Theresa Bair, CFA, a portfolio manager for Brinton Investment Company (BIC), has recently been promoted to lead portfolio manager for her firm’s new small capitalization closed-end equity fund, the Quaker Fund. BIC is an asset management firm headquartered in Holland with regional offices in several other European countries.
After accepting the position, Bair received a letter from the three principals of BIC. The letter congratulated Bair on her accomplishment and new position with the firm and also provided some guidance as to her new role and the firm’s expectations.
Among other things, the letter stated the following:
"Because our firm is based in Holland and you will have clients located in many European countries, it is essential that you determine what laws and regulations are applicable to the management of this new fund. It is your responsibility to obtain this knowledge and comply with appropriate regulations. This is the first time we have offered a fund devoted solely to small capitalization securities, so we will observe your progress carefully. You will likely need to arrange for our sister companies to quietly buy and sell Quaker Fund shares over the first month of operations. This will provide sufficient price support to allow the fund to trade closer to its net asset value than other small-cap closed-end funds. Because these funds generally trade at a discount to net asset value, if our fund trades close to its net asset value, the market may perceive it as more desirable than similar funds managed by our competitors."
Bair heeded the advice from her firm’s principals and collected information on the laws and regulations of three countries: Norway, Sweden, and Denmark. So far, all of the investors expressing interest in the Quaker Fund are from these areas. Based on her research, Bair decides the following policies are appropriate for the fund:
Note: Laws mentioned below are assumed for illustrative purposes.
• For clients located in Norway the fund will institute transaction crossing, since, unlike in Holland, the practice is not prohibited by securities laws or regulations. The process will involve internally matching buy and sell orders from Norwegian clients whenever possible. This will reduce brokerage fees and improve the fund’s overall performance.
• For clients located in Denmark, account statements that include the value of the clients’ holdings, number of trades, and average daily trading volume will be generated on a monthly basis as required by Denmark’s securities regulators, even though the laws in Holland only require such reports to be generated on a quarterly basis.
• For clients located in Sweden, the fund will not disclose differing levels of service that are available for investors based upon the size of their investment. This policy is consistent with the laws and regulations in Holland. Sweden’s securities regulations do not cover this type of situation.
Three months after the inception of the fund, its market value has grown from $200 million to $300 million and Bair’s performance has earned her a quarter-end bonus. Since it is now the end of the quarter, Bair is participating in conference calls with companies in her fund. Bair calls into the conference number for Swift Petroleum. The meeting doesn’t start for another five minutes, however, and as Bair waits, she hears the CEO and CFO of Swift discussing the huge earnings restatement that will be necessary for the financial statement from the previous quarter. The restatement will not be announced until the year’s end, six months from now. Bair does not remind the officers that she can hear their conversation. Once the call has ended, Bair rushes to BIC’s compliance officer to inform him of what she has learned during the conference call. Bair ignores the fact that two members of the firm’s investment banking division are in the office while she is telling the compliance officer what happened on the conference call. The investment bankers then proceed to sell their personal holdings of Swift Petroleum stock. After her meeting, Bair sells the Quaker Fund’s holdings of Swift Petroleum stock.
Do the suggestions in the letter from the principals of BIC violate any CFA Institute Standards of Professional Conduct?
- A . No.
- B . Yes, because the suggestions are intended to manipulate market data in order to attract investors for the fund.
- C . Yes, because the compliance officer should be responsible for knowing applicable laws and regulations, not Bair.
B
Explanation:
Standard 11(B) Market Manipulation prohibits members and candidates from misleading investors through manipulated securities prices or volume. BIC’s principals have suggested to Bair that she artificially inflate the Quaker Fund’s price to alter the market’s perception of the fund and mislead investors.
Theresa Bair, CFA, a portfolio manager for Brinton Investment Company (BIC), has recently been promoted to lead portfolio manager for her firm’s new small capitalization closed-end equity fund, the Quaker Fund. BIC is an asset management firm headquartered in Holland with regional offices in several other European countries.
After accepting the position, Bair received a letter from the three principals of BIC. The letter congratulated Bair on her accomplishment and new position with the firm and also provided some guidance as to her new role and the firm’s expectations.
Among other things, the letter stated the following:
"Because our firm is based in Holland and you will have clients located in many European countries, it is essential that you determine what laws and regulations are applicable to the management of this new fund. It is your responsibility to obtain this knowledge and comply with appropriate regulations. This is the first time we have offered a fund devoted solely to small capitalization securities, so we will observe your progress carefully. You will likely need to arrange for our sister companies to quietly buy and sell Quaker Fund shares over the first month of operations. This will provide sufficient price support to allow the fund to trade closer to its net asset value than other small-cap closed-end funds. Because these funds generally trade at a discount to net asset value, if our fund trades close to its net asset value, the market may perceive it as more desirable than similar funds managed by our competitors."
Bair heeded the advice from her firm’s principals and collected information on the laws and regulations of three countries: Norway, Sweden, and Denmark. So far, all of the investors expressing interest in the Quaker Fund are from these areas. Based on her research, Bair decides the following policies are appropriate for the fund:
Note: Laws mentioned below are assumed for illustrative purposes.
For clients located in Norway the fund will institute transaction crossing, since, unlike in Holland, the practice is not prohibited by securities laws or regulations. The process will involve internally matching buy and sell orders from Norwegian clients whenever possible. This will reduce brokerage fees and improve the fund’s overall performance.
For clients located in Denmark, account statements that include the value of the clients’ holdings, number of trades, and average daily trading volume will be generated on a monthly basis as required by Denmark’s securities regulators, even though the laws in Holland only require such reports to be generated on a quarterly basis.
For clients located in Sweden, the fund will not disclose differing levels of service that are available for investors based upon the size of their investment. This policy is consistent with the laws and regulations in Holland. Sweden’s securities regulations do not cover this type of situation.
Three months after the inception of the fund, its market value has grown from $200 million to $300 million and Bair’s performance has earned her a quarter-end bonus. Since it is now the end of the quarter, Bair is participating in conference calls with companies in her fund. Bair calls into the conference number for Swift Petroleum. The meeting doesn’t start for another five minutes, however, and as Bair waits, she hears the CEO and CFO of Swift discussing the huge earnings restatement that will be necessary for the financial statement from the previous quarter. The restatement will not be announced until the year’s end, six months from now. Bair does not remind the officers that she can hear their conversation. Once the call has ended, Bair rushes to BIC’s compliance officer to inform him of what she has learned during the conference call. Bair ignores the fact that two members of the firm’s investment banking division are in the office while she is telling the compliance officer what happened on the conference call. The investment bankers then proceed to sell their personal holdings of Swift Petroleum stock. After her meeting, Bair sells the Quaker Fund’s holdings of Swift Petroleum stock.
With regard to the treatment of clients in Norway and Denmark, do the policies that Bair has selected for the Quaker Fund violate any CFA Institute Standards of Professional Conduct? Norway Denmark
- A . No Yes
- B . Yes No
- C . No No
B
Explanation:
Standard 1(A) Knowledge of the Law requires members and candidates to know and comply with rules, laws, and regulations that apply to their professional activities. If there is a conflict, members and candidates are expected to adhere to the stricter of applicable laws, rules, and regulations or the Code and Standards. Because the Quaker Fund is located in Holland, which does not allow crossing trades (a law that is stricter than the Code and Standards), the fund is not allowed to utilize such a practice even for clients that live in countries with less strict regulations. Thus, the policy for clients in Norway violates Standard 1(A). In the case of the policy for clients located in Denmark, no violation has occurred since the fund is going to comply with Denmark’s law, which is stricter than the Code and Standards. (Study Session 1, LOS l.b)
Theresa Bair, CFA, a portfolio manager for Brinton Investment Company (BIC), has recently been promoted to lead portfolio manager for her firm’s new small capitalization closed-end equity fund, the Quaker Fund. BIC is an asset management firm headquartered in Holland with regional offices in several other European countries.
After accepting the position, Bair received a letter from the three principals of BIC. The letter congratulated Bair on her accomplishment and new position with the firm and also provided some guidance as to her new role and the firm’s expectations.
Among other things, the letter stated the following:
"Because our firm is based in Holland and you will have clients located in many European countries, it is essential that you determine what laws and regulations are applicable to the management of this new fund. It is your responsibility to obtain this knowledge and comply with appropriate regulations. This is the first time we have offered a fund devoted solely to small capitalization securities, so we will observe your progress carefully. You will likely need to arrange for our sister companies to quietly buy and sell Quaker Fund shares over the first month of operations. This will provide sufficient price support to allow the fund to trade closer to its net asset value than other small-cap closed-end funds. Because these funds generally trade at a discount to net asset value, if our fund trades close to its net asset value, the market may perceive it as more desirable than similar funds managed by our competitors."
Bair heeded the advice from her firm’s principals and collected information on the laws and regulations of three countries: Norway, Sweden, and Denmark. So far, all of the investors expressing interest in the Quaker Fund are from these areas. Based on her research, Bair decides the following policies are appropriate for the fund:
Note: Laws mentioned below are assumed for illustrative purposes.
• For clients located in Norway the fund will institute transaction crossing, since, unlike in Holland, the practice is not prohibited by securities laws or regulations. The process will involve internally matching buy and sell orders from Norwegian clients whenever possible. This will reduce brokerage fees and improve the fund’s overall performance.
• For clients located in Denmark, account statements that include the value of the clients’ holdings, number of trades, and average daily trading volume will be generated on a monthly basis as required by Denmark’s securities regulators, even though the laws in Holland only require such reports to be generated on a quarterly basis.
• For clients located in Sweden, the fund will not disclose differing levels of service that are available for investors based upon the size of their investment. This policy is consistent with the laws and regulations in Holland. Sweden’s securities regulations do not cover this type of situation.
Three months after the inception of the fund, its market value has grown from $200 million to $300 million and Bair’s performance has earned her a quarter-end bonus. Since it is now the end of the quarter, Bair is participating in conference calls with companies in her fund. Bair calls into the conference number for Swift Petroleum. The meeting doesn’t start for another five minutes, however, and as Bair waits, she hears the CEO and CFO of Swift discussing the huge earnings restatement that will be necessary for the financial statement from the previous quarter. The restatement will not be announced until the year’s end, six months from now. Bair does not remind the officers that she can hear their conversation. Once the call has ended, Bair rushes to BIC’s compliance officer to inform him of what she has learned during the conference call. Bair ignores the fact that two members of the firm’s investment banking division are in the office while she is telling the compliance officer what happened on the conference call. The investment bankers then proceed to sell their personal holdings of Swift Petroleum stock. After her meeting, Bair sells the Quaker Fund’s holdings of Swift Petroleum stock.
With regard to the treatment of clients in Sweden, does the policy that Bair has selected for the Quaker Fund violate any CFA Institute Standards of Professional Conduct?
- A . Yes, Bair’s policy will violate Standard 11(B) Fair Dealing.
- B . No, because disclosure in Sweden would disadvantage clients residing in other countries.
- C . No, because disclosure in any country would break the confidentiality that Bair owes to her clients.
A
Explanation:
According to Standard III(B) Fair Dealing, members and candidates are allowed to offer different levels of service but must offer all levels of service to all clients and must disclose the existence of different levels of service to all clients and prospects. By not disclosing the levels of service to Swedish investors, Bair is adhering to local law, which is less strict than the Code and Standards and thus is in violation of Standard I {A) Knowledge of the Law, which requires she adhere to the stricter of the two. She also violated Standard III(B) by not disclosing the service levels. (Study Session 1, LOS l.b)
Theresa Bair, CFA, a portfolio manager for Brinton Investment Company (BIC), has recently been promoted to lead portfolio manager for her firm’s new small capitalization closed-end equity fund, the Quaker Fund. BIC is an asset management firm headquartered in Holland with regional offices in several other European countries.
After accepting the position, Bair received a letter from the three principals of BIC. The letter congratulated Bair on her accomplishment and new position with the firm and also provided some guidance as to her new role and the firm’s expectations.
Among other things, the letter stated the following:
"Because our firm is based in Holland and you will have clients located in many European countries, it is essential that you determine what laws and regulations are applicable to the management of this new fund. It is your responsibility to obtain this knowledge and comply with appropriate regulations. This is the first time we have offered a fund devoted solely to small capitalization securities, so we will observe your progress carefully. You will likely need to arrange for our sister companies to quietly buy and sell Quaker Fund shares over the first month of operations. This will provide sufficient price support to allow the fund to trade closer to its net asset value than other small-cap closed-end funds. Because these funds generally trade at a discount to net asset value, if our fund trades close to its net asset value, the market may perceive it as more desirable than similar funds managed by our competitors."
