Question 1 - #93502

Your answer: B was correct!

This is an example of the mosaic theory where separate pieces of nonmaterial information are
pieced together to make an investment recommendation.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 2 - #94338
Your answer: A was correct!
Long violated Standard III(E) because he did not preserve the confidentiality of information
communicated by clients. Short did not violate Standard III(E) because this standard does not
prevent members from cooperating with an investigation by CFA Institutes Professional
Conduct Program. Thus, Short can forward confidential information to the PCP.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 3 - #94786
Your answer: C was incorrect. The correct answer was A) examine whether the strategy is
appropriate for the client and explain the implications of the new strategy before implementing
the strategy.
According to Standard III(C), Suitability, the member manager must determine that an
investment is suitable given the clients objectives/constraints and within the context of the
clients total portfolio. In this case, the member manager must examine the new strategy to
see if it is appropriate for the client, even if the client asked for the change. The member should
also explain the implications of the strategy to avoid any misrepresentations that may result
from omitting details.
This question tested from Session 1, Reading 2-III, LOS C..

Question 4 - #94662
Your answer: B was incorrect. The correct answer was C) neither of these choices.
An analyst should not make a recommendation based only upon a statistical anomaly.
Furthermore, none of the other choices would be appropriate. Clients with low risk tolerance
should not short sell assets. The analyst cannot make a recommendation to all clients because
each client has different characteristics and portfolios. The one answer that may have some
merit is to increase the allocation of T-bills in portfolios that have had recent, dramatic
increases. This would be for the purposes of maintaining a balanced portfolio. But the decision
to rebalance must be made on a case-by-case basis and not for all portfolios.
This question tested from Session 1, Reading 2-V, LOS A..

Question 5 - #94555
Your answer: A was incorrect. The correct answer was B) Trading on information your sister, the
firm's attorney, told you over dinner.

Members may not trade on material nonpublic information; therefore, the information conveyed
by the firms attorney may not be used by a member for trading purposes.
This question tested from Session 1, Reading 2-II, LOS A..

Question 6 - #94373
Your answer: C was incorrect. The correct answer was B) violated the Standards by not dealing
fairly with clients but has not violated the Standards regarding material nonpublic information.
Kent must treat all clients fairly in acting on the information, regardless of the size of the
investment. The information concerning the fund managers departure is not material
nonpublic information because its release would have no effect on individual stock prices within
the fund and thus should not impact the fund's net asset value.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 7 - #127430
Your answer: B was incorrect. The correct answer was A) in violation of Standard V(C)
Record Retention.
Hurst is most likely in violation of Standard V(C) "Record Retention" because the supporting
documentation is unavailable. He needs to recreate the supporting records based on
information gathered through public sources or the covered company.
This question tested from Session 1, Reading 2-V, LOS C..

Question 8 - #94675
Your answer: B was correct!
The last bullet point of the Code says that a member shall Maintain and improve their
professional competence and strive to maintain and improve the competence of other
investment professionals. Ignoring the neglect of rule changes of others would clearly be
incongruent with this component. As long as the colleagues do not violate the laws, the member
does not have to disassociate himself from the colleagues.
This question tested from Session 1, Reading 2-I, LOS A..

Question 9 - #94591
Your answer: A was correct!
According to the procedures for compliance involving Standard I(A), CFA Institute members
should determine legality and disassociate from any illegal or unethical activity.
This question tested from Session 1, Reading 2-I, LOS A..

Question 10 - #94648
Your answer: B was correct!

Both Gordon and Haney violated Standard VII(A) by compromising the integrity of the exam.
Gordon now has an unfair advantage.
This question tested from Session 1, Reading 2-VII, LOS A..

Question 11 - #94302
Part 1)
Your answer: A was correct!
No information in the case suggests that Rangens conduct violates Standard IV(B),
Disclosure of Additional Compensation Arrangements.
This question tested from Session 1, Reading 2-III, LOS C..

Part 2)
Your answer: C was correct!
Rangen's actions are inconsistent with Standard III(C), Suitability, because his investment
actions are neither appropriate nor suitable for each client. Even if his clients were aware of the
risks, the portfolios that he constructed are inconsistent with their financial needs. Because he is
in a position to control the volume and frequency of transactions in their accounts, he has
control over the accounts. Although Rangen relies upon recommendations from his firms
research department, he cannot shift blame to his employer because he must follow
recommendations that are in the best interests of his clients.
This question tested from Session 1, Reading 2-III, LOS C..

