Test Prep CFA® Level I Chartered Financial Analyst CFA® LEVEL 1 Exam Questions in PDF

Free Test Prep CFA® LEVEL 1 Dumps Questions (page: 32)

Jay Simpson was recently convicted of a felony in the state of California. Jay is a resident of Arizona, where he conducts all his business. The felony conviction resulted from activities not related to his primary business. With regard to standard II.B-Professional Misconduct, Jay has:

  1. violated the standard since felony convictions are considered professional misconduct.
  2. not violated the standard since the conviction occurred in a non-resident state.
  3. not violated the standard since AIMR does not impose sanctions for felony convictions.
  4. not violated the standard since the conviction is for non-business activities.
  5. none of these answers.

Answer(s): A

Explanation:

Standard II (B) is violated if convictions for felony or similar offenses occur, regardless of whether the offenses were related to the member's professional activities or not.



Which of the following will result in an insider trading prosecution?

  1. A tippee trades based on inside information, not knowing that the source of the information has actually received the information illegally and has breached fiduciary duty to the shareholders by leaking it. He has no reasons to suspect such a behavior.
    II. A corporate outsider who has absolutely no connections to any of the insiders misappropriates inside information and trades for profit based on that information.
    III. A tippee trades based on inside information about an impending tender offer after verifying that the source of the information has not breached any fiduciary duty to the company.
  2. I only
  3. III only
  4. I, II and III
  5. II and III only

Answer(s): D

Explanation:

A "Tippee" is any person who learns inside information from a corporate insider. A tippee can be held liable under SEC's section 10b and rule 10(b)-5 only if he knows or should know that the insider has behaved improperly and breached fiduciary duty in revealing the information. Otherwise, the tippee is not held responsible for insider trading. One exception to this rule is information about tender offers, in which tippee liability results automatically under SEC Rule 14e-3, even if the insider has not breached any fiduciary duty.
Under the Misappropriation Theory of insider trading, a person who misappropriates inside information and trades or abets trading in it is committing securities fraud and can be so charged, even if the person is a complete corporate outsider. The Topical Study, "Insider Trading," is probably the most important (and the trickiest) section in the handbook and you can expect at least one question from it.



An AIMR member:

  1. must report any criminal activity to the appropriate legal or regulatory authority.
    II. may be held responsible for any illegal activity he associates himself with.
    III. may be held liable for violations by others when he is unaware of the facts giving rise to the violations.
    IV. can be held liable for violations if he does not take actions to dissociate himself from them.
  2. I, II, III and IV
  3. II and IV only
  4. I, II and IV only
  5. II, III and IV only

Answer(s): B

Explanation:

Standard I does not require a member to report the illegal activity to the appropriate regulatory authorities, though it may be prudent to do so in many cases if it is evident that the activity is illegal.



Mark Blazewhich, an analyst with an investment advisory firm, changed the recommendation on Zomega, Inc.'s stock from hold to sell 10 days ago. This recommendation was published in the firm's newsletter that came out two days after this announcement. Blazewhich has just given his broker instructions to liquidate Blazewhich's personal holdings of Zomega. Blazewhich has:

  1. violated Standard IV (B.3) - Fair Dealing.
  2. violated Standard IV (7) - Disclosure of Conflicts to Clients and Prospects.
  3. violated Standard IV (B.4) - Priority of Transactions.
  4. not violated any standard of AIMR code.

Answer(s): D

Explanation:

Because Blazewhich has allowed sufficient time for dissemination of the change in recommendation, he is free to carry out personal transactions. Also, since the recommendation is to sell the stock, there is no personal conflict in the situation. Note that it would be a violation of Standard IV (B.7) - Disclosure of Conflicts to Clients and Prospects - if the recommendation were to buy the stock and Crumpet had failed to reveal information about his personal holdings.



Which one of the following actions will not help to ensure the fair treatment of brokerage firm clients when a new investment recommendation is made?

  1. Minimize elapsed time between the decision and the dissemination of a recommendation.
  2. Limit the number of people in the firm who are aware in advance that a recommendation is to be disseminated.
  3. Distribute recommendations to institutional clients prior to individual accounts.
  4. Monitor the trading activities of firm personnel.

Answer(s): C

Explanation:

This question deals with Standard IV (B.3), Fair Dealing. All the procedures listed will help members treat clients fairly, except distributing recommendations to institutional clients prior to individual accounts. This practice discriminates among clients based on size and class of assets and is a violation of Standard IV (B.3).



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