Ethics Quiz Questions

irussuri
Posts: 1
Joined: Wed Aug 03, 2016 8:02 am

Ethics Quiz Questions

Postby irussuri » Wed Aug 17, 2016 12:33 pm

Following are four questions from the LMS quiz which are not clear to me, explanation and choices are posted as well:

1) Why is buy a violation and not sell?

Geet Seth an analyst with an investment advisory firm changed the recommendation on Uniball. Inc.'s stock from hold to sell 12 days ago. This recommendation was published in the firm’s newsletter that came out three days after this announcement. Geet has just given his broker instructions to liquidate his personal holdings of Uniball. Geet has:
Choose one answer.
a. Violated Standard VI (A) - Disclosure of Conflicts to Clients and Prospects.
b. Violated Standard VI (B) - Priority of Transactions.
c. Not violated any standard of CFA INSTITUTE code.

Because Geet has allowed sufficient time for dissemination of the change in recommendation, he is free to carry out personal transactions. Also, since the recommendation is to sell the stock, there is no personal conflict in the situation. Note that it would be a violation of Standard VI(A) - Disclosure of Conflicts to Clients and Prospects - if the recommendation were to buy the stock and Geet had failed to reveal information about his personal holdings.

2) Why should he disclose anything to clients other than client who the security was purchased for?

Himesh Gandhi, CFA has received a special compensation from his client for his performance. He had advised his clients for a structured product which although had a tail risk associated but offered superior returns vis-à-vis other products in the market. Mr. Gandhi

Choose one answer.
a. Should disclose to his clients about the compensation/benefit received from recommendation of products
b. Has done his duty to his employer and is in compliance with iv (a)
c. Has violated investment analysis standard by recommending a tail risk product

The correct answer is A.
Members and candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from, or paid to, others for the recommendation of products or services


3) How is the explanation related to the question?

Amazing returns Inc. has developed a complex valuation methodology for picking stocks and successfully tested it, by applying on 15 years prices/ data in Lusbania stock exchange. Therefore company publishes full pager inserts in newspapers to advertise that they have a sure-shot winning formula for making returns and invites investors. However, it claims confidentiality on the methodology. Company is violating

Choose one answer.
a. Standard IV (C)
b. Standard V (B)
c. None of the answers is correct

The correct answer is C.
Standard III(E) states that “members shall preserve the confidentiality of information communicated by clients, prospects, or employers concerning matters within the scope of the client member relationship, unless the member receives information concerning illegal activities on the part of the client."

4) Is this explanation true?

Ajay jadeja, CFA saw his colleagues doing some fraudulent activities which could potential harm his employer and clients of the firm. He, however, chose to remain quiet due to fear of being ostracized from the peer group. He might run a danger to his life, if he goes on to report those activities to any body. In effect he has
Choose one answer.

a. Ajay has assisted his colleagues by not reporting those activites in his knowledge
b. CFA code of Standard I—PROFESSIONALISM (A) – knowledge of law requires him to report these activities to his employer, clients and SEC on a must basis
c. None of the above
The correct answer is C.
He should not be a part of those activities, however he can chose not to report them to any body and still not be in violation of any CFA INSTITUTE standard

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Ethics Quiz Questions

Postby edupristine » Fri Sep 09, 2016 6:43 am

Answer 1: If Buy was given as a recommendation, this would result in increase in the value of the stock. This would result in increase in the value of holdings of seth. The favorable movement in stock prices is however not possible because of the sell recommendation.


Answer 2: Because of the special compensation from the structured product, Himesh would be tempted to give recommendation in a way that would avoid the tail risk and provide him with superior returns. If all the clients are aware of such compensation, they would read the recommendations of Himesh with caution.

Answer 3: Standard IV C relates to “Responsibilities of Supervisors” and Standard V(B) relates to “Communication with clients and prospective clients” both of which are not violated. Only Section III(E) could be violated, if the clients suspect illegality of mdoel usage.

Answer 4: Yes.


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