Bair heeded the advice from her firm’s principals and collected information on the laws and regulations of three countries: Norway, Sweden, and Denmark. So far, all of the investors expressing interest in the Quaker Fund are from these areas. Based on her research, Bair decides the following policies are appropriate for the fund:
Note: Laws mentioned below are assumed for illustrative purposes.
• For clients located in Norway the fund will institute transaction crossing, since, unlike in Holland, the practice is not prohibited by securities laws or regulations. The process will involve internally matching buy and sell orders from Norwegian clients whenever possible. This will reduce brokerage fees and improve the fund’s overall performance.
• For clients located in Denmark, account statements that include the value of the clients’ holdings, number of trades, and average daily trading volume will be generated on a monthly basis as required by Denmark’s securities regulators, even though the laws in Holland only require such reports to be generated on a quarterly basis.
• For clients located in Sweden, the fund will not disclose differing levels of service that are available for investors based upon the size of their investment. This policy is consistent with the laws and regulations in Holland. Sweden’s securities regulations do not cover this type of situation.
Three months after the inception of the fund, its market value has grown from $200 million to $300 million and Bair’s performance has earned her a quarter-end bonus. Since it is now the end of the quarter, Bair is participating in conference calls with companies in her fund. Bair calls into the conference number for Swift Petroleum. The meeting doesn’t start for another five minutes, however, and as Bair waits, she hears the CEO and CFO of Swift discussing the huge earnings restatement that will be necessary for the financial statement from the previous quarter. The restatement will not be announced until the year’s end, six months from now. Bair does not remind the officers that she can hear their conversation. Once the call has ended, Bair rushes to BIC’s compliance officer to inform him of what she has learned during the conference call. Bair ignores the fact that two members of the firm’s investment banking division are in the office while she is telling the compliance officer what happened on the conference call. The investment bankers then proceed to sell their personal holdings of Swift Petroleum stock. After her meeting, Bair sells the Quaker Fund’s holdings of Swift Petroleum stock.
After her conference call with Swift Petroleum, Bair should have:
- A . included the information in a research report to make it public before selling the holdings from the Quaker Fund.
- B . attempted to have Swift publicly disclose the earnings restatement before informing the compliance officer of the information.
- C . informed the compliance officer and then publicly disclosed the information in a research report before selling the Swift stock.
B
Explanation:
According co Standard 11(A) Material Nonpublic Information, it is appropriate procedure for the member or candidate who possesses material nonpublic information to first attempt to have the subject company disclose the information publicly themselves. If this is not possible, then the appropriate supervisor and/or compliance officer should be made aware of the situation- (Study Session 11 LOS 1 .b)
Theresa Bair, CFA, a portfolio manager for Brinton Investment Company (BIC), has recently been promoted to lead portfolio manager for her firm’s new small capitalization closed-end equity fund, the Quaker Fund. BIC is an asset management firm headquartered in Holland with regional offices in several other European countries.
After accepting the position, Bair received a letter from the three principals of BIC. The letter congratulated Bair on her accomplishment and new position with the firm and also provided some guidance as to her new role and the firm’s expectations.
Among other things, the letter stated the following:
"Because our firm is based in Holland and you will have clients located in many European countries, it is essential that you determine what laws and regulations are applicable to the management of this new fund. It is your responsibility to obtain this knowledge and comply with appropriate regulations. This is the first time we have offered a fund devoted solely to small capitalization securities, so we will observe your progress carefully. You will likely need to arrange for our sister companies to quietly buy and sell Quaker Fund shares over the first month of operations. This will provide sufficient price support to allow the fund to trade closer to its net asset value than other small-cap closed-end funds. Because these funds generally trade at a discount to net asset value, if our fund trades close to its net asset value, the market may perceive it as more desirable than similar funds managed by our competitors."
Bair heeded the advice from her firm’s principals and collected information on the laws and regulations of three countries: Norway, Sweden, and Denmark. So far, all of the investors expressing interest in the Quaker Fund are from these areas. Based on her research, Bair decides the following policies are appropriate for the fund:
Note: Laws mentioned below are assumed for illustrative purposes.
• For clients located in Norway the fund will institute transaction crossing, since, unlike in Holland, the practice is not prohibited by securities laws or regulations. The process will involve internally matching buy and sell orders from Norwegian clients whenever possible. This will reduce brokerage fees and improve the fund’s overall performance.
• For clients located in Denmark, account statements that include the value of the clients’ holdings, number of trades, and average daily trading volume will be generated on a monthly basis as required by Denmark’s securities regulators, even though the laws in Holland only require such reports to be generated on a quarterly basis.
• For clients located in Sweden, the fund will not disclose differing levels of service that are available for investors based upon the size of their investment. This policy is consistent with the laws and regulations in Holland. Sweden’s securities regulations do not cover this type of situation.
Three months after the inception of the fund, its market value has grown from $200 million to $300 million and Bair’s performance has earned her a quarter-end bonus. Since it is now the end of the quarter, Bair is participating in conference calls with companies in her fund. Bair calls into the conference number for Swift Petroleum. The meeting doesn’t start for another five minutes, however, and as Bair waits, she hears the CEO and CFO of Swift discussing the huge earnings restatement that will be necessary for the financial statement from the previous quarter. The restatement will not be announced until the year’s end, six months from now. Bair does not remind the officers that she can hear their conversation. Once the call has ended, Bair rushes to BIC’s compliance officer to inform him of what she has learned during the conference call. Bair ignores the fact that two members of the firm’s investment banking division are in the office while she is telling the compliance officer what happened on the conference call. The investment bankers then proceed to sell their personal holdings of Swift Petroleum stock. After her meeting, Bair sells the Quaker Fund’s holdings of Swift Petroleum stock.
By selling their personal holdings of Swift Petroleum, did the employees of BIC’s investment banking division violate any CFA Institute Standards of Professional Conduct?
- A . Yes, because they breached their fiduciary duty and were disloyal to the clients of the Quaker Fund.
