Subject 1. CFA Institute Research Objectivity Standards

The objectives of the Research Objectivity Standards:

A. Clients' interests come before the interests of investment managers.
B. Any potential and actual conflicts of interest should be disclosed fully to current and prospective clients.
C. Effective policies and procedures should be created and maintained to minimize and manage conflicts of interest.
D. Specific, measurable and demonstrable industry standards should be developed to promote and reward independent and objective research.
E. The work environment for all investment professionals should support, encourage and reward ethical behavior and support their adherence to the Code and Standards.

There are 18 basic questions and 15 review questions available for this section.

Practice Question 1

The CFA Institute-ROS is based on the fundamental principle of ethical investment practice that:

A. Investment managers must try to achieve objectivity and independence when preparing research reports.
B. Clients' interests should be placed before the interests of investment managers.
C. Conflicts of interest should be minimized and managed properly to achieve objectivity and independence of research.
D. Any potential and actual conflicts of interest should be disclosed fully to the investment manager's current and perspective clients.
Correct Answer: B

Practice Question 2

Which is true about the CFA Institute-ROS?

I. They are designed to replace the corresponding standards of the CFA Institute Code and Standards as the Code and Standards already embody these research-related principles.
II. Adoption of the CFA Institute-ROS can ensure the accuracy of research reports and recommendations.
Correct Answer: Both statements are false.

I is false as the CFA Institute-ROS are designed to complement, not replace, the Code and Standards.
II is false as future events are inherently uncertain.

Practice Question 3

Covered employees should include those who:

I. conduct research.
II. write research reports.
III. make recommendations.
IV. come in contact with research and recommendations.
V. may benefit from influencing research and recommendations.
Correct Answer: All

Practice Question 4

According to the CFA Institute-ROS, a formal written policy on the independence and objectivity of research must be made available to:

I. potential and existing investing clients.
II. potential and existing corporate clients.
III. all firm employees.
IV. only those employees that prepare research reports, make investment recommendations and taking investment actions on behalf of clients.
Correct Answer: I, II and III

The policy must be, not only made available, but disseminated, to ALL firm employees.

Practice Question 5

Covered employees should be required to attest ______ to their understanding of and adherence to the research objectivity policy.

A. annually in writing
B. quarterly in writing
C. verbally every year
Correct Answer: A

Practice Question 6

A public appearance includes ______, in which a research analyst makes a recommendation or offers an opinion.

I. participation in a seminar.
II. participation in a TV interview.
III. giving lectures to a MBA class.
IV. posting messages in an online forum such as the career forum of analystnotes.com site.
Correct Answer: All are correct.

Practice Question 7

The "Public Appearances" requirement of the CFA Institute-ROS only applies when the audience is:

I. investment professionals.
II. investing clients.
III. the general investing public.
Correct Answer: All

Practice Question 8

When making a recommendation, firms should disclose ______ of the security in question.

A. the current price
B. their expected price based on clients' investment horizon
C. historical prices
Correct Answer: A

This is based on standard 3.0 (Reasonable and Adequate Basis).

Practice Question 9

CFA Institute recommends quiet periods of ______ calendar days from issuance for IPOs and at least ______ calendar days from issuance for secondary offerings.

A. 30, 30
B. 10, 5
C. 30, 10
Correct Answer: C

Quiet periods should be of sufficient length to ensure that inside information is not used in research reports and recommendations.

Practice Question 10

CFA Institute recommends the following good practices regarding investment banking.

I. No collaboration between the research and investment banking activities of a firm.
II. Prior to publishing a research report, related research analysts should not communicate to any members of the investment banking or corporate finance department.
III. Research analysts should not participate in any "roadshows" for IPOs but can participate in marketing activities for secondary offerings.
IV. The head of investment banking department should not supervise research analysts.
Correct Answer: I, II and IV

Practice Question 11

Regarding the issue of research analyst compensation, firms should link the compensation to the:

I. quality of research reports.
II. accuracy of recommendations.
III. investment banking revenues.
Correct Answer: I and II

Practice Question 12

When dealing with subject companies, firms are recommended:

I. not to communicate with them.
II. not to share any sections of related research reports with subject companies before they are published.
III. to send them research reports for verification purposes.
Correct Answer: None of them

I. Firms should fully communicate with subject-company management and maintain appropriate working relationships with subject-company personnel.
II. Only sections containing facts could be checked or verified by the subject company.

