6. Does Omar’s participation in the ESOP most likely violate any of the Standards of Professional
Conduct?
A. No
B. Yes, with regard to “Priority of Transactions”
C. Yes, with regard to “Conflicts of Stock Ownership”
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Kim Tang Case Scenario
Kim Tang, CFA, is a consultant reviewing a hedge fund, CleanTech Research Fund. CleanTech invests in
“clean technology” companies. CleanTech has adopted the CFA Institute Code of Ethics and Standards of
Professional Conduct.
Tang examines the various forms of advertising used by CleanTech to attract new clients. In one of its
advertising messages, CleanTech states, “We have a very experienced research team and are proud they
all are CFA’s. Several of our managers serve as volunteers for CFA Institute. CFA Institute recognizes
their expertise, and as a result, you can rely on our team for superior performance results.”
In reviewing CleanTech’s marketing brochure, Tang reads the following statements:
Statement 1: “The share prices of companies in the clean technology sector have increased recently due
to the growing awareness of climate change issues and the rising cost of energy. It is our opinion that
returns in this area will continue to be above average for several years. In fact, our proprietary
investment analysis software has determined that investments in green transportation companies are
likely to double in value in the next six months based on a multiple factor regression analysis. We will
earn a 200% return over the next year on one of our solar power company investments based upon
sales projections we prepared assuming last year’s generous tax incentives stay in place.”
Statement 2: “The CleanTech fund invests in publicly traded and highly liquid companies and is
recommended only for investors who are able to assume a high level of risk. Last month we invested in
EnergyAlgae, a “green energy” company that partnered with a global energy firm early last year to
create oil from algae. EnergyAlgae’s market capitalization quadrupled shortly after the partnership was
formed. Recently, EnergyAlgae also patented a waste plastic-to-oil process that produces oil at less than
$30 per barrel. One of the founders of CleanTech is on the board of EnergyAlgae, and his information on
the company’s patent process led us to purchase additional stock in EnergyAlgae before the patent
became widely publicized with the release of the company’s semi-annual financial report.”*
*Information supporting the statements made in this communication is available upon request.
When Tang asks CleanTech’s founders for supporting documents related to their investment in
EnergyAlgae, she is told this information is based upon third-party research from Slar Brokerage (Slar),
who maintains all necessary records. Tang completes a due diligence exercise on Slar and learns that
Slar used, at a minimum, the following attributes to form the basis of the recommendation: the
company’s past 3 years of operational and financial history; current stage of the industry’s business
cycle; an annual research update; and a one-year earnings forecast.
Tang also learns that the founders of CleanTech are majority shareholders of Slar, who underwrote the
public offering of EnergyAlgae. Additionally, CleanTech’s analysts inform Tang they did not need to look
at the quality of Slar’s research because one of their former colleagues recently left CleanTech and
established the research department at the brokerage firm.
In researching EnergyAlgae, Tang finds that potential customers and suppliers of EnergyAlgae are highly
skeptical of the claims made regarding the companies’ respective products. She also contacts several
energy companies and is unable to locate anyone who has even heard of EnergyAlgae. When Tang
reviews CleanTech’s trading activity in EnergyAlgae shares, she finds that CleanTech liquidated its
position in EnergyAlgae soon after CleanTech’s portfolio managers presented positive views on
EnergyAlgae in a number of media interviews. In addition, many of CleanTech’s employees also sold
their shares in EnergyAlgae immediately after CleanTech sold its shares of the company. The share price
of EnergyAlgae dropped dramatically after the stock sales made by CleanTech and its employees.
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