- B . Yes, because they did not maintain the confidentiality of the information they overheard in the compliance officer’s office.
- C . Yes, because they knowingly traded on information that, if it had been publicly known, would have affected the price of Swift stock.
C
Explanation:
Standard 11(A) Material Nonpublic Information prohibits trading on material nonpublic information in all situations. The investment bankers should have known char the information was material and nonpublic and have thus violated Standard 11(A) by trading on the information. (Study Session 1, LOS l.b)
Theresa Bair, CFA, a portfolio manager for Brinton Investment Company (BIC), has recently been promoted to lead portfolio manager for her firm’s new small capitalization closed-end equity fund, the Quaker Fund. BIC is an asset management firm headquartered in Holland with regional offices in several other European countries.
After accepting the position, Bair received a letter from the three principals of BIC. The letter congratulated Bair on her accomplishment and new position with the firm and also provided some guidance as to her new role and the firm’s expectations.
Among other things, the letter stated the following:
"Because our firm is based in Holland and you will have clients located in many European countries, it is essential that you determine what laws and regulations are applicable to the management of this new fund. It is your responsibility to obtain this knowledge and comply with appropriate regulations. This is the first time we have offered a fund devoted solely to small capitalization securities, so we will observe your progress carefully. You will likely need to arrange for our sister companies to quietly buy and sell Quaker Fund shares over the first month of operations. This will provide sufficient price support to allow the fund to trade closer to its net asset value than other small-cap closed-end funds. Because these funds generally trade at a discount to net asset value, if our fund trades close to its net asset value, the market may perceive it as more desirable than similar funds managed by our competitors."
Bair heeded the advice from her firm’s principals and collected information on the laws and regulations of three countries: Norway, Sweden, and Denmark. So far, all of the investors expressing interest in the Quaker Fund are from these areas. Based on her research, Bair decides the following policies are appropriate for the fund:
Note: Laws mentioned below are assumed for illustrative purposes.
• For clients located in Norway the fund will institute transaction crossing, since, unlike in Holland, the practice is not prohibited by securities laws or regulations. The process will involve internally matching buy and sell orders from Norwegian clients whenever possible. This will reduce brokerage fees and improve the fund’s overall performance.
• For clients located in Denmark, account statements that include the value of the clients’ holdings, number of trades, and average daily trading volume will be generated on a monthly basis as required by Denmark’s securities regulators, even though the laws in Holland only require such reports to be generated on a quarterly basis.
• For clients located in Sweden, the fund will not disclose differing levels of service that are available for investors based upon the size of their investment. This policy is consistent with the laws and regulations in Holland. Sweden’s securities regulations do not cover this type of situation.
Three months after the inception of the fund, its market value has grown from $200 million to $300 million and Bair’s performance has earned her a quarter-end bonus. Since it is now the end of the quarter, Bair is participating in conference calls with companies in her fund. Bair calls into the conference number for Swift Petroleum. The meeting doesn’t start for another five minutes, however, and as Bair waits, she hears the CEO and CFO of Swift discussing the huge earnings restatement that will be necessary for the financial statement from the previous quarter. The restatement will not be announced until the year’s end, six months from now. Bair does not remind the officers that she can hear their conversation. Once the call has ended, Bair rushes to BIC’s compliance officer to inform him of what she has learned during the conference call. Bair ignores the fact that two members of the firm’s investment banking division are in the office while she is telling the compliance officer what happened on the conference call. The investment
bankers then proceed to sell their personal holdings of Swift Petroleum stock. After her meeting, Bair sells the Quaker Fund’s holdings of Swift Petroleum stock.
By selling the Quaker Fund’s shares of Swift Petroleum, did Bair violate any CFA Institute Standards of Professional Conduct?
- A . Yes, Bair violated Standard II Integrity of Capital Markets.
- B . No, because she ensured public dissemination of the earnings restatement information before she traded the shares.
- C . Yes, because waiting to trade the stock would severely disadvantage investors in her fund and would have violated her duty of loyalty to her clients.
A
Explanation:
The large earnings restatement is certainly material information. Disclosing the information before the conference call does not make the information public even if several analysts overheard the information. Disclosing the information to her compliance officer also does not make the information public. Therefore, Bair has traded on the basis of material nonpublic information and is in violation of Standard 11(A). (Study Session l.LOS l.b)
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’s 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 U.S. 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. She feels 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 that 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. 1 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 twelve years. My clients have been very satisfied with my past performance and will likely be very 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 charter-holders 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, since one of the clients requesting the materials, Craig Adams, is about to inherit S20 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.
B
Explanation:
Mackley has appropriately disclosed the referral arrangement to clients and prospects but the nature of the arrangement itself is a violation of Standard VII(A) Conduct as Members and Candidates in the CFA Program. According to this Standard, members and candidates are prohibited from activities that compromise the integrity of CFA Institute. Mackley has misused her authority to select companies to make presentations to her local society. She only selects Kern & Associates to make presentations and excludes their competitors in order to generate referrals for her business. This reflects poorly on the local society and CFA Institute. Mackley may have also violated Standard 1(D) Misconduct by engaging in behavior that reflects poorly on her professional reputation.
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’s 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 U.S. 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. She feels 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 that 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. 1 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 twelve years. My clients have been very satisfied with my past performance and will likely be very 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 charter-holders 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, since one of the clients requesting the materials, Craig Adams, is about to inherit S20 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.
Were any CFA Institute Standards of Professional Conduct violated in conjunction with Welch’s report on InnerTech and Mackley’s purchase of InnerTech stock? Welch Mackley
- A . No Yes
- B . Yes No
- C . Yes Yes
B
Explanation:
Welch violated Standard V(C) Record Retention by failing to maintain adequate records to support his investment recommendations. In the absence of other regulation, CFA Institute recommends keeping such records for a minimum of seven years. Certainly, one week is not an adequate record retention policy. Mackley violated Standard III(C) Suitability by purchasing the stock for all clients with a net worth greater than $6 million. It does not matter that the clients are later happy with the stock performance. Mackley should have evaluated the stock purchase for all of her accounts, not just the larger ones, in terms of each accounts objectives and constraints as stated in their investment policy statements. (Study Session 1, LOS l.b)
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’s 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 U.S. 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. She feels 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 that 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. 1 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 twelve years. My clients have been very satisfied with my past performance and will likely be very 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 charter-holders 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, since one of the clients requesting the materials, Craig Adams, is about to inherit S20 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.
