ArsonDebart, CFA, dealing with middle level income clients and some high-net worthclients, establish an AA Investment company four years ago. At the beginning,Debart work alone. With the growth of company, he hired 18 employees now. He still continues to attract new clients andhired Yoshiko Yamada as a junior analyst.

　　Yamadais registered for Level I of the CFA exams. He ask Debart for some tips inpreparing the CFA exam as he get to Debart served as an instructor with a CFAexam prep program for many years. Debart replies, "For the reason that ourprep course providers looked at the curriculum readings you do not need toworry about exotic over-the-counter (OTC) derivatives being tested. You justneed to concentrate on the core body of chapters. In my view, CFA Institute putmoreemphasis on equities and fixed-income analysis, so I think CFA test would putmore weights on these two fields." Debartalso responds, "I think theymight also emphasize the alternative investment parts when I took the practiceexam.”

　　HolyJackson is a long term client with AA and he is in his late 60's and in poorhealth. He is supposed to retire in two years and insisted that Debart sell allof her stock holdings during a unfavorable timing of market last year. Hecomplained that Debart only invest her assets in bonds and cash to forreducingrisk exposure purpose. Jackson asks Debartto put some equity to his portfoliowith positive sign at the stock market these days. Debart wrote a note toconvey his idea: Debart drafts a note to Jackson telling her "there is nobet”. It’s the best time to invest in the stock market now. It is wise to ownmore stocks and seize the best opportunities to share the market high profit withstocks approaching all-time highs.My recommendation is to invest at least 60%of your portfolio to grasp the high profit in rising market environment for thenext several years.

　　However,Debart is surprised to see a securities industry regulator appear on his officethe next daybecause the regulator receives a complaint AA company and requireDebart the hand in all client investment records based on that the regulatorcould make an initial assessment of this issue.

　　Asrequired by local legal statutes,Debart keep past seven years clientsinvestment records available. For records older than seven years, Debart refersthe regulator to the clients' brokers. On the another hand, Debart asks clientYamada to respond to any other requests from the regulator and to take carefulnotes on any comments or recommendations he madewhenthe regulator isinvestigating investment recommendation compliance issues. The firm establishedthe compliance policies and procedures at the beginning of operating. Debartplans to revise these documents and any regulatory changes over past five yearsusing what he learns from this visit.

　　Oneday, Debart meets with a prospective client, Sigma Chabo, who recently sold hisbusiness for over $80 millionandChabo tells Deabrt he want to retire now. Chabois interested in how to invest his sale proceeds to build wealth within a truststructureand his aim is to pass the capital to his twin sons, who are 18year-old students currently. Debart replies: "Regarding to your specificinvestment objectives, I think infrastructure projects in developing countries ismore suitable for such clients interested in diversifying their portfolios withlong-duration projects, consistent cash flow, high operating margins, and apositive correlation to inflation. However, these kinds of investment usuallyrelated to the properties of large up front cash injections, patience and theability to accept a long cash out period. However, the benefits are obvious; itincludes diversification characteristics, taking advantage of rapidly growingeconomies, and returns of 8 to12% range.

　　Debarkrecommend two clients investing in real estate for diversification purpose andhe refers them to a licensed attorney in real estate investments field. Debartalso fully discloses to his client that he will be paid a referral fee by thisattorney if anyone of them makes an investment. The attorney providedinvestment opportunities to both clients to invest in a loan secured bymortgages on several commercial warehouses. In these two clients, one of theminvestedinto the lucrative deal, another one did not invest at the same time becauseDebartrecommends him to defer his investment due to liquidity constraints. Unfortunately,the investment opportunity went away when the liquidity issues are finallyresolved.

　　Debart found several unauthorizedcredit card payments for thousands of dollars when he was checking the bankingaccount of his company. Then he found that Hidy Will, Debart’s personalassistant, admitted that sheuse Debart’s credit card to pay for her personaltravels. The report is required by local lawif any employee theft occurs. But, consideringthat Will is Debark’s cousin, he reduce the level of punishment and only verballyreprimands her; "I will hold the checkbook from today and report you tothe regulators if I found you do that again."

　　Ethicaland professional standards

　　1Professionalstandards

　　1.2Guidance forstandards

　　1.2.1 CFA programguidance

　　Intheir talking with regards to CFA exam, did either Employer Debart or employeeYamada violate Standard VII–Responsibilities as a CFA Institute Member or CFACandidate?

　　A.Yes,Debart violated the Standard.

　　B. No.

　　C. Yes,both Debart and Yamada violated the Standard.

　　B is correct.

　　The information disclosed about theexams by either Debart or Yamada is not confidential CFA Program information sothey are not in violation of Standard VII. Debart's information was based uponhis analysis of the readings and is his opinion, and Yamada referenced thepractice exam, which does not reflect content in the actual CFA exam.

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　　Ethicaland professional standards

　　1Professionalstandards

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　　1.2.2Suitability,Diligence and Reasonable Basis, Communication with Clients and ProspectiveClients

　　Whichof Debart's statements to Jackson least likely violates the CFA InstituteStandards of Professional Conduct? Choose one of his following statement s regardingto:

　　A.Themarket forecast.

　　B. Assetallocation.

　　C. Investmenttiming.

　　A is correct.

　　The market environment forecast isstated as an opinion, not fact, and as such is not a violation of StandardV(B)-Communication with Clients and Prospective Clients. But, Debart's assetallocation recommendation, a 60% equity allocation is risky and does not relateto the long-term objectives and circumstances of Jackson, so, is in violationof Standard III(C)-Suitability. A high equity allocation for a sick and elderlyclient who plans to retire soon is not a suitable recommendation, especially toa client who is risk averse and seeking preservation of capital. Finally,Debart has violated Standard V(A)-Diligence and Reasonable Basis because hisrecommendation that Jackson invest a large percentage of his assets in equitiesin an already highly priced market does not appear to be based on any evidenceor analysis.

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　　Ethicaland professional standards

　　1Professionalstandards

　　1.2Guidance forstandards

　　1.2.3Responsibilitiesof Supervisors, Record Retention

　　Consideringhis actions related to the regulatory visit, which of following actions isDebart most likely violated the CFA Institute Standards of ProfessionalConduct?

　　A.Compliancepolicies and procedures.

　　B. Clientrecord storage.

　　C. Junioranalyst regulatory interaction.

　　A is correct.

　　Standard IV(C)-Responsibilities ofSupervisors has been violated. As to it requires members and candidates withsupervisory responsibility to understand what constitutes an adequatecompliance system for their firms and to make reasonable efforts to see thatappropriate compliance procedures are established, documented, communicated tocovered personnel, and followed. "Adequate" procedures are thosedesigned to meet industry standards, regulatory requirements, the requirementsof the Code and Standards, and the circumstances of the firm. Once complianceprocedures are established, the supervisor must also make reasonable efforts toensure that the procedures are monitored and enforced. By not updating hiscompliance policies and procedures since founding his company, Debart hasviolated this standard.

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　　Ethicaland professional standards

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　　1.2.4Suitability,Performance Presentation, Diligence and Reasonable Basis

　　Whichof following is most consistent with the CFA Institute Standards ofProfessional Conduct concerning with Debart’s recommendation to Chabo in hisfuture investment?

　　A.Suitability

　　B. Diligenceand Reasonable Basis

　　C. PerformancePresentation

　　C is correct.

　　Debart has only stated historicalreturns for these types of investments based on research of other similarinvestments. In addition, he has not promised a specific return. Thus Debart isnot in violation of Standard III(D)-Performance Presentation. But, Debart is inviolation of Standard III(A)-Loyalty, Prudence, and Care because he is requiredto identify the actual client, which in this case would be Chabo and the trustbeneficiaries, the twins. From the information provided, there is no evidencethat Debart knows or has considered the twin's investment objectives andconstraints and thus is also in violation of Standard III(C)-Suitability.

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　　1.2.5Fairdealing and referral fee

　　Whichof following aspects did Debart most likely violate the CFA Institute Standardsof Professional Conduct with his advice in real estate investment?

　　A.No.

　　B. Yes,with regard to Referral Fees.

　　C. Yes,with regard to Fair Dealing.

　　B is correct.

　　Standard VI(C)-Referral Fees requiresMembers and Candidates to disclose to their employer, clients, and prospectiveclients, as appropriate, any compensation, consideration, or benefit receivedfrom or paid to others for the recommendation of products or services beforeentry into any formal agreement for services. In this case, Debart advisesclients of the referral fee arrangement after the fact, thus violating StandardVI(C).

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　　1.2.6Knowledgeof Law

　　Debartleast likely violated the CFA Institute Standards of Professional Conductconcerning which of the following regarding to his cousin, Will?

　　A.Knowledgeof the Law

　　B.Conflictsof Interest

　　C.Misconduct

　　B is correct.

　　Debart has not violated StandardVI(A)-Disclosure of Conflicts because disclosure of his relationship with Willis not required because it would not impair Debart's independence andobjectivity nor interfere with his respective duties to clients.

　　But, by not following local law andreporting his cousin's malfeasance, Debart violated Standard I(A)-Knowledge ofthe Law and as a result also violated Standard I(D)-Misconduct because his actionsreflect adversely on his professional reputation and integrity.

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