CFA CFA-Level-III Exam Prep
CFA Level III Chartered Financial Analyst (Page 13 )

Robert Keith, CFA, has begun a new job at CMT Investments as Head of Compliance. Keith has just completed a review of all of CMT's operations, and has interviewed all the firm's portfolio managers. Many are CFA charterholders, but some are not. Keith intends to use the CFA Institute Code and Standards, as well as the Asset Manager Code of Professional Conduct, as ethical guidelines for CMT to follow.

In the course of Keith's review of the firm's overall practices, he has noted a few situations which potentially need to be addressed.

Situation 1:
CMT Investments' policy regarding acceptance of gifts and entertainment is not entirely clear. There is general confusion within the firm regarding what is and is not acceptable practice regarding gifts, entertainment and additional compensation.

Situation 2:
Keith sees inconsistency regarding fee disclosures to clients. In some cases, information related to fees paid to investment managers for investment services provided are properly disclosed. However, a few of the periodic costs, which will affect investment return, are not disclosed to the clients. Most managers are providing clients with investment returns net of fees, but a few are just providing the gross returns. One of the managers stated "providing gross returns is acceptable, as long as I show the fees such that the client can make their own simple calculation of the returns net of fees."

Situation 3:
Keith has noticed a few gaps in CMT's procedure regarding use of soft dollars. There have been cases where "directed brokerage" has resulted in less than prompt execution of trades. He also found a few cases where a manager paid a higher commission than normal, in order to obtain goods or services. Keith is considering adding two statements to CMT's policy and procedures manual specifically addressing the primary issues he noted.

Statement 1:
"Commissions paid, and any corresponding benefits received, are the property of the client. The benefit(s) must directly benefit the client. If a manager's client directs the manager to purchase goods or services that do not provide research services that benefit the client, this violates the duty of loyalty to the client.”

Statement 2:
"In cases of "directed brokerage," if there is concern that the client is not receiving the best execution, it is acceptable to utilize a less than ideal broker, but it must be disclosed to the client that they may not be obtaining the best execution."

Situation 4:
Keith is still evaluating his data, but it appears that there may be situations where proxies were not voted. After completing his analysis of proxy voting procedures at CMT, Keith wants to insert the proper language into the procedures manual to address proxy voting.

Situation 5:
Keith is putting into place a "disaster recovery- plan," in order to ensure business continuity in the event of a localized disaster, and also to protect against any type of disruption in the financial markets. This plan includes the following provisions:
• Procedures for communicating with clients, especially in the event of extended disruption of services provided.
• Alternate arrangement for monitoring and analyzing investments in the event that primary systems become unavailable.
• Plans for internal communication and coverage of crucial business functions in the event of disruption at the primary place of business, or a communications breakdown.
Keith is considering adding the following provisions to the disaster recovery plan in order to properly comply with the CFA Institute Asset Manager Code of Professional Conduct:

Provision 1: "A provision needs to be added incorporating off-site backup for all pertinent account information." Provision 2: "A provision mandating testing of the plan on a company-wide basis, at periodical intervals, should be added."

Situation 6:
Keith is spending an incredible amount of time on detailed procedures and company policies that are in compliance with the CFA Institute Code and Standards, and also in compliance with the CFA Institute Asset Manager Code of Professional Conduct. As part of this process, he has had several meetings with CMT senior management, and is second-guessing the process. One of the senior managers is indicating that it might be a better idea to just formally adopt both the Code and Standards and the Asset Manager Code of Conduct, which would make a detailed policy and procedure manual redundant.

Indicate whether Keith's statements in Situation 3 involving soft dollars / client brokerage are correct or incorrect.

Robert Keith, CFA, has begun a new job at CMT Investments as Head of Compliance. Keith has just completed a review of all of CMT's operations, and has interviewed all the firm's portfolio managers. Many are CFA charterholders, but some are not. Keith intends to use the CFA Institute Code and Standards, as well as the Asset Manager Code of Professional Conduct, as ethical guidelines for CMT to follow.

In the course of Keith's review of the firm's overall practices, he has noted a few situations which potentially need to be addressed.

Situation 1:
CMT Investments' policy regarding acceptance of gifts and entertainment is not entirely clear. There is general confusion within the firm regarding what is and is not acceptable practice regarding gifts, entertainment and additional compensation.

