard V (B). The third choice is correct. Standard V
(B) states that members and candidates should communicate in a recommendation the factors that were instrumental
in making the investment recommendation. By leaving out the key details of the recommendation, she therefore
violated the standard.