Question 12 - #94815
Your answer: C was incorrect. The correct answer was A) start the registration of her new
company.
The only action that will not breach Standard IV(A) Loyalty to Employer, is to start the
registration of her new company.
This question tested from Session 1, Reading 2-IV, LOS A..

Question 13 - #94981
Part 1)
Your answer: B was incorrect. The correct answer was C) make recommendations that were
consistent with his clients' financial needs.
Rangen did not fulfill the obligation he assumed when he agreed to counsel these clients. That
is, he did not make recommendations that were consistent with their financial needs. According
to Standard III(C), Suitability, Rangen must consider the appropriateness and suitability of
investment recommendations or actions for each portfolio or client. This is true even if his
clients wanted to speculate and were aware of the risks.
This question tested from Session 1, Reading 2, LOS a, b, c.

Part 2)
Your answer: A was correct!

Rangen cannot shift the blame to his employer. He had an obligation to consider not only his
firm's recommendations, but also his clients' investment objectives and financial situations. He
failed to consider relevant factors relating to his clients. Rangen violated Standard III(C)
because he initiated investment actions without properly considering whether these actions
were suitable to his clients' financial situations and investment objectives.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 14 - #94529
Your answer: B was incorrect. The correct answer was C) can publish his conclusion in a
research report.
While the information that Allen received from the Edmonds CEO may be non-public, we are
also told that it is non-material. Because Allen has reached his investment conclusion through
an analysis of public information together with items of non-material non-public information (ie.
"mosaic theory"), publishing this conclusion is not a violation of the Code and Standards.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 15 - #94882
Your answer: B was correct!
Standard V(C) Record Retention requires that Members and Candidates document all
recommendation and communications with clients. McCoy should document the details of the
conversation, including any resulting investment decisions and/or actions. The suitability of the
investment should have already been considered before the recommendation and McCoy
should not execute the order until the client instructs him to. Identifying other clients for this
investment would fall under Standard III(B) Fair Dealing.
This question tested from Session 1, Reading 1, LOS c.

Question 16 - #94755
Your answer: A was correct!
Such a policy is a violation of the Standard and client acknowledgement and/or consent does
not change that fact.
This question tested from Session 1, Reading 2-III, LOS B..

Question 17 - #94498
Your answer: C was incorrect. The correct answer was B) not violated the Standards.
Because Westfall performed the same degree of research as she did for the other funds on her
list, she provided a reasonable and adequate basis for her recommendation. There is not
enough information given about the Eligis fund and how it fits in with the other funds on
Westfall's list to determine whether or not the standard on Fair Dealing was broken. It was the
Craigs who wanted the Eligis fund and Westfall found it to be acceptable for them and thus
added it to her list of acceptable funds. If the Eligis fund was found to possess unique
characteristics that were not found in any of the other funds on Westfall's list and the Eligis fund

was suitable for some of Westfall's other clients and Westfall hadn't added it to their portfolios
after their periodic review then a violation of fair dealing would have occurred.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 18 - #94610
Your answer: B was incorrect. The correct answer was A) An annual bonus, sent to the analyst
by a client, which varies with the performance of the client's portfolio that the analyst manages
as an employee even though no verbal or written agreement exists about the bonus.
Standard IV(B) requires that members disclose to their employer in writing all benefits that they
receive in addition to their regular compensation for services they perform on behalf of their
employer. Since the bonus varies with the performance of the clients portfolio, there is a
clear link to the services of the analyst. The analyst is not required to report the lunch since it is
not linked to performance.
This question tested from Session 1, Reading 2-IV, LOS B..

Question 19 - #94409
Your answer: A was incorrect. The correct answer was C) The portfolio securities were carefully
selected by Factor to minimize Williams' risk.
Standard I(C), Misrepresentation, prohibits CFA charterholders from misrepresenting
characteristics of the portfolio or the services that the company can provide. The only statement
that can be accepted as plausible is that the securities were selected to minimize the risk.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 20 - #94592
Your answer: B was incorrect. The correct answer was C) Smith should promptly disassociate
himself from Atlantic's actions by resigning as a director or by reporting the activities to the
appropriate authorities.
Smith should disassociate from any illegal activity by resigning as a director or by reporting the
activities to appropriate authorities. Inaction combined with continuing association with Atlantic's
illegal conduct may be construed as participation, or assistance, in the illegal conduct.
This question tested from Session 1, Reading 2-I, LOS A..