Situation 2:
Keith sees inconsistency regarding fee disclosures to clients. In some cases, information related to fees paid to investment managers for investment services provided are properly disclosed. However, a few of the periodic costs, which will affect investment return, are not disclosed to the clients. Most managers are providing clients with investment returns net of fees, but a few are just providing the gross returns. One of the managers stated "providing gross returns is acceptable, as long as I show the fees such that the client can make their own simple calculation of the returns net of fees."

Situation 3:
Keith has noticed a few gaps in CMT's procedure regarding use of soft dollars. There have been cases where "directed brokerage" has resulted in less than prompt execution of trades. He also found a few cases where a manager paid a higher commission than normal, in order to obtain goods or services. Keith is considering adding two statements to CMT's policy and procedures manual specifically addressing the primary issues he noted.

Statement 1:
"Commissions paid, and any corresponding benefits received, are the property of the client. The benefit(s) must directly benefit the client. If a manager's client directs the manager to purchase goods or services that do not provide research services that benefit the client, this violates the duty of loyalty to the client.”

Statement 2:
"In cases of "directed brokerage," if there is concern that the client is not receiving the best execution, it is acceptable to utilize a less than ideal broker, but it must be disclosed to the client that they may not be obtaining the best execution."

Situation 4:
Keith is still evaluating his data, but it appears that there may be situations where proxies were not voted. After completing his analysis of proxy voting procedures at CMT, Keith wants to insert the proper language into the procedures manual to address proxy voting.
Situation 5:
Keith is putting into place a "disaster recovery- plan," in order to ensure business continuity in the event of a localized disaster, and also to protect against any type of disruption in the financial markets. This plan includes the following provisions:
• Procedures for communicating with clients, especially in the event of extended disruption of services provided.
• Alternate arrangement for monitoring and analyzing investments in the event that primary systems become unavailable.
• Plans for internal communication and coverage of crucial business functions in the event of disruption at the primary place of business, or a communications breakdown.
Keith is considering adding the following provisions to the disaster recovery plan in order to properly comply with the CFA Institute Asset Manager Code of Professional Conduct:

Provision 1: "A provision needs to be added incorporating off-site backup for all pertinent account information." Provision 2: "A provision mandating testing of the plan on a company-wide basis, at periodical intervals, should be added."

Situation 6:
Keith is spending an incredible amount of time on detailed procedures and company policies that are in compliance with the CFA Institute Code and Standards, and also in compliance with the CFA Institute Asset Manager Code of Professional Conduct. As part of this process, he has had several meetings with CMT senior management, and is second-guessing the process. One of the senior managers is indicating that it might be a better idea to just formally adopt both the Code and Standards and the Asset Manager Code of Conduct, which would make a detailed policy and procedure manual redundant.

Which of the following statements most accurately describes the obligations of investment managers related to the voting of proxies under the CFA Institute Asset Manager Code of Professional Conduct?

Robert Keith, CFA, has begun a new job at CMT Investments as Head of Compliance. Keith has just completed a review of all of CMT's operations, and has interviewed all the firm's portfolio managers. Many are CFA charterholders, but some are not. Keith intends to use the CFA Institute Code and Standards, as well as the Asset Manager Code of Professional Conduct, as ethical guidelines for CMT to follow.

In the course of Keith's review of the firm's overall practices, he has noted a few situations which potentially need to be addressed.

Situation 1:
CMT Investments' policy regarding acceptance of gifts and entertainment is not entirely clear. There is general confusion within the firm regarding what is and is not acceptable practice regarding gifts, entertainment and additional compensation.

Situation 2:
Keith sees inconsistency regarding fee disclosures to clients. In some cases, information related to fees paid to investment managers for investment services provided are properly disclosed. However, a few of the periodic costs, which will affect investment return, are not disclosed to the clients. Most managers are providing clients with investment returns net of fees, but a few are just providing the gross returns. One of the managers stated "providing gross returns is acceptable, as long as I show the fees such that the client can make their own simple calculation of the returns net of fees."

Situation 3:
Keith has noticed a few gaps in CMT's procedure regarding use of soft dollars. There have been cases where "directed brokerage" has resulted in less than prompt execution of trades. He also found a few cases where a manager paid a higher commission than normal, in order to obtain goods or services. Keith is considering adding two statements to CMT's policy and procedures manual specifically addressing the primary issues he noted.

Statement 1:
"Commissions paid, and any corresponding benefits received, are the property of the client. The benefit(s) must directly benefit the client. If a manager's client directs the manager to purchase goods or services that do not provide research services that benefit the client, this violates the duty of loyalty to the client.”

