MCQ Quiz

Question 1 of 14

At lunch, a research analyst tells a colleague that her own financial adviser is very capable. She does not mention that the adviser is her brother. The colleague is not her client, is not seeking investment advice from her professionally, and no referral fee is paid. Under the CFA Curriculum, this is most likely:

a violation because family relationships must always be disclosed before any recommendation
not a violation of Standard VI(A), although disclosure would have been prudent
a violation because the brother should disclose that the referral came from a relative

Question 2 of 14

An adviser begins a personal relationship with an advisory client. He continues to handle the client’s account and believes he can stay objective, so he tells no one at his firm. His conduct is most likely:

acceptable if he gives the client no preferential pricing
acceptable because the relationship concerns his private life rather than investment analysis
a violation because the relationship should be disclosed to his employer

Question 3 of 14

A wealth adviser works for a firm that mainly sells its own mutual funds. She recommends one of those funds to a client because it fits the client’s objectives, but she does not explain that her firm earns additional fees when its proprietary fund is selected. Her conduct is most likely:

acceptable because suitability removes the conflict
acceptable if clients can infer she prefers her employer’s products
a violation because the extra firm benefit should be prominently disclosed even if the fund is suitable

Question 4 of 14

A portfolio adviser hires outside subadvisers for clients. Certain subadvisers pay the adviser’s firm based on client assets placed with them. The adviser tells clients that subadvisers will be used but says nothing about those payments. The adviser’s conduct is most likely:

acceptable because clients approved the use of subadvisers
a violation unless the source and nature of the subadviser payments are disclosed to clients
acceptable if the adviser intended to negotiate a direct benefit for clients

Question 5 of 14

A chief investment officer shifts a retirement fund’s real estate mandate to a new external manager run by an old classmate. The only mention of the change appears months later in the annual report’s manager list. The most appropriate interpretation is:

no violation because the annual report eventually informed stakeholders of the new manager
no violation if the new manager was chosen partly to improve returns
a violation because the personal relationship should have been disclosed promptly to the employer before the decision

Question 6 of 14

A firm recommends promissory notes issued by Aquarius to mutual fund clients. One principal of the recommending firm also has indirect ownership ties to entities receiving fees, credit support, and referral benefits from Aquarius, but clients are told only that some affiliates are related. This disclosure is most likely:

insufficient because it omits the nature, magnitude, and extent of the financial ties
sufficient because a general statement of affiliation alerts clients to possible conflicts
sufficient if the firm’s compliance staff reviewed the investment

Question 7 of 14

A pension portfolio manager’s bonus is changed from a long-term system to one based on quarterly results relative to peers and benchmarks. She starts buying higher-beta stocks for long-term client accounts without telling clients about the new incentive arrangement. She most likely:

violates Standard VI(A) because the changed compensation structure should be disclosed when it may conflict with client objectives
does not violate Standard VI(A) because employer pay policy is an internal matter
does not violate Standard VI(A) if the higher-beta stocks may improve returns

Question 8 of 14

An adviser personally lent funds to a private company. Later, he invests client assets in a fund that purchases securities linked to that same company, but he does not tell clients about his creditor position. Which action is most appropriate under Standard VI(A)?:

disclose the personal loan because repayment could affect his objectivity
make no disclosure because co-investing with clients can sometimes be appropriate
make no disclosure if the client mandate gave him broad discretion

Question 9 of 14

A broker is offered extra compensation by a stock promoter for selling a particular issuer’s shares to clients. He believes he can still judge the stock fairly and plans to tell his employer but not the clients. Under Standard VI(A), the most accurate statement is:

disclosure to the employer alone is sufficient because the employer supervises recommendations
the arrangement should at minimum be disclosed to clients, and best practice is to decline it
no disclosure is needed if the broker would have recommended the stock anyway

Question 10 of 14

A research analyst covers an issuer whose acquisition work has long been handled by her employer’s investment banking unit, and officers of her employer have served on boards of the issuer’s subsidiaries. She writes a positive report without mentioning those ties. This is most likely:

acceptable because the relationships belong to the firm, not to the analyst personally
a violation because the firm’s special relationship with the issuer should be disclosed in the report
acceptable if the report contains objective valuation analysis

Question 11 of 14

An investment professional serves on a public company’s board while also helping manage client portfolios. The firm erects a firewall so she is isolated from the team making investment decisions about that company, and the arrangement is disclosed. Under the CFA Curriculum, this setup is most likely:

acceptable if the conflict is isolated and disclosed because board service creates risks that must be managed rather than ignored
a violation in all circumstances because board service can never coexist with investment responsibilities
acceptable without disclosure because the firewall alone removes the conflict

Question 12 of 14

An analyst personally owns shares of a thinly traded mining company. Her employer then asks her to publish industry research that would likely move that company’s stock price upward. She believes the stock is genuinely attractive. The most appropriate action is to:

disclose the conflict to her employer and, if she still writes the report, disclose it in the report
write the report without disclosure because she would recommend the stock even without owning it
sell her shares after publication because that avoids the original conflict

Question 13 of 14

A research analyst recommends Kincaid for clients. Later, the analyst’s spouse inherits a large amount of Kincaid stock. The analyst is asked to publish a follow-up report on Kincaid. Under the CFA Curriculum, the best course is to:

continue coverage without disclosure because the shares are legally owned by the spouse
disclose the spouse’s ownership to the employer and in the follow-up report, while best practice is to seek reassignment
continue coverage if the analyst did not influence the inheritance

Question 14 of 14

A portfolio manager’s firm sells a 25% interest to a bank holding company. Soon after, the manager changes the firm’s view on that bank from sell to buy and adds its short-term debt to the approved list. She tells portfolio managers internally but not clients. Her conduct is most likely:

acceptable because internal communication ensures consistent treatment across accounts
a violation because clients should be informed of the new ownership relationship, and best practice is to stop covering the issuer
acceptable if the new recommendation can be supported by research

Standard VI(A) - Conflicts of Interest

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard