12 RELATE TO ETHICAL AND PROFESSIONAL STANDARDS. STEPHANIE...

Questions 7-12 relate to Ethical and Professional Standards.

Stephanie Mackley is a portfolio manager for Durango Wealth Management (DWM), a

regional money manager catering to wealthy investors in the southwestern portion of the

United States. Mackley's clients vary widely in terms of their age, net worth, and investment

objectives, but all must have at least $1 million in net assets before she will accept them as

clients.

Many of Mackley's clients are referred to her by Kern & Associates, an accounting and

consulting firm. DWM does not provide any direct compensation to Kern & Associates for

the referrals, but Mackley, who is the president of her local CFA Society, invites Kern &

Associates to give an annual presentation to the society on the subject of tax planning and

minimization strategies that Kern & Associates provides for its clients. Kern & Associates'

competitors have never received an invitation to present their services to the society. When

Mackley receives a referral, she informs the prospect of the arrangement between DWM and

Kern & Associates.

DWM maintains a full research staff that analyzes and recommends equity and debt

investments. All of the in-house research is provided to the firm's portfolio managers and

their clients. In addition, DWM provides a subscription service to outside investors and

portfolio managers. Aaron Welch, CFA, a private contractor, researches and reports on high-

tech firms in the United States and other developed countries for several portfolio

management clients. One of his latest reports rated InnerTech, Inc., a small startup that

develops microscopic surgical devices, as a strong buy. After reviewing the report carefully,

Mackley decides to purchase shares of InnerTech for clients with account values over $6

million. After careful review of each client, she determines that accounts with less than this

amount cannot accept the risk level associated with InnerTech stock.

Two days after purchasing InnerTech for her clients, the stock nearly doubles in value, and

the clients are ecstatic about the returns on their portfolios. Several of them give her small

bouquets of flowers and boxes of chocolates, which she discloses to her supervisor at DWM.

One client even offers her the use of a condo in Vail, Colorado, for two weeks during ski

season if she can reproduce the results next quarter. Mackley graciously thanks her clients

and asks that they refer any of their friends and relatives who are in need of asset

management services. She provides brochures to a few clients who mention they have friends

who would be interested. The brochure contains a description of Mackley's services and her

qualifications. At the end of the brochure, Mackley includes her full name followed by "a

Chartered Financial Analyst" in bold font of the same size as her name. Following is an

excerpt from the brochure:

"DWM can provide many of the investment services you are likely to need. For those

services that we do not provide directly, such as estate planning, we have standing

relationships with companies that do provide such services. I have a long history with DWM,

serving as an investment analyst for six years and then in my current capacity as a portfolio

manager for 12 years. My clients have been very satisfied with my past performance and will

likely be satisfied with my future performance, which I attribute to my significant investment

experience as well as my participation in the CFA Program. I earned the right to use the CFA

designation thirteen years ago. All CFA charterholders must pass a series of three rigorous

examinations that cover investment management and research analysis."

Two weeks later, some of Mackley's clients request that she provide supporting

documentation for the research report on InnerTech so they can familiarize themselves with

how DWM analyzes investment opportunities. Mackley asks Welch for the documents, but

Welch is unable to provide copies of his supporting research since he disposed of them,

according to the company's policy, one week after issuing and distributing the report.

Mackley informs Welch that obtaining the supporting documents is of the utmost importance

because of one of the clients requesting the materials. She explains that Craig Adams is about

to inherit $20 million and, as a result, will be one of the firm's most important clients. Welch

agrees to recreate the research documents in order to support the firm's relationship with

Adams.

...

Does the arrangement between Mackley and Kern & Associates violate any CFA Institute

Standards of Professional Conduct?

A) Yes.

B) No, because the referral agreement is fully disclosed to all clients and prospects before they

employ Mackley's services.

C) No, because Mackley only accepts clients with net assets above $1 million who are likely to know

that the arrangement is common in the industry.

Question #8 of 60

Were any CFA Institute Standards of Professional Conduct violated in conjunction with

Welch's report on InnerTech and Mackley's initial purchase of InnerTech stock?

Welch Mackley

A) No Yes

B) Yes No

C) Yes Yes

Question #9 of 60

According to the Standards of Professional Conduct, Mackley must do which of the

following regarding the gifts offered to her by her clients? She may:

A) not accept use of the condo without prior disclosure to her employer in writing.

B) not accept the gifts or use of the condo without disclosing them to her employer in writing.

C) accept the gifts and use of the condo as they represent little or no monetary value to her or cost

to her clients.

Question #10 of 60

Does Mackley's signature at the end of her brochure violate any CFA Institute Standards of

Professional Conduct?

A) Yes. Including "a Chartered Financial Analyst" after her name is a violation.

B) No. Although writing out "a Chartered Financial Analyst" is discouraged, doing so does not

represent a violation.

C) Yes. Mackley may include "a Chartered Financial Analyst" in bold type only if the rest of her name

is also in bold type.

Question #11 of 60

In her marketing brochure, did Mackley violate any CFA Institute Standards of Professional

Conduct in her reference to her past and future investment performance or her description of

the CFA Program?

Performance CFA Program

A) Yes Yes

B) No Yes

C) Yes No

Question #12 of 60

In her discussions with Welch, where she asks him to recreate the supporting research for the

InnerTech report, has Mackley violated any CFA Institute Standards of Professional

Conduct?

A) No.

B) Yes, because the request creates a conflict of interest between Mackley and Welch.

C) Yes, because she failed to preserve the confidentiality of her client's information.

Question #13 of 60