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CFA Level 2
Minenhle Talbot Case Scenario (Questions 1 – 6) Minenhle Talbot, CFA, a former employee of Dekso Chemicals Inc.
(DCI), has recently joined Gold Crest Investment Advisors as the chief investment officer.
She is informed by Gold Crest Investment Committee to look into the accounts of DCI, which is on their investment list but now will be put on hold due to an inquiry filed by the regulator yesterday against the company’s investment bankers – Ackso Capital and its Chief Financial Officer (CFO).
Talbot learns from the newspapers that the regulator has placed Ackso, the lead underwriter of the follow-on equity offering of DCI, under investigation for alleged price-setting and misleading of market participants by the CFO and his team.
The inquiry amidst intense media coverage has been initiated one month after Ackso’s CFO, Mike Vanlucker retired.
Talbot headed the treasury and investments department at DCI up until a month ago and knew nothing of any market fraud or price-volume distortion, despite being involved in the company’s equity offering.
Intrigued by these developments, she calls Kris Hoffman, a CFA candidate, who works in the Corporate Finance Department of Ackso.
Hoffman headed the team of underwriters and acted as the investor relations officer of the issue. The offering, approved by the capital markets regulator, was hugely successful and oversubscribed.
Hoffman tells Talbot that he was shocked by the inquiry, as there was no suspicious activity of any kind when his team diligently worked on the offering documents and reminded Talbot that the compliance officer, along with her had signed off on all of the public marketing materials of the issue, after an extensive review and financial analysis.
Hoffman states, “Issuance guidelines were followed as stipulated by the regulator, who reviewed the procedures and raised no objections at the time.”
Concerned with the impact of the inquiry on its clientele, Ackso’s management instructs Hoffman to issue a public statement regarding the capital market regulator’s investigations for price-setting and the involvement of the now-retired CFO of the bank.
Hoffman prepares the following three draft statements for the management.
Statement 1 “Ackso Capital is under investigation by the capital markets regulator because of illegal activity by Mr. Vanlucker, the retired CFO, and his underwriting team for Dekso Chemicals Inc.”
Statement 2 “The capital markets regulator has placed Ackso Capital under investigation for the alleged involvement in illegal activity by its former senior manager and his team.”
Statement 3 “Ackso Capital has been placed under investigation by the capital markets regulator as a result of illegal activity.”
Following Ackso’s press release, Hoffman receives inquiries and several phone calls from investment advisers who purchased the issue for their clients.
One adviser, Raul Bhavin, threatens to report Hoffman to CFA Institute for violating his fiduciary duty.
Hoffman responds, “You can report to CFA Institute if you like because I haven’t violated the Code of Ethics and Standards of Professional Conduct.
As a Level III candidate in the CFA Program, I know my ethical responsibilities towards the clients because of the ethics portion covered in all three CFA exams.
The CFA Program ensures one of becoming better at preserving the integrity of capital markets.”
In view of Ackso’s investigation, Talbot decides to go over her company’s compliance policies and procedures to ensure they are in accordance with the CFA Institute Standards of Professional Conduct.
She checks the firm’s firewall elements involving interdepartmental communication of the corporate finance department with the sales and research departments.
Talbot discovers gaps regarding communications of sensitive information across departments and firm’s proprietary trading policies with respect to the recently implemented laws of the regulator.
Worried that the firm could already be in trouble, Talbot elects to update them with the help of the compliance officer immediately.
Next Talbot reviews the firm’s conflicts of interest policies and recommends changes to the firm’s investment committee and board. Talbot makes the following revisions to the existing policy:
Revision 1: Materially beneficial ownership in stock by staff should be reported to both employer and clients with proper reporting requirements for personal transactions.
Revision 2: Any investment banking, underwriting and financial relationship with companies or issuer should be closely monitored by the firm when the investment advisory staff is recommending the securities of the same company or issuer to clients.
Following a complaint from one of the firm’s potential clients – Avri Insurance, about the lack of information of the performance history of accounts and the absence of comparative data with similar portfolios under Gold Crest’s management, Talbot calls them.
During the phone conversation, Talbot states, “We are reviewing and updating our compliance policies, including performance presentation reporting procedures.
I can assure you that the new reporting requirements will meet your demands completely.”
Q 1. Based on the information given, are Hoffman and the compliance officer most likely in violation of the CFA Institute Standards of Professional Conduct regarding their role in Ackso’s underwriting of DCI’s issue?
A. Yes, with regard to market manipulation.
B. Yes, with regard to the responsibilities of supervisors.
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