Test Prep CFA Level 2 - CFA Level 2 Exam
Page: 3 / 111
Total 554 questions
Question #11 (Topic: Single Topic)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is commonly involved in complex trading strategies on behalf
of Islandwide and maintains a significant relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market volatility has led
Islandwide to incur record-high trading volume and commissions with Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers
Harris an all-expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance officer and, based
on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While Harris is sitting in the restaurant waiting for Swamy to
arrive, Harris overhears a conversation between the president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that
Progressive's board of directors has just approved dropping the company's cash dividend, despite its record of paying dividends for the past 46 quarters. The
company plans to announce this information in about a week. Harris owns Progressive's common stock and immediately calls her broker to sell her shares in
anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on the board of directors of Landmark Enterprises, a
private company owned by her brother-in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on
investing their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of her account over the previous quarter. Bert Baker, also a
client, has offered Harris two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark participates in a conference call for several analysts in which
the chief executive officer at Dex says his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a 40% premium
over the market price. Clark contacts a friend and relates the information about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares
of Dex's stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the
price of a small-cap stock, in which Islandwide owns shares, by approximately 5% because the orders were large in relation to the average daily trading volume of
the stock. Michaels' firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create additional liquidity in the stock over its first 90 days of
trading by committing to minimum bids and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an oversubscribed IPO. One of his clients has been complaining about
the execution price of a trade Park made for her last month, but Park knows from researching it that the trade received the best possible execution. In order to
calm the client down. Park increases her allocation of shares in the IPO above what it would be if he allocated them to all suitable client accounts based on
account size. He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary beneficiary.
According to Standard IV Duties to Employers, which of the following is most likely required of Swamy? Swamy must:
of Islandwide and maintains a significant relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market volatility has led
Islandwide to incur record-high trading volume and commissions with Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers
Harris an all-expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance officer and, based
on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While Harris is sitting in the restaurant waiting for Swamy to
arrive, Harris overhears a conversation between the president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that
Progressive's board of directors has just approved dropping the company's cash dividend, despite its record of paying dividends for the past 46 quarters. The
company plans to announce this information in about a week. Harris owns Progressive's common stock and immediately calls her broker to sell her shares in
anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on the board of directors of Landmark Enterprises, a
private company owned by her brother-in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on
investing their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of her account over the previous quarter. Bert Baker, also a
client, has offered Harris two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark participates in a conference call for several analysts in which
the chief executive officer at Dex says his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a 40% premium
over the market price. Clark contacts a friend and relates the information about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares
of Dex's stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the
price of a small-cap stock, in which Islandwide owns shares, by approximately 5% because the orders were large in relation to the average daily trading volume of
the stock. Michaels' firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create additional liquidity in the stock over its first 90 days of
trading by committing to minimum bids and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an oversubscribed IPO. One of his clients has been complaining about
the execution price of a trade Park made for her last month, but Park knows from researching it that the trade received the best possible execution. In order to
calm the client down. Park increases her allocation of shares in the IPO above what it would be if he allocated them to all suitable client accounts based on
account size. He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary beneficiary.
According to Standard IV Duties to Employers, which of the following is most likely required of Swamy? Swamy must:
A. secure written permission from her employer before performing services for the symphony.
B. inform her immediate supervisor at Dillon in writing that she (Swamy) must comply with the Code and Standards.
C. disclose to her employer any additional compensation she receives from Landmark Enterprises and secure written permission to serve on the board.
Answer: A
Question #12 (Topic: Single Topic)
Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is commonly involved in complex trading strategies on behalf
of Islandwide and maintains a significant relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market volatility has led
Islandwide to incur record-high trading volume and commissions with Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers
Harris an all-expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance officer and, based
on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While Harris is sitting in the restaurant waiting for Swamy to
arrive, Harris overhears a conversation between the president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that
Progressive's board of directors has just approved dropping the company's cash dividend, despite its record of paying dividends for the past 46 quarters. The
company plans to announce this information in about a week. Harris owns Progressive's common stock and immediately calls her broker to sell her shares in
anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on the board of directors of Landmark Enterprises, a
private company owned by her brother-in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on
investing their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of her account over the previous quarter. Bert Baker, also a
client, has offered Harris two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark participates in a conference call for several analysts in which
the chief executive officer at Dex says his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a 40% premium
over the market price. Clark contacts a friend and relates the information about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares
of Dex's stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the
price of a small-cap stock, in which Islandwide owns shares, by approximately 5% because the orders were large in relation to the average daily trading volume of
the stock. Michaels' firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create additional liquidity in the stock over its first 90 days of
trading by committing to minimum bids and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an oversubscribed IPO. One of his clients has been complaining about
the execution price of a trade Park made for her last month, but Park knows from researching it that the trade received the best possible execution. In order to
calm the client down. Park increases her allocation of shares in the IPO above what it would be if he allocated them to all suitable client accounts based on
account size. He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary beneficiary.