It's recommended that the compliance of legal department receives a draft and approves it before sharing the part of the research report.

Practice Question 13

If a research analyst is permitted to trade in the securities of company XYZ he covers, and he recommends a sell of XYZ stocks to his clients,

A. he cannot purchase XYZ stocks under any circumstances.
B. he cannot sell XYZ stocks under any circumstances.
C. he can purchase XYZ stocks in the case of "extreme financial hardship".
D. he can purchase XYZ stocks if it's approved by the compliance of legal department.
Correct Answer: A

In general his firm should prohibit him from trading contrary to the published recommendation. Note that the case of "extreme financial hardship" applies to the analyst selling his shares, not purchasing (choice C).

Practice Question 14

Research reports and recommendations should be issued at least ______ to ensure their timeliness.

A. monthly
B. quarterly
C. annually
Correct Answer: B

Practice Question 15

If a firm decides not to cover a subject company anymore, it should:

A. unobtrusively discontinue the coverage.
B. issue a final research report which includes the reason for discontinuing coverage, without any recommendations as the firm is not going to cover the company.
C. issue a final research report which includes a recommendation and the reason for discontinuing coverage.
Correct Answer: C

Practice Question 16

Regarding compliance and enforcement, firms should

I. create, maintain and enforce compliance policies and procedures.
II. maintain all records of internal audits.
III. disseminate such policies and procedures to all covered employees.
IV. disseminate such policies and procedures to all investment and corporate clients and prospective clients.
Correct Answer: All statements are correct.

Practice Question 17

Firms should establish a ______ rating system for investment decision making process.

A. two-dimensional
B. three-dimensional
C. four-dimensional
Correct Answer: B

A useful rating system should incorporate recommendation or rating categories, time horizon categories, and risk categories.

Practice Question 18

Regarding rating system of CFA Institute-ROS, which of the following are valid recommendation or rating categories?

I. buy.
II. sell.
III. market under-perform.
IV. market neutral.
Correct Answer: All of them

I and II belong to absolute rating categories. III and IV belong to relative rating categories.

Practice Question 19

The conflicts of interest that covered employees may face may include:

I. participation in marketing activities.
II. necessary ongoing working relationships with corporate issuers.
III. personal investments and trading.
IV. firm investment and trading.
V. collaboration with investment banking or corporate finance.

A. I, II, III, IV and V.
B. I, II, IV and V.
C. II, III, IV and V.
Correct Answer: A

All of the statements are correct.

Practice Question 20

When making public appearances, covered employees should make full disclosure of all conflicts of interest. The disclosures should include:

I. whether the subject company is an investment banking client of the firm.
II. whether the subject company is a corporate finance client of the firm.
III. whether the research analyst has participated or is participating in marketing activities for the subject company.

A. II and III
B. I and III
C. I, II and III
Correct Answer: C

All statements are correct.

Practice Question 21

Regarding the full research reports on the subject companies discussed to the audience in a public appearance, firms , in general, should:

A. not provide such reports to the audience.
B. provide such reports at a reasonable price.
C. provide such reports only to members of the audience who are clients of the firm.
Correct Answer: B

If reports are not available to non-members of the firm, the covered employee should disclose this to the interviewer or audience. However, in general, B is the best answer in this case.

Practice Question 22

According to the CFA Institute-ROS, firms must require research reports and recommendations to have a basis that can be substantiated as:

I. objective.
II. independent.
III. reasonable.
IV. adequate.

A. I and II
B. III and IV
C. I and IV
Correct Answer: B

This is based on Standard 3.0 (Reasonable and Adequate Basis) of the CFA Institute ROS.

