Title 11.3 Guidance For Standards I–VII.pdf ✅

1. Alexander Petrov, CFA, regularly posts investment ideas and videos on several popular social media investment forums. Petrov has developed a sizable following that often immediately reacts to his recommendations. Petrov buys a significant number of shares in a micro-cap mining stock. He then posts to his followers on several social media platforms that he has a large position in this stock. Petrov then starts a rumor stating that "the company is likely to be acquired at a substantial premium to the current price in the near future." The stock immediately jumps 20% and Petrov sells most of his shares over the rest of the trading day. According to Standard II(B) Market Manipulation, Petrov most likely violated the Standard by:  A. starting a rumor. B. selling his shares. C. buying before his followers. Explanation "Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants." Standard II(B) Market Manipulation prohibits activities by Members or Candidates that distort securities prices. Manipulation can occur through: information-based activities, such as spreading false rumors, or transaction-based activities, such as exaggerated trading between two accounts. Manipulation can lead to a loss of trust in the fairness and integrity of the markets. The Member's or Candidate's intent determines whether he or she has violated the Standard. Actions that move security prices but were not intended to deceive market participants do not violate the Standard. In this scenario, Alexander Petrov violated the Standard by intentionally spreading false rumors to manipulate the price of the stock. Petrov's behavior is a classic example of a "pump and dump" scheme, in which someone accumulates a thinly traded and therefore easily manipulated stock, fabricates a story to boost the price, and then sells those shares to the new investors who "buy" the story and the stock. (Choices B and C) It is not a violation to buy securities ahead of publicly announcing a position or selling shares after a stock appreciates. The violation centered around Petrov's intent to manipulate by specifically spreading a rumor to artificially boost the stock price. Things to remember: Standard II(B) Market Manipulation prohibits information-based and transaction-based activities that distort security prices. The intent of the action is the factor that determines whether a Member or Candidate violated the Standard. Identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
2. Seth Farleigh, CFA, manages the Australian Mid-Cap Fund. After conducting his review, Farleigh prepares a shareholder report for current and prospective clients. The report is dated December 31, 20X7, and Farleigh believes he has identified all risks to which investors are exposed. On January 31, 20X8, one country changes its tax code, which significantly benefits Australian companies, and causes the fund to experience a significant gain. Despite the gain, however, Farleigh believes this event creates a new risk for the fund. To comply with the Standard V(B) Communication with Clients and Prospective Clients, Farleigh most likely is:  A. required to communicate the new risk to clients immediately. B. not required to communicate the new risk to clients since they benefited C. required to communicate the new risk to clients in the future if the clients are harmed. Explanation "Members and Candidates must: 1. Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. 2. Disclose to clients and prospective clients significant limitations and risks associated with the investment process." Under Standard V(B) Communication with Clients and Prospective Clients, members and candidates must communicate all pertinent investment risks to existing and prospective clients. All pertinent risks are only those identified at a point in time. If new risks are identified after an investment recommendation is made, that does not signify a violation of the Standard. Here, Farleigh could not have known in December about tax codes being changed in another country in the following January, so he did not violate the Standard in failing to report it in his 20X7 report. However, once he determined that the tax change posed a new risk, the Standard obliged him to immediately disclose it to clients regardless of its impact (ie, gain or loss) (Choices B and C). Things to remember: Standard V(B) requires members and candidates to communicate to clients all pertinent investment risks. If new risks are identified after an investment is recommended, it is not a violation of the Standard. Only the reasonable and identifiable risks at the time the investment action is made must be communicated. Identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
3. Miguel Flores, CFA, is responsible for allocating shares for the firm's participation in an initial public offering (IPO) to discretionary client accounts. He asks his colleagues for advice. Marcia Sanz suggests Flores review each client's investment policy statement before allocating shares. Lorenzo Torres instructs Flores to allocate shares on a prorated basis based to each client's assets under management. Matias Jimenez tells Flores to make sure equal shares of the IPO are allocated to each client. Which advisor's suggestion most likely complies with Standard III(B) Fair Dealing?  A. Sanz B. Torres C. Jimenez Explanation "Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities." Standard III(B) Fair Dealing focuses on managers' responsibility to treat all clients fairly and objectively, specifically in terms of information distribution and investment actions. For example, a manager must allocate an initial public offering (IPO) trade that allows each client a fair opportunity to act on the information. Managers who treat clients fairly uphold the ethical principles of the Code and Standards and the profession. Sanz seeks to ensure that the IPO allocation will be completed fairly and objectively with adherence to each client's investment policy statement, which states the client's investment objectives and constraints. Even clients that participate in IPOs may have certain constraints that make a prorated allocation approach inappropriate (Choice B). (Choice C) Jimenez is incorrect since the Standards require that all clients be treated fairly, not equally. Since clients and their goals differ, equal treatment (eg, the same IPO allocation) would not be appropriate for all clients. Things to remember: Standard III(B) Fair Dealing focuses on managers' responsibility to treat all clients fairly and objectively. This means that managers should have a fair process for making investment decisions such as the allocation of trades. All clients should be given a fair opportunity to act on investment recommendations. Identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
4. Himari Sato just got home from taking Level I of the CFA exam. She goes onto a popular online forum and writes, "Just got back from Level I. Definitely a hard exam, much harder than I expected based on my studying, but I think I passed! However, I still disagree with CFA Institute's policy of providing ranges for the weights of each subject on the exam. Just tell us what to expect! I studied way too hard for derivatives, but the number of questions was at the bottom of the range. I wasted so much time on this." Sato violated the Standards by: A. disagreeing with CFA Institute's exam policies. B. expressing an opinion on the difficulty of the exam.  C. providing information about topics tested on the exam. Explanation "Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs." Standard VII(A) Conduct as Participants in CFA Institute Programs mandates that Members and Candidates maintain the reputation, integrity, validity, and security of CFA Institute exams and programs. The Standard prohibits behavior that would compromise the public's confidence in the level of merit needed to achieve a CFA charter. Candidates taking the exam must sign the Candidate Pledge, which identifies behaviors that are prohibited before, during, and after the test. These behaviors include: giving or receiving information about the exam before or during the exam, and providing information about the exam to others after the exam, including broad topic areas tested, until it is publicly released by CFA Institute. In this scenario, Himari Sato violates the Standard by disclosing information about the exam. Even though she did not disclose information about specific questions, she did disclose that the number of questions about derivatives was at the bottom of the given range. Learning this could give those who have not yet taken the exam an unfair advantage. (Choice A) The Standard allows Members and Candidates to share opinions that disagree with CFA Institute policies (eg, allowing only two types of calculators) and stances on key issues (eg, advocacy articles). (Choice B) Members and Candidates are allowed to share opinions about the exams or CFA Institute as long as the opinions do not reveal specific information about the exams. Things to remember: Standard VII(A) requires Members and Candidates to refrain from engaging in conduct that undermines the integrity of the CFA exam process. This includes disclosing confidential information, including specific details about questions or broad topic areas tested on the exam, until it is publicly released by CFA Institute. Identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.