Question 21 - #94935
Your answer: C was correct!
Bellow did not violate Standard I(A), Knowledge of the law, because he sought advice of
counsel and followed that advice. Bellow did not violate Standard I(C), Misrepresentation,
because he made reasonable and diligent efforts to ensure the accuracy of the information and
to avoid any material representation.
This question tested from Session 1, Reading 2-I, LOS A..

Question 22 - #93496
Your answer: A was incorrect. The correct answer was B) soft dollar practices.
Directing client brokerage for research and/or services is called soft dollar practices.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 23 - #94720
Your answer: C was correct!
The current yield curve is factual information that is available from many recognized financial or
statistical reporting services.
This question tested from Session 1, Reading 2-I, LOS C..

Question 24 - #94624
Your answer: A was correct!
Standard IV(C) permits members to delegate supervisory duties but such delegation does not
relieve members of their supervisory responsibility.
This question tested from Session 1, Reading 2-IV, LOS C..

Question 25 - #94754
Your answer: B was incorrect. The correct answer was A) not permissible under the Code and
Standards.
Standard III(B) requires a member to deal fairly with all clients when taking investment actions.
Since she knew at the outset that she was going to place shares in all accounts, regardless of
the first letter of the surname, all accounts must participate on a pro-rata basis in each block in
order to conform to the Standard. Her actions constitute a violation of the Standard concerning
fair dealing.
This question tested from Session 1, Reading 2-III, LOS B..

Question 26 - #94886
Your answer: B was incorrect. The correct answer was C) No, because it is a statement of fact.
The statement is not a violation because it is a fact. However, the member must not go on to
claim superior performance.
This question tested from Session 1, Reading 2-VII, LOS B..

Question 27 - #94562

Your answer: A was incorrect. The correct answer was B) should revise the recommendation
based on this new information.
This question is related to Standard V(B) which states that CFA Institute members should use
reasonable judgment regarding the inclusion or exclusion of relevant factors in research reports.
The change in management was a relevant factor and must be disclosed before dissemination.
This question tested from Session 1, Reading 2-V, LOS B..

Question 28 - #94946
Your answer: C was incorrect. The correct answer was B) Both Standard I(B) Independence and
Objectivity and Standard V(A) Diligence and Reasonable Basis.
Whitman violated Standard V(A) Diligence and Reasonable Basis because he did not have a
reasonable and adequate basis for issuing a favorable recommendation. Whitman violated
Standard I(B) Independence and Objectivity because he did not act independently in issuing his
recommendation but instead was influenced by senior management at Hilton and Ross.
This question tested from Session 1, Reading 2-V, LOS A..

Question 29 - #94594
Your answer: A was incorrect. The correct answer was B) current clients, former clients, and
prospects.
According to Standard III(E), Preservation of Confidentiality, an analyst must preserve the
confidentiality of information communicated by clients, former clients, and prospects.
This question tested from Session 1, Reading 2-III, LOS E..

Question 30 - #94953
Your answer: C was correct!
Standard of Professional Conduct III(C), not the Code of Ethics, requires that investments be
appropriate and suitable.
This question tested from Session 1, Reading 1, LOS b.

Question 31 - #95003
Your answer: A was correct!
While any of the answers can be shown to violate CFA Institute Standards, this cannot be
determined conclusively from the information given. However, the scenario clearly indicates that
Anderson does not distinguish between opinion and fact in communicating to his clients.
Therefore, he violates the Standards on this basis.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 32 - #94422

Your answer: C was correct!

The money manager has done his duty. He has warned the client of the risk and made no
explicit promises concerning what he can and cannot do.
This question tested from Session 1, Reading 2-V, LOS A..

Question 33 - #94730
Your answer: A was incorrect. The correct answer was C) remand a percentage (to be
determined by the employee and employer) of the income earned back to the employer.
The member is obligated to get permission from his employer if he will be in any way competing
with his current employer. They must provide notification to their employer describing the types
of services to be rendered, the expected duration, and compensation for the services.
This question tested from Session 1, Reading 2-IV, LOS A..