Statement 2:
"In cases of "directed brokerage," if there is concern that the client is not receiving the best execution, it is acceptable to utilize a less than ideal broker, but it must be disclosed to the client that they may not be obtaining the best execution."

Situation 4:
Keith is still evaluating his data, but it appears that there may be situations where proxies were not voted. After completing his analysis of proxy voting procedures at CMT, Keith wants to insert the proper language into the procedures manual to address proxy voting.

Situation 5:
Keith is putting into place a "disaster recovery- plan," in order to ensure business continuity in the event of a localized disaster, and also to protect against any type of disruption in the financial markets. This plan includes the following provisions:

• Procedures for communicating with clients, especially in the event of extended disruption of services provided.
• Alternate arrangement for monitoring and analyzing investments in the event that primary systems become unavailable.
• Plans for internal communication and coverage of crucial business functions in the event of disruption at the primary place of business, or a communications breakdown.
Keith is considering adding the following provisions to the disaster recovery plan in order to properly comply with the CFA Institute Asset Manager Code of Professional Conduct:

Provision 1: "A provision needs to be added incorporating off-site backup for all pertinent account information." Provision 2: "A provision mandating testing of the plan on a company-wide basis, at periodical intervals, should be added."

Situation 6:
Keith is spending an incredible amount of time on detailed procedures and company policies that are in compliance with the CFA Institute Code and Standards, and also in compliance with the CFA Institute Asset Manager Code of Professional Conduct. As part of this process, he has had several meetings with CMT senior management, and is second-guessing the process. One of the senior managers is indicating that it might be a better idea to just formally adopt both the Code and Standards and the Asset Manager Code of Conduct, which would make a detailed policy and procedure manual redundant.

Are Keith's suggested additional provisions to the disaster recovery plan correct or incorrect, according to the CFA Institute Asset Manager Code of Professional Conduct?

Robert Keith, CFA, has begun a new job at CMT Investments as Head of Compliance. Keith has just completed a review of all of CMT's operations, and has interviewed all the firm's portfolio managers. Many are CFA charterholders, but some are not. Keith intends to use the CFA Institute Code and Standards, as well as the Asset Manager Code of Professional Conduct, as ethical guidelines for CMT to follow.
In the course of Keith's review of the firm's overall practices, he has noted a few situations which potentially need to be addressed.

Situation 1:
CMT Investments' policy regarding acceptance of gifts and entertainment is not entirely clear. There is general confusion within the firm regarding what is and is not acceptable practice regarding gifts, entertainment and additional compensation.

Situation 2:
Keith sees inconsistency regarding fee disclosures to clients. In some cases, information related to fees paid to investment managers for investment services provided are properly disclosed. However, a few of the periodic costs, which will affect investment return, are not disclosed to the clients. Most managers are providing clients with investment returns net of fees, but a few are just providing the gross returns. One of the managers stated "providing gross returns is acceptable, as long as I show the fees such that the client can make their own simple calculation of the returns net of fees."

Situation 3:
Keith has noticed a few gaps in CMT's procedure regarding use of soft dollars. There have been cases where "directed brokerage" has resulted in less than prompt execution of trades. He also found a few cases where a manager paid a higher commission than normal, in order to obtain goods or services. Keith is considering adding two statements to CMT's policy and procedures manual specifically addressing the primary issues he noted.

Statement 1:
"Commissions paid, and any corresponding benefits received, are the property of the client. The benefit(s) must directly benefit the client. If a manager's client directs the manager to purchase goods or services that do not provide research services that benefit the client, this violates the duty of loyalty to the client.”

Statement 2:
"In cases of "directed brokerage," if there is concern that the client is not receiving the best execution, it is acceptable to utilize a less than ideal broker, but it must be disclosed to the client that they may not be obtaining the best execution."

Situation 4:
Keith is still evaluating his data, but it appears that there may be situations where proxies were not voted. After completing his analysis of proxy voting procedures at CMT, Keith wants to insert the proper language into the procedures manual to address proxy voting.

Situation 5:
Keith is putting into place a "disaster recovery- plan," in order to ensure business continuity in the event of a localized disaster, and also to protect against any type of disruption in the financial markets. This plan includes the following provisions:
• Procedures for communicating with clients, especially in the event of extended disruption of services provided.
• Alternate arrangement for monitoring and analyzing investments in the event that primary systems become unavailable.
• Plans for internal communication and coverage of crucial business functions in the event of disruption at the primary place of business, or a communications breakdown.
Keith is considering adding the following provisions to the disaster recovery plan in order to properly comply with the CFA Institute Asset Manager Code of Professional Conduct:

Provision 1: "A provision needs to be added incorporating off-site backup for all pertinent account information." Provision 2: "A provision mandating testing of the plan on a company-wide basis, at periodical intervals, should be added."