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 . accept the flowers and chocolates and the use of the condo without disclosing the gifts to her employer.
- B . not accept the flowers and chocolates or the use of the condo without disclosing the gifts to her employer.
- C . accept the flowers and chocolates but may not accept the use of the condo without first receiving written approval from her employer.
C
Explanation:
According to Standard IV(B) Additional Compensation Arrangements, members and candidates are not to accept additional compensation (monetary or non-monetary) unless they obtain written consent from all parties, including their employer. The use of the condo, however, can be considered additional compensation and presents a potential conflict of interest, if Mackley agrees to the arrangement. Thus, it must be disclosed to the employer and written consent must be obtained from the employer. Standard 1(B) Independence and Objectivity notes that client gifts must be disclosed to the employer before being accepted. (Study Session 1, LOS l.b)
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’s 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 U.S. 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. She feels 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 that 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. 1 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 twelve years. My clients have been very satisfied with my past performance and will likely be very 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 charter-holders 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, since one of the clients requesting the materials, Craig Adams, is about to inherit S20 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 Mackley’s signature at the end of her brochure violate any CFA Institute Standards of Professional Conduct?
- A . No.
- B . Yes, because "a Chartered Financial Analyst" should not be written in bold.
- C . Yes, because "a Chartered Financial Analyst" should not be written in bold and should not include "a."
C
Explanation:
According to Standard V11(B) Reference to CFA Institute, the CFA Designation, and the CFA Program, proper use of the designation would stipulate that CFA and Chartered Financial Analyst always be used as adjectives. Also, the designation may not be written in bold type. (Study Session 1, LOS l.b)
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’s 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 U.S. 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. She feels 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 that 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. 1 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 twelve years. My clients have been very satisfied with my past performance and will likely be very 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 charter-holders 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, since one of the clients requesting the materials, Craig Adams, is about to inherit S20 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.
In her marketing brochure, did Mackley violate any CFA Institute Standards of Professional Conduct in her reference to her investment performance or her reference to the CFA Program? Performance CFA Program
- A . Yes Yes
- B . No Yes
- C . Yes No
B
Explanation:
In reference to her investment performance, Mackley’s statement is appropriate and does not violate any CFA Institute Standards of Professional Conduct. It is okay to make statements about past performance as long as they are factual and not misleading. She does not guarantee future performance but instead indicates that her clients "will likely be very satisfied," which is an acceptable way to phrase future expectations.
However, in reference to the CFA Program, she does violate the standards. According to Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program, members and candidates must not exaggerate the implication of the CFA designation or misrepresent the nature of the CFA program. In her statement, Mackley has somewhat exaggerated the implication of the CFA designation by stating that her participation in the CFA Program has contributed significantly to her investment experience. This could potentially mislead clients into thinking that the CFA designation ensures investment success, which is not guaranteed.
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’s 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 U.S. 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. She feels 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 that 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. 1 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 twelve years. My clients have been very satisfied with my past performance and will likely be very 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 charter-holders 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, since one of the clients requesting the materials, Craig Adams, is about to inherit S20 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.
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.
A
Explanation:
Mackley asking Welch to recreate the supporting research for the InnerTech report does not violate any CFA Institute Standards of Professional Conduct. There is no direct conflict of interest between Mackley and Welch due to this request. The conflict of interest would have occurred if the request was made for personal gain or to distort the market view in some way, which is not suggested in the scenario.
Additionally, Mackley does not violate any standards related to confidentiality either. She has not disclosed any specific confidential client information to Welch. She only mentions that the request for the documents is important due to the significant potential investment from a client. It is normal practice to share such level of information in business while trying to retrieve important documents.
Rowan Brothers is a full service investment firm offering portfolio management and investment banking services. For the last ten years, Aaron King, CFA, has managed individual client portfolios for Rowan Brothers, most of which are trust accounts over which King has full discretion. One of King’s clients, Shelby Pavlica, is a widow in her late 50s whose husband died and left assets of over $7 million in a trust, for which she is the only beneficiary.
Pavlica’s three children are appalled at their mother’s spending habits and have called a meeting with King to discuss their concerns. They inform King that their mother is living too lavishly to leave much for them or Pavlica’s grandchildren upon her death. King acknowledges their concerns and informs them that, on top of her ever-increasing spending, Pavlica has recently been diagnosed with a chronic illness. Since the diagnosis could indicate a considerable increase in medical spending, he will need to increase the risk of the portfolio to generate sufficient return to cover the medical bills and spending and still maintain the principal. King restructures the portfolio accordingly and then meets with Pavlica a week later to discuss how he has altered the investment strategy, which was previously revised only three months earlier in their annual meeting.
During the meeting with Pavlica, Kang explains his reasoning tor altering the portfolio allocation but does not mention the meeting with Pavlica’s children. Pavlica agrees that it is probably the wisest decision and accepts the new portfolio allocation adding that she will need to tell her children about her illness, so they will understand why her medical spending requirements will increase in the near future. She admits to King that her children have been concerned about her spending. King assures her that the new investments will definitely allow her to maintain her lifestyle and meet her higher medical spending needs.
One of the investments selected by King is a small allocation in a private placement offered to him by a brokerage firm that often makes trades for King’s portfolios. The private placement is an equity investment in ShaleCo, a small oil exploration company. In order to make the investment, King sold shares of a publicly traded biotech firm, VNC Technologies. King also held shares of VNC, a fact that he has always disclosed to clients before purchasing VNC for their accounts. An hour before submitting the sell order for the VNC shares in Pavlica’s trust account. King placed an order to sell a portion of his position in VNC stock. By the time Pavlica’s order was sent to the trading floor, the price of VNC had risen, allowing Pavlica to sell her shares at a better price than received by King.
Although King elected not to take any shares in the private placement, he purchased positions for several of his clients, for whom the investment was deemed appropriate in terms of the clients* objectives and constraints as well as the existing composition of the portfolios. In response to the investment support, ShaleCo appointed King to their board of directors. Seeing an opportunity to advance his career while also protecting the value of his clients’ investments in the company, King gladly accepted the offer. King decided that since serving on the board of ShaleCo is in his clients’ best interest, it is not necessary to disclose the directorship to his clients or his employer.