Practice Question 23

The ______ should act as an intermediary for all communications between the research analyst and investment banking or corporate finance.

A. compliance or legal department.
B. head of research department.
C. head of investment banking or corporate finance department.
Correct Answer: A

All written and oral communications are recommended to be documented and conducted with the compliance or legal department as an intermediary.

Practice Question 24

Sections of the research report that contain ______ can be reasonably checked or verified by the subject company prior to publication of the research report.

I. facts
II. specific price target
III. proposed recommendation
IV. proposed rating

A. I only
B. I and III
C. I, II, III and IV
Correct Answer: A

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Practice Question 25

The complete list of all personal investments should be provided by covered employees at least:

A. Monthly.
B. Quarterly.
C. Annually.
Correct Answer: C

This is based on Standard 7 of CFA Institute-ROS.

Practice Question 26

Restricted periods for personal trading by covered employees should be at least ______ calendar days before and ______ calendar days after research report issuance.

A. 30, 5
B. 30, 10.
C. 10, 5
Correct Answer: A

This is based on Standard 7 of CFA Institute-ROS.

Practice Question 27

Firms should have specific policies and procedures that adequately prevent "front running" of investing client trades. These procedures should include restricted periods before and after issuing a research report. If a covered employee or his immediate family members have no investment discretion or control over a diversified investment company:

A. He should be prohibited from trading the company's securities at least 5 calendar days after report issuance.
B. He should be prohibited from trading the company's securities at least 30 calendar days before and 5 days after report issuance.
C. There is no restriction of personal trading.
Correct Answer: C

Restrictions on purchases or sales of securities need not apply to the securities of a diversified investment company or other investment fund over which the covered employees or members of their immediate families have no investment discretion or control.

Practice Question 28

If a research analyst is permitted to trade in the securities of company XYZ he covers, and he recommends a buy of XYZ stocks to his clients,

A. he cannot sell XYZ stocks unless in the case of "extreme financial hardship".
B. he cannot buy or sell XYZ stocks under any circumstances.
C. he can sell XYZ stocks if he wants to.
Correct Answer: A

In general his firm should prohibit him from trading contrary to the published recommendation. However, in case of "extreme financial hardship", the analyst can sell his shares.

Practice Question 29

Regarding compliance and enforcement of the CFA Institute ROS, firms should disseminate such policies and procedures to:

I. all employees.
II. covered employees.
III. investing clients.
IV. corporate clients.
V. prospective clients.

A. All of them.
B. II, III, IV and V.
C. I, II, III and V.
Correct Answer: B

This is based on Standard 9 of CFA Institute-ROS.

Practice Question 30

A useful rating system should incorporate:

I. recommendation categories.
II. rating categories.
III. time horizon categories.
IV. risk categories.
V. expected return categories.

A. All of them
B. I, II, III and IV
C. II, III and IV
Correct Answer: B

A useful rating system should incorporate recommendation or rating categories, time horizon categories, and risk categories.

Practice Question 31

Regarding rating system of CFA Institute-ROS, which of the following are valid recommendation or rating categories?

I. hold.
II. sell.
III. market outperform.
IV. market neutral.

A. I and II
B. I, II and IV
C. All of them
Correct Answer: C

I and II belong to absolute rating categories. III and IV belong to relative rating categories.

Practice Question 32

Which statement(s) is (are) true?

I. It is recommended by the CFI Institute ROS that covered employees do not invest and trade in the securities of subject companies.

II. The disclosure of conflicts of interest is recommended to be made on the back cover of the research report.

A. I only
B. Both
C. None
Correct Answer: C

I: However, such actions should require notification to and approval by the compliance of legal department in advance of all trades.

II: It is recommended to be made on the front of the research report.

Practice Question 33

Which statement(s) is (are) true?

I. Covered employees should be required to hold securities for a minimum of 30 calendar days.

II. Covered employees should not communicate a rating that is different from the current published rating or recommendation.

A. II only
B. Both
C. None
Correct Answer: A

I is false. 60 days instead, except in the case of extreme financial hardship.