Question 34 - #94805
Your answer: B was incorrect. The correct answer was A) a violation of Standard III(C),
Suitability.
According to Standard III(C), the analyst must consider the appropriateness and suitability of an
investment recommendation for each portfolio or client. Having a fixed policy of adding
investments to portfolios without evaluating their suitability is a violation of Standard III(C). The
action does not violate Standard III(B)
This question tested from Session 1, Reading 2-III, LOS C..

Question 35 - #94439
Your answer: A was incorrect. The correct answer was C) Soprano is violating the Standards by
not disclosing the fundamental research aspect of the investment process.
Soprano is violating the Standard on portfolio investment recommendations and actions by
excluding relevant factors of the investment process. The fundamental research aspect is highly
relevant to the process and should be disclosed to clients. It is acceptable for Melfi to use two
investment processes that may be in conflict with each other and to use a process that was not
developed by her.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 36 - #94806
Your answer: B was incorrect. The correct answer was C) a violation of the Standard concerning
appropriateness and suitability of investment actions.
Given the variety of accounts under her supervision, it is not likely the shares of a speculative
biotech firm would be suitable for all accounts. Placing such shares in all accounts indicates that
she has failed to consider the appropriateness and suitability of the investment for each
account, and this places her in violation of Standard III(C).

This question tested from Session 1, Reading 2-III, LOS C..

Question 37 - #94374
Your answer: A was incorrect. The correct answer was C) require Walker to update the data
regularly.
According to Standard III(C), Suitability, Members and Candidates must reassess client
information and update regularly.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 38 - #126952
Your answer: B was incorrect. The correct answer was A) Private equity and real estate.
The GIPS standards do not address performance measurement or coverage of all asset
classes, but sections 6, 7 and 8 are supplemental provisions which must be specifically applied
to private equity, real estate, and wrap fee/separately managed account (SMA) portfolios.
This question tested from Session 1, Reading 4, LOS d.

Question 39 - #94497
Your answer: A was incorrect. The correct answer was C) has violated CFA Institute Standards
of Professional Conduct because she did not have a reasonable and adequate basis for making
this recommendation.
Analysts are required to have a reasonable and adequate basis, supported by appropriate
research and investigation, for their recommendations.
This question tested from Session 1, Reading 2-V, LOS A..

Question 40 - #93504
Your answer: C was incorrect. The correct answer was B) exploiting differences in market
inefficiencies.
Standard II(B) Market Manipulation prohibits practices that distort prices or artificially inflate
trading volumes with the intent to mislead market participants. The Standard is not intended to
prohibit legitimate trading strategies that exploit differences in market inefficiencies.
This question tested from Session 1, Reading 2-II, LOS B..

Question 41 - #126953
Your answer: B was correct!
"Implementation" is not a name of one of the nine major sections of the GIPS standards.
This question tested from Session 1, Reading 4, LOS d.

Question 42 - #94634
Your answer: A was correct!
There is no violation if the opinion is based upon the factual information gathered and the
firms actual capabilities. This is true whether or not the representation was written, oral, or
electronic. None of the other choices are correct.
This question tested from Session 1, Reading 2-I, LOS C..

Question 43 - #127416
Your answer: B was correct!
Dalby is in violation of Standard IV(B) "Additional Compensation Arrangements." Nonmonetary
compensation may still create a conflict of interest.
This question tested from Session 1, Reading 2-IV, LOS B..

Question 44 - #94370
Your answer: B was incorrect. The correct answer was A) inform her supervisor that she cannot
work on the portfolio because of a legal agreement, but cannot tell him why.
Jason must inform her supervisor of the conflict, but she cannot violate the terms of the
confidentiality agreement and she cannot work on the portfolio.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 45 - #94644
Your answer: A was incorrect. The correct answer was C) when applicable local laws or
regulations conflict with the GIPS, in which case, firms must comply with local laws and fully
disclose the conflict.
In the case of a conflict, GIPS require that firms comply with local or country-specific laws or
regulations rather than GIPS, but must fully disclose the nature and scope of the conflict.
This question tested from Session 1, Reading 4, LOS c.

Question 46 - #94772
Your answer: B was incorrect. The correct answer was C) Standard VI(A), Disclosure of
Conflicts, and III(C), Suitability.
Mack is obliged to disclose the conflict of interest regarding her companys IPO and to
consider both the appropriateness and the suitability of the investment for her client. She has
apparently failed in both respects.
This question tested from Session 1, Reading 2-III, LOS C..