For his portfolio management services, King charges a fixed percentage fee based on the value of assets under management. All fees charged and other terms of service are disclosed to clients as well as prospects. In the past month, however. Rowan Brothers has instituted an incentive program for its portfolio managers. Under the program, the firm will award an all-expense-paid vacation to the Cayman islands for any portfolio manager who generates two consecutive quarterly returns for his clients in excess of 10%. King updates his marketing literature to ensure that his prospective clients are fully aware of his compensation arrangements, but he does not contact current clients to make them aware of the newly created performance incentive.
In discussing Pavlica’s spending and medical condition with Pavlica’s children, did King violate any CFA Institute Standards of Professional Conduct?
- A . No.
- B . Yes, because he violated his client’s confidentiality.
- C . Yes, because he created a conflict of interest between himself and his employer.
B
Explanation:
In the meeting with Pavlica’s children, King disclosed Pavlica’s medical condition. Since King learned this information as a result of his professional relationship with the client, he has a ducy to keep it confidential, even from her children. By breaking the confidentiality, King has violated Standard III(E) Preservation of Confidentiality. (Study Session 1, LOS l.b)
Rowan Brothers is a full service investment firm offering portfolio management and investment banking services. For the last ten years, Aaron King, CFA, has managed individual client portfolios for Rowan Brothers, most of which are trust accounts over which King has full discretion. One of King’s clients, Shelby Pavlica, is a widow in her late 50s whose husband died and left assets of over $7 million in a trust, for which she is the only beneficiary.
Pavlica’s three children are appalled at their mother’s spending habits and have called a meeting with King to discuss their concerns. They inform King that their mother is living too lavishly to leave much for them or Pavlica’s grandchildren upon her death. King acknowledges their concerns and informs them that, on top of her ever-increasing spending, Pavlica has recently been diagnosed with a chronic illness. Since the diagnosis could indicate a considerable increase in medical spending, he will need to increase the risk of the portfolio to generate sufficient return to cover the medical bills and spending and still maintain the principal. King restructures the portfolio accordingly and then meets with Pavlica a week later to discuss how he has altered the investment strategy, which was previously revised only three months earlier in their annual meeting.
During the meeting with Pavlica, Kang explains his reasoning tor altering the portfolio allocation but does not mention the meeting with Pavlica’s children. Pavlica agrees that it is probably the wisest decision and accepts the new portfolio allocation adding that she will need to tell her children about her illness, so they will understand why her medical spending requirements will increase in the near future. She admits to King that her children have been concerned about her spending. King assures her that the new investments will definitely allow her to maintain her lifestyle and meet her higher medical spending needs.
One of the investments selected by King is a small allocation in a private placement offered to him by a brokerage firm that often makes trades for King’s portfolios. The private placement is an equity investment in ShaleCo, a small oil exploration company. In order to make the investment, King sold shares of a publicly traded biotech firm, VNC Technologies. King also held shares of VNC, a fact that he has always disclosed to clients before purchasing VNC for their accounts. An hour before submitting the sell order for the VNC shares in Pavlica’s trust account. King placed an order to sell a portion of his position in VNC stock. By the time Pavlica’s order was sent to the trading floor, the price of VNC had risen, allowing Pavlica to sell her shares at a better price than received by King.
Although King elected not to take any shares in the private placement, he purchased positions for several of his clients, for whom the investment was deemed appropriate in terms of the clients* objectives and constraints as well as the existing composition of the portfolios. In response to the investment support, ShaleCo appointed King to their board of directors. Seeing an opportunity to advance his career while also protecting the value of his clients’ investments in the company, King gladly accepted the offer. King decided that since serving on the board of ShaleCo is in his clients’ best interest, it is not necessary to disclose the directorship to his clients or his employer.
For his portfolio management services, King charges a fixed percentage fee based on the value of assets under management. All fees charged and other terms of service are disclosed to clients as well as prospects. In the past month, however. Rowan Brothers has instituted an incentive program for its portfolio managers. Under the program, the firm will award an all-expense-paid vacation to the Cayman islands for any portfolio manager who generates two consecutive quarterly returns for his clients in excess of 10%. King updates his marketing literature to ensure that his prospective clients are fully aware of his compensation arrangements, but he does not contact current clients to make them aware of the newly created performance incentive.
In reallocating the portfolio after the meeting with Pavlica’s children, did King violate any CFA Institute Standards of Professional Conduct?
- A . Yes, he violated Standard III(A) Loyalty, Prudence, and Care.
- B . No, because he had a reasonable basis for making adjustments to the portfolio.
- C . No, because Pavlica agreed with the investment choices and King has discretion over the portfolio.
C
Explanation:
As per CFA Institute’s Standard III(C): Suitability, when members or candidates are in an advisory relationship with a client, they must:
Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly.
Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action.
Judge the suitability of investments in the context of the client’s total portfolio.
When King learned of the impending increase in Pavlica’s medical expenses due to her diagnosis, he had a reasonable basis to adjust the portfolio allocation to generate sufficient returns to cover these expenses. Furthermore, he informed Pavlica of his decision to restructure her portfolio and she agreed with his investment strategy. Since King had discretionary authority over Pavlica’s account and he made the changes with her consent, it appears he has not violated the CFA Institute’s Standards of Professional Conduct based on the information provided. However, it’s important to note that King should continue to assess the suitability of the investments in the context of Pavlica’s overall portfolio and circumstances.
Rowan Brothers is a full service investment firm offering portfolio management and investment banking services. For the last ten years, Aaron King, CFA, has managed individual client portfolios for Rowan Brothers, most of which are trust accounts over which King has full discretion. One of King’s clients, Shelby Pavlica, is a widow in her late 50s whose husband died and left assets of over $7 million in a trust, for which she is the only beneficiary.
Pavlica’s three children are appalled at their mother’s spending habits and have called a meeting with King to discuss their concerns. They inform King that their mother is living too lavishly to leave much for them or Pavlica’s grandchildren upon her death. King acknowledges their concerns and informs them that, on top of her ever-increasing spending, Pavlica has recently been diagnosed with a chronic illness. Since the diagnosis could indicate a considerable increase in medical spending, he will need to increase the risk of
the portfolio to generate sufficient return to cover the medical bills and spending and still maintain the principal. King restructures the portfolio accordingly and then meets with Pavlica a week later to discuss how he has altered the investment strategy, which was previously revised only three months earlier in their annual meeting.
