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Sample Level II CFA ProgramItem-Set Questions
TOPIC: ETHICAL AND PROFESSIONAL STANDARDS
TOTAL POINT VALUE OF THIS QUESTION SET IS 12 POINTS
Edgar Somer, CFA, was recently hired as a portfolio manager at Karibe Investment
Management. Somer previously worked at a rival firm where he produced an average annual
return of 11% using a small-cap value strategy.
On his first day at Karibe, the firm asks Somer to approve marketing materials that present the
following performance disclosures.
Text which states: “Somer has generated average annual returns of 11%”
The 3-year performance of a composite of Karibe client accounts that follow a similar
small-cap value strategy
A disclosure that the assumptions and calculations underlying the returns presented are
publicly available on Karibe’s public website
To maintain relationships with clients and to attract prospective clients, Somer is active on
social media. He posts a link to a news story about a famous athlete who recently paid
substantial tax penalties after failing to properly report investment gains. In addition to the link
Somer writes the comment: “A client of mine had similar gains, but because I kept proper
records he faced no penalties. #HireAProfessional”. Some responses to the post suggest that
readers mistakenly believe the athlete is Somer’s client. Somer does not post a clarifying
comment.
Somer develops a new quantitative investment strategy that he describes in marketing
materials. The description states that “the strategy is based on eight proven fundamental and
technical factors, including well-known factors such as value and momentum as well as certain
proprietary factors that have been back-tested. The strategy includes a dynamic weighting
component to adjust the amount allocated to each factor based on prevailing market
conditions.” The materials also highlight risks such as “the possibility that the model or its
underlying factors may not work out of sample,” and “because the weight placed on various
factors is dynamic, it may not be suitable for clients who seek steady exposure to certain
factors.” One of Somer’s clients agrees to use this strategy. When preparing the first
performance report for this client, Somer discovers a coding error that reversed the client’s
weightings assigned to the value and momentum factors.
Prior to joining Karibe, Somer purchased shares in a small-cap technology firm for his personal
portfolio. When he started his new role Somers disclosed the position, which had quadrupled in
value since the initial purchase and represented more than 5% of his personal holdings. He had
, no intention to sell the shares and he recommended them to clients at Karibe, to whom he
disclosed his ownership. After the successful launch of a new product resulted in additional
large gains in the shares, Somer now recommends that clients place limit orders when
purchasing the shares. Though he remains bullish on the stock he is concerned about the size of
his personal position, which is now more than 15% of his portfolio. One of his clients recently
placed a limit order at $50 per share, which represents the highest bid in the market. The
lowest offer is $52. Somer considers filling the client’s order with some of his own shares at the
$50 bid price.
1. To best comply with the CFA Institute Standards of Professional Conduct (the Standards)
related to performance presentation, Somer should modify the:
A. text regarding Somer’s investment returns.
B. presentation of the performance for Karibe’s representative composite.
C. content of the disclosure statement related to assumptions and calculations.
2. Does Somer’s social media post result in a violation of the Standards?
A. No.
B. Yes, he violates the standard related to preservation of confidentiality.
C. Yes, he violates the standard related to communication with clients and prospective
clients.
3. When preparing the marketing materials for the quantitative strategy, did Somer comply
with the standard related to communication with clients and prospective clients?
A. Yes.
B. No, because he did not identify the risk of coding errors.
C. No, because he did not describe the investment process in detail.
4. If he fills the client’s order for shares of the technology firm, would Somer violate the
standard related to priority of transactions?
A. No.
B. Yes, because the client would be disadvantaged by the trade.
C. Yes, because he would benefit personally from a trade undertaken for a client.
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