Question 47 - #94563
Your answer: B was correct!
Both of these are explicitly required by Standard V(A).
This question tested from Session 1, Reading 2-V, LOS A..

Question 48 - #94398
Your answer: A was correct!
Abbott violated Standard V(A), Diligence and Reasonable Basis, because she did not have a
reasonable and adequate basis to support the $1.10 EPS without further investigation. By
including the $1.10 EPS in her report, she did not exercise diligence and thoroughness to
ensure that any research report finding is accurate. If Abbott suspects that any information in a
source is not accurate, she should refrain from relying on that information. Abbott did not violate
Standard I(B), Independence and Objectivity, because the gift from Carter was merely a token
item.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 49 - #94853
Your answer: A was incorrect. The correct answer was B) Yes, because he undertook an
independent practice that could result in compensation or other benefit to him.
Standard IV(A) does not preclude providing independent services for compensation while still
employed; however, notification to the employer is required describing the type of service, the
expected duration, and the compensation. Compensation includes more than just monetary
benefits.
This question tested from Session 1, Reading 2-IV, LOS A..

Question 50 - #94380
Your answer: C was incorrect. The correct answer was B) must cease distributing the cards with
the CFA designation, but can continue to use the existing promotional materials.
Use of the CFA designation must be stopped immediately, however, the receipt of the Charter is
a matter of fact.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 51 - #94741
Your answer: B was incorrect. The correct answer was A) Only one of these purchases violates
the Standard.
Using soft dollars for the purchase of office furniture does not benefit clients and is a violation.
Purchasing research reports with soft dollars is not a violation, but the advisor should ensure
that research purchased with client brokerage will benefit her clients.

This question tested from Session 1, Reading 2-III, LOS A..

Question 52 - #94653
Your answer: A was incorrect. The correct answer was C) for neither of the reasons listed.
According to Standard III(E), Preservation of Confidentiality, Stiles may not withhold information
under any of the listed reasons. The reason is that CFA Institute will keep the information
confidential.
This question tested from Session 1, Reading 2-III, LOS E..

Question 53 - #94950
Your answer: C was incorrect. The correct answer was A) as soon as the information is
disseminated to all clients.
Family accounts that are client accounts should be treated like any other firm account and
should neither be given special treatment nor be disadvantaged because of an existing family
relationship with the member or candidate. Members or candidates may undertake transactions
in accounts for which they are a beneficial owner only after their clients and employers have had
adequate opportunity to act on the recommendation. Personal transactions include those made
for the member or candidate's own account, for family (including spouse, children, and other
immediate family members) accounts, and for accounts in which the member or candidate has a
direct or indirect pecuniary interest, such as a trust or retirement account. It could be argued
that Rock is a beneficial owner of his wife's account and the reason why his wife's account
should be treated like any other client account is because it does not state that Rock makes the
trades in his wife's account. From that we are to infer that another person other than Rock is
managing his wife's account thus she should be treated like any other client.
This question tested from Session 1, Reading 2-VI, LOS B..

Question 54 - #94587
Your answer: A was incorrect. The correct answer was B) provided that the analyst has a
reasonable basis for his or her actions.
According to Standard V(B), the analyst must use reasonable judgment in identifying relevant
factors when communicating with clients and prospects . The Mosaic theory does not apply
here.
This question tested from Session 1, Reading 2-V, LOS B..

Question 55 - #94388
Your answer: C was correct!
Election of internal auditors is not a major proxy issue.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 56 - #93507

Your answer: B was correct!

The use of security analysis combined with nonmaterial nonpublic information to arrive at
significant conclusions is legal and is called the mosaic theory.
This question tested from Session 1, Reading 2, LOS a, b, c.

Question 57 - #94904
Your answer: A was incorrect. The correct answer was C) Yes, because he uses CFA as a noun.
The initials CFA cannot be used as a noun. The initials can appear on a business card but
cannot be used to exaggerate the meaning or implications of membership.
This question tested from Session 1, Reading 2-VII, LOS B..

Question 58 - #94496
Your answer: B was incorrect. The correct answer was A) violating the standard by either
showing the pre-release version to his intern or sending it to his brother.
Standard II(A), Material Nonpublic Information, says that a member must be careful about
handling material non-public information. As a member of CFA Institute, the CFO must limit the
people who see important information before it is released. It would not be appropriate to
involve an intern or a relative in the process.
This question tested from Session 1, Reading 2-II, LOS A..