During the meeting with Pavlica, Kang explains his reasoning tor altering the portfolio allocation but does not mention the meeting with Pavlica’s children. Pavlica agrees that it is probably the wisest decision and accepts the new portfolio allocation adding that she will need to tell her children about her illness, so they will understand why her medical spending requirements will increase in the near future. She admits to King that her children have been concerned about her spending. King assures her that the new investments will definitely allow her to maintain her lifestyle and meet her higher medical spending needs.
One of the investments selected by King is a small allocation in a private placement offered to him by a brokerage firm that often makes trades for King’s portfolios. The private placement is an equity investment in ShaleCo, a small oil exploration company. In order to make the investment, King sold shares of a publicly traded biotech firm, VNC Technologies. King also held shares of VNC, a fact that he has always disclosed to clients before purchasing VNC for their accounts. An hour before submitting the sell order for the VNC shares in Pavlica’s trust account. King placed an order to sell a portion of his position in VNC stock. By the time Pavlica’s order was sent to the trading floor, the price of VNC had risen, allowing Pavlica to sell her shares at a better price than received by King.
Although King elected not to take any shares in the private placement, he purchased positions for several of his clients, for whom the investment was deemed appropriate in terms of the clients* objectives and constraints as well as the existing composition of the portfolios. In response to the investment support, ShaleCo appointed King to their board of directors. Seeing an opportunity to advance his career while also protecting the value of his clients’ investments in the company, King gladly accepted the offer. King decided that since serving on the board of ShaleCo is in his clients’ best interest, it is not necessary to disclose the directorship to his clients or his employer.
For his portfolio management services, King charges a fixed percentage fee based on the value of assets under management. All fees charged and other terms of service are disclosed to clients as well as prospects. In the past month, however. Rowan Brothers has instituted an incentive program for its portfolio managers. Under the program, the firm will award an all-expense-paid vacation to the Cayman islands for any portfolio manager who generates two consecutive quarterly returns for his clients in excess of 10%. King updates his marketing literature to ensure that his prospective clients are fully aware of his compensation arrangements, but he does not contact current clients to make them aware of the newly created performance incentive.
In his statements to Pavlica after the reallocation, did King violate any CFA Institute Standards of Professional Conduct?
- A . No.
- B . Yes, because he misrepresented the expected performance of the strategy.
- C . Yes, because he met with her before their annual meeting which is unfair to clients who only meet with King annually.
A
Explanation:
According to the CFA Institute’s Standards of Professional Conduct, King did not violate any rules in his statements to Pavlica after the reallocation.
Standard V(B) Communication with Clients and Prospective Clients states that "Members and Candidates must disclose to clients and prospective clients the basic format and general principles of the investment processes used to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes."
In this case, King met with Pavlica after making changes to her portfolio, which were in response to her increased spending and diagnosis with a chronic illness. King explained his reasoning for altering the portfolio allocation and reassured Pavlica that the new investments will allow her to maintain her lifestyle and meet her higher medical spending needs. As per the information given, he did not misrepresent the expected performance of the strategy, nor was there any information suggesting that he met with Pavlica earlier than he should have. Therefore, based on the information provided, King did not violate any CFA Institute Standards of Professional Conduct in his statements to Pavlica.
Rowan Brothers is a full service investment firm offering portfolio management and investment banking services. For the last ten years, Aaron King, CFA, has managed individual client portfolios for Rowan Brothers, most of which are trust accounts over which King has full discretion. One of King’s clients, Shelby Pavlica, is a widow in her late 50s whose husband died and left assets of over $7 million in a trust, for which she is the only beneficiary.
Pavlica’s three children are appalled at their mother’s spending habits and have called a meeting with King to discuss their concerns. They inform King that their mother is living too lavishly to leave much for them or Pavlica’s grandchildren upon her death. King acknowledges their concerns and informs them that, on top
of her ever-increasing spending, Pavlica has recently been diagnosed with a chronic illness. Since the diagnosis could indicate a considerable increase in medical spending, he will need to increase the risk of the portfolio to generate sufficient return to cover the medical bills and spending and still maintain the principal. King restructures the portfolio accordingly and then meets with Pavlica a week later to discuss how he has altered the investment strategy, which was previously revised only three months earlier in their annual meeting.
During the meeting with Pavlica, Kang explains his reasoning tor altering the portfolio allocation but does not mention the meeting with Pavlica’s children. Pavlica agrees that it is probably the wisest decision and accepts the new portfolio allocation adding that she will need to tell her children about her illness, so they will understand why her medical spending requirements will increase in the near future. She admits to King that her children have been concerned about her spending. King assures her that the new investments will definitely allow her to maintain her lifestyle and meet her higher medical spending needs.
One of the investments selected by King is a small allocation in a private placement offered to him by a brokerage firm that often makes trades for King’s portfolios. The private placement is an equity investment in ShaleCo, a small oil exploration company. In order to make the investment, King sold shares of a publicly traded biotech firm, VNC Technologies. King also held shares of VNC, a fact that he has always disclosed to clients before purchasing VNC for their accounts. An hour before submitting the sell order for the VNC shares in Pavlica’s trust account. King placed an order to sell a portion of his position in VNC stock. By the time Pavlica’s order was sent to the trading floor, the price of VNC had risen, allowing Pavlica to sell her shares at a better price than received by King.
Although King elected not to take any shares in the private placement, he purchased positions for several of his clients, for whom the investment was deemed appropriate in terms of the clients* objectives and constraints as well as the existing composition of the portfolios. In response to the investment support, ShaleCo appointed King to their board of directors. Seeing an opportunity to advance his career while also protecting the value of his clients’ investments in the company, King gladly accepted the offer. King decided that since serving on the board of ShaleCo is in his clients’ best interest, it is not necessary to disclose the directorship to his clients or his employer.
For his portfolio management services, King charges a fixed percentage fee based on the value of assets under management. All fees charged and other terms of service are disclosed to clients as well as prospects. In the past month, however. Rowan Brothers has instituted an incentive program for its portfolio managers. Under the program, the firm will award an all-expense-paid vacation to the Cayman islands for any portfolio manager who generates two consecutive quarterly returns for his clients in excess of 10%. King updates his marketing literature to ensure that his prospective clients are fully aware of his compensation arrangements, but he does not contact current clients to make them aware of the newly created performance incentive.