According to Standard IV Duties to Employers, which of the following is most likely required of Swamy? Swamy must:
Which action by Park violated Standard III(B) Duties to Clients: Fair Dealing?
of Islandwide and maintains a significant relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market volatility has led
Islandwide to incur record-high trading volume and commissions with Quadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers
Harris an all-expenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance officer and, based
on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While Harris is sitting in the restaurant waiting for Swamy to
arrive, Harris overhears a conversation between the president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that
Progressive's board of directors has just approved dropping the company's cash dividend, despite its record of paying dividends for the past 46 quarters. The
company plans to announce this information in about a week. Harris owns Progressive's common stock and immediately calls her broker to sell her shares in
anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on the board of directors of Landmark Enterprises, a
private company owned by her brother-in-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on
investing their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of her account over the previous quarter. Bert Baker, also a
client, has offered Harris two airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark participates in a conference call for several analysts in which
the chief executive officer at Dex says his company's board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a 40% premium
over the market price. Clark contacts a friend and relates the information about Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares
of Dex's stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy program for a client. This buy program has driven up the
price of a small-cap stock, in which Islandwide owns shares, by approximately 5% because the orders were large in relation to the average daily trading volume of
the stock. Michaels' firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create additional liquidity in the stock over its first 90 days of
trading by committing to minimum bids and offers of 5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an oversubscribed IPO. One of his clients has been complaining about
the execution price of a trade Park made for her last month, but Park knows from researching it that the trade received the best possible execution. In order to
calm the client down. Park increases her allocation of shares in the IPO above what it would be if he allocated them to all suitable client accounts based on
account size. He allocates a pro rata portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary beneficiary.
According to Standard IV Duties to Employers, which of the following is most likely required of Swamy? Swamy must:
Which action by Park violated Standard III(B) Duties to Clients: Fair Dealing?
A. Increasing allocation to the problem client.
B. Decreased allocation to the brother-in-law and other firm clients.
C. Both actions are violations.
Answer: C
Question #13 (Topic: Single Topic)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm that employs three investment professionals and currently has
approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts
to a $30 million private school endowment. In addition to Burton's administrative responsibilities as the managing partner at United, he also serves as an
investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its
investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the
two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United's
business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners.
Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for
the private school endowment, Unitcd's largest client. Burton states that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United's three
investment professionals. Crossley notices that all three of United's investment professionals are described as "CFA charterholders," but he is not familiar with the
designation. In response to Crossley's inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing
three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank.
Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts
Crossley's brother-in-law and determines that Security Bank's trade execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United's clients to Security Bank's retail banking
division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley's trades but
will use research materials provided by the other two brokers to assist in the management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead
underwriter on SolutionWare's IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security
Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the
purchase of SolutionWare equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing Crossley's order, Burton reads the
SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley's portfolio. United Partners, being a small firm,
has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton
adds his order to Crossley's order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata
basis between Crossley's account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a
position, though smaller than requested, in such a "hot" offering.
Did the marketing materials presented to Crossley by Burton violate Standard III(D) Performance Presentation or Standard VI 1(B) Reference to CFA Institute, the
CFA Designation, and the CFA Program?
approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts
to a $30 million private school endowment. In addition to Burton's administrative responsibilities as the managing partner at United, he also serves as an
investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its
investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the
two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United's
business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners.
Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for
the private school endowment, Unitcd's largest client. Burton states that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United's three
investment professionals. Crossley notices that all three of United's investment professionals are described as "CFA charterholders," but he is not familiar with the
designation. In response to Crossley's inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing
three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank.
Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts
Crossley's brother-in-law and determines that Security Bank's trade execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United's clients to Security Bank's retail banking
division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley's trades but
will use research materials provided by the other two brokers to assist in the management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead
underwriter on SolutionWare's IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security
Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the
purchase of SolutionWare equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing Crossley's order, Burton reads the
SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley's portfolio. United Partners, being a small firm,
has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton
adds his order to Crossley's order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata
basis between Crossley's account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a
position, though smaller than requested, in such a "hot" offering.
Did the marketing materials presented to Crossley by Burton violate Standard III(D) Performance Presentation or Standard VI 1(B) Reference to CFA Institute, the
CFA Designation, and the CFA Program?
A. Standard III(D) only.
B. Standard VII(B) only.
C. Both Standard III(D) and Standard VIT(B) are violated.
Answer: A
Question #14 (Topic: Single Topic)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm that employs three investment professionals and currently has
approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts
to a $30 million private school endowment. In addition to Burton's administrative responsibilities as the managing partner at United, he also serves as an
investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its
investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the
two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United's
business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners.
Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for
the private school endowment, Unitcd's largest client. Burton states that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United's three
investment professionals. Crossley notices that all three of United's investment professionals are described as "CFA charterholders," but he is not familiar with the
designation. In response to Crossley's inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing
three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank.
Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts
Crossley's brother-in-law and determines that Security Bank's trade execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United's clients to Security Bank's retail banking
division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley's trades but
will use research materials provided by the other two brokers to assist in the management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead
underwriter on SolutionWare's IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security
Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the
purchase of SolutionWare equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing Crossley's order, Burton reads the
SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley's portfolio. United Partners, being a small firm,
has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton
adds his order to Crossley's order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata
basis between Crossley's account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a
position, though smaller than requested, in such a "hot" offering.
The trading arrangement between Burton and Security Bank is most likely to be a violation of the CFA Institute Soft Dollar Standards because:
approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts
to a $30 million private school endowment. In addition to Burton's administrative responsibilities as the managing partner at United, he also serves as an
investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its
investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the
two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United's
business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners.
Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for
the private school endowment, Unitcd's largest client. Burton states that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United's three
investment professionals. Crossley notices that all three of United's investment professionals are described as "CFA charterholders," but he is not familiar with the
designation. In response to Crossley's inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing
three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank.
Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts
Crossley's brother-in-law and determines that Security Bank's trade execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United's clients to Security Bank's retail banking
division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley's trades but
will use research materials provided by the other two brokers to assist in the management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead
underwriter on SolutionWare's IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security
Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the
purchase of SolutionWare equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing Crossley's order, Burton reads the
SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley's portfolio. United Partners, being a small firm,
has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton
adds his order to Crossley's order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata
basis between Crossley's account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a
position, though smaller than requested, in such a "hot" offering.
The trading arrangement between Burton and Security Bank is most likely to be a violation of the CFA Institute Soft Dollar Standards because:
A. the practice of directed brokerage violates the member's or candidate's duty of loyalty to the client.
B. although Security Bank's execution is competitive, Burton will not be able to always obtain the best execution for his client.
C. the other clients' brokerage will be used to pay for research that will be utilized in the management of Crossley's account.
Answer: C
Question #15 (Topic: Single Topic)
Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm that employs three investment professionals and currently has
approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts
to a $30 million private school endowment. In addition to Burton's administrative responsibilities as the managing partner at United, he also serves as an
investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its
investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the
two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United's
business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners.
Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for
the private school endowment, Unitcd's largest client. Burton states that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United's three
investment professionals. Crossley notices that all three of United's investment professionals are described as "CFA charterholders," but he is not familiar with the
designation. In response to Crossley's inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing
three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank.
Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts
Crossley's brother-in-law and determines that Security Bank's trade execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United's clients to Security Bank's retail banking
division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley's trades but
will use research materials provided by the other two brokers to assist in the management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead
underwriter on SolutionWare's IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security
Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the
purchase of SolutionWare equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing Crossley's order, Burton reads the
SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley's portfolio. United Partners, being a small firm,
has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton
adds his order to Crossley's order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata
basis between Crossley's account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a
position, though smaller than requested, in such a "hot" offering.
According to CFA Institute Standards of Professional Conduct, which of the following statements best describes the circumstances under which Burton may enter
into the referral agreement with Security Bank? Burton may enter into the agreement:
approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts
to a $30 million private school endowment. In addition to Burton's administrative responsibilities as the managing partner at United, he also serves as an
investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its
investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the
two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United's
business.
A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners.
Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for
the private school endowment, Unitcd's largest client. Burton states that the composite's management style and performance results are representative of the
management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United's three
investment professionals. Crossley notices that all three of United's investment professionals are described as "CFA charterholders," but he is not familiar with the
designation. In response to Crossley's inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing
three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.
As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank.
Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts
Crossley's brother-in-law and determines that Security Bank's trade execution is competitive, but Crossley's account alone would not generate enough volume to
warrant any soft dollar arrangement for research materials.
However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United's clients to Security Bank's retail banking
division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley's trades but
will use research materials provided by the other two brokers to assist in the management of Crossley's account.
Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead
underwriter on SolutionWare's IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security
Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering
prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the
purchase of SolutionWare equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing Crossley's order, Burton reads the
SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton
determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley's portfolio. United Partners, being a small firm,
has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton
adds his order to Crossley's order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was
oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata
basis between Crossley's account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a
position, though smaller than requested, in such a "hot" offering.
According to CFA Institute Standards of Professional Conduct, which of the following statements best describes the circumstances under which Burton may enter
into the referral agreement with Security Bank? Burton may enter into the agreement:
A. under no circumstances.
B. only after receiving written permission from clients.
C. only after fully disclosing the referral arrangement to clients and prospective clients.
Answer: C