Situation 6:
Keith is spending an incredible amount of time on detailed procedures and company policies that are in compliance with the CFA Institute Code and Standards, and also in compliance with the CFA Institute Asset Manager Code of Professional Conduct. As part of this process, he has had several meetings with CMT senior management, and is second-guessing the process. One of the senior managers is indicating that it might be a better idea to just formally adopt both the Code and Standards and the Asset Manager Code of Conduct, which would make a detailed policy and procedure manual redundant.

Keith wants to assure CMT's compliance with the requirements of the CFA Institute Code and Standards of Professional Conduct. Which of the following statements most accurately describes CMT's responsibilities in order to assure compliance?

Cindy Hatcher, CFA, has spent the last ten years as a portfolio manager with Bernhardt Capital. While working for Bernhardt, Hatcher was responsible for maintaining and improving the company's code of ethics and guidelines for ethical money management. As a result of Hatcher's efforts, Bernhardt saw a dramatic decline in the number of complaints received from their individual and institutional customers.
One of Bernhardt's direct competitors, Smith Investments, is keenly aware of Hatcher's reputation for ethical business practices and has offered her a job as their compliance officer. Hatcher has been apprised of several potential ethical problems at Smith that she will be directly responsible for fixing through implementation of policies and procedures that will prevent ethical dilemmas. The management at Smith is willing to grant Hatcher the authority to construct and implement policies to eliminate the ethical problems at the company.

Hatcher agrees to accept the position with Smith and resigns from employment with Bernhardt. As her first initiative with the company, Hatcher distributes to all employees at Smith a survey intended to acquaint her with the company's common business practices. Her goal is to identify those factors that are most likely to interfere with Smith's compliance with the CFA Institute's Code of Ethics and Standards of Practice. After collecting and analyzing the anonymous responses to the survey, Hatcher has identified the following four issues as the most frequently cited questionable business practices:
1. Many Smith employees have relatives who are clients of the firm. For relatives* accounts where the Smith employee does not have beneficial ownership, trades are generally executed in conjunction with trades for other discretionary accounts held at the firm. Only in accounts where the Smith employee has beneficial ownership are trades delayed until all discretionary account trading is completed.
2. Many of Smith's employees either personally own or maintain, through a family member, beneficial ownership of stocks that are also held in accounts for many of the firm's clients. While the company maintains a strict disclosure policy to the firm of such beneficial ownership and an "at will" disclosure policy to its clients, employees are not barred from trading these securities for their personal benefit even if their clients also own or have a direct or indirect financial interest in the same securities.
3. Account managers meet weekly to discuss the issues and concerns of the client portfolios managed at the firm. During the meetings it is not unusual for individual clients to be identified and discussed. Information regarding the client's holdings and investment strategy is discussed as well as persona! needs related to the client's portfolio. The meetings are held in order to provide guidance and continuing education to all of the firm's account managers.
4. At the suggestion of fixed-income analysts at the firm, most of the portfolio managers working for Smith have been adding B-rated corporate fixed-income securities to their portfolios. Analysts originally made (and continue to make) the suggestion due to the attractive yield potential offered by this class of investments. Smith's portfolio managers were thrilled with the idea since the returns on many of the portfolios' equity positions have been stifled by high profile accounting scandals.
Management at Smith Investments has been pleased with Hatcher's efforts so far but is concerned about the firm's ability to maintain compliance with the CFA Institute's Global Investment Performance Standards (GIPS®). The managing director of the firm, Erich Prince, has made the following comments to Hatcher:
"I am concerned that we will not be able to claim compliance with GIPS at the end of the year since our new information system has inhibited our ability to include terminated portfolios in the historical record up to the last full measurement period before they were terminated. Also, we are unable to regroup portfolios that utilize hedging into separate composites from those that do not utilize hedging. These portfolios are currently grouped according to traditional value and growth strategies based on the capitalization of portfolio holdings (i.e., large vs. small)."
Hatcher eases Prince's mind by telling him she will "ensure full compliance with GIPS by the end of the quarter."

Which of the following best describes a policy that Hatcher could implement to eliminate violations of the CFA Institute Code and Standards in conjunction with trades placed for relatives of the employees of Smith Investments?