Did King’s actions with regard to allocating the private placement and the sale of VNC stock violate any
CFA Institute Standards of Professional Conduct?
Private placement VNC sale
- A . Yes Yes
- B . No No
- C . No Yes
A
Explanation:
Regarding the private placement: According to Standard VI(B) Priority of Transactions, investment transactions for clients must have priority over investment transactions in which a Member or Candidate is the beneficial owner. King allocated shares of the private placement to his clients, however, the situation is complicated by his appointment to the board of ShaleCo. Standard IV(A) Loyalty requires Members and Candidates to act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests. By accepting the directorship at ShaleCo without disclosing it to his employer or his clients, King violated this standard.
Regarding the VNC sale: King violated Standard VI(B) Priority of Transactions by selling his own VNC shares before selling Pavlica’s. Even though Pavlica ended up receiving a better price, King’s personal transaction still should have been executed after the client’s. This is to prevent the possibility of a conflict of interest and to ensure that clients are always prioritized above the financial professionals who serve them.
Rowan Brothers is a full service investment firm offering portfolio management and investment banking services. For the last ten years, Aaron King, CFA, has managed individual client portfolios for Rowan Brothers, most of which are trust accounts over which King has full discretion. One of King’s clients, Shelby Pavlica, is a widow in her late 50s whose husband died and left assets of over $7 million in a trust, for which she is the only beneficiary.
Pavlica’s three children are appalled at their mother’s spending habits and have called a meeting with King to discuss their concerns. They inform King that their mother is living too lavishly to leave much for them or Pavlica’s grandchildren upon her death. King acknowledges their concerns and informs them that, on top of her ever-increasing spending, Pavlica has recently been diagnosed with a chronic illness. Since the diagnosis could indicate a considerable increase in medical spending, he will need to increase the risk of the portfolio to generate sufficient return to cover the medical bills and spending and still maintain the principal. King restructures the portfolio accordingly and then meets with Pavlica a week later to discuss how he has altered the investment strategy, which was previously revised only three months earlier in their annual meeting.
During the meeting with Pavlica, Kang explains his reasoning tor altering the portfolio allocation but does not mention the meeting with Pavlica’s children. Pavlica agrees that it is probably the wisest decision and accepts the new portfolio allocation adding that she will need to tell her children about her illness, so they will understand why her medical spending requirements will increase in the near future. She admits to King that her children have been concerned about her spending. King assures her that the new investments will definitely allow her to maintain her lifestyle and meet her higher medical spending needs.
One of the investments selected by King is a small allocation in a private placement offered to him by a brokerage firm that often makes trades for King’s portfolios. The private placement is an equity investment in ShaleCo, a small oil exploration company. In order to make the investment, King sold shares of a publicly traded biotech firm, VNC Technologies. King also held shares of VNC, a fact that he has always disclosed to clients before purchasing VNC for their accounts. An hour before submitting the sell order for the VNC shares in Pavlica’s trust account. King placed an order to sell a portion of his position in VNC stock. By the time Pavlica’s order was sent to the trading floor, the price of VNC had risen, allowing Pavlica to sell her shares at a better price than received by King.
Although King elected not to take any shares in the private placement, he purchased positions for several of his clients, for whom the investment was deemed appropriate in terms of the clients* objectives and constraints as well as the existing composition of the portfolios. In response to the investment support, ShaleCo appointed King to their board of directors. Seeing an opportunity to advance his career while also protecting the value of his clients’ investments in the company, King gladly accepted the offer. King decided that since serving on the board of ShaleCo is in his clients’ best interest, it is not necessary to disclose the directorship to his clients or his employer.
For his portfolio management services, King charges a fixed percentage fee based on the value of assets under management. All fees charged and other terms of service are disclosed to clients as well as prospects. In the past month, however. Rowan Brothers has instituted an incentive program for its portfolio managers. Under the program, the firm will award an all-expense-paid vacation to the Cayman islands for any portfolio manager who generates two consecutive quarterly returns for his clients in excess of 10%. King updates his marketing literature to ensure that his prospective clients are fully aware of his compensation arrangements, but he does not contact current clients to make them aware of the newly created performance incentive.
According to the CFA Institute Standards of Professional Conduct, which of the following statements is correct concerning King’s directorship with ShaleCo?
- A . King may not accept the directorship since it creates a conflict of interest.
- B . King may accept the directorship as long as it is disclosed to clients and prospects.
- C . King may accept the directorship as long as it is disclosed to his employer, clients, and prospects.
C
Explanation:
King may accept the directorship even chough it may create a potential conflict of interest as long as the conflict is prominently disclosed in understandable language co all clients and prospects as well as to his employer. According to Standard VI(A) Disclosure of Conflicts, such disclosure is necessary so that all related parties can assess the impact the potential conflict will have on Kings professional acrivities. Additionally, the directorship will provide additional compensation that must be approved ahead of his assuming the position. (Study Session 1, LOS Lb)
Rowan Brothers is a full service investment firm offering portfolio management and investment banking services. For the last ten years, Aaron King, CFA, has managed individual client portfolios for Rowan Brothers, most of which are trust accounts over which King has full discretion. One of King’s clients, Shelby
Pavlica, is a widow in her late 50s whose husband died and left assets of over $7 million in a trust, for which she is the only beneficiary.
Pavlica’s three children are appalled at their mother’s spending habits and have called a meeting with King to discuss their concerns. They inform King that their mother is living too lavishly to leave much for them or Pavlica’s grandchildren upon her death. King acknowledges their concerns and informs them that, on top of her ever-increasing spending, Pavlica has recently been diagnosed with a chronic illness. Since the diagnosis could indicate a considerable increase in medical spending, he will need to increase the risk of the portfolio to generate sufficient return to cover the medical bills and spending and still maintain the principal. King restructures the portfolio accordingly and then meets with Pavlica a week later to discuss how he has altered the investment strategy, which was previously revised only three months earlier in their annual meeting.
During the meeting with Pavlica, Kang explains his reasoning tor altering the portfolio allocation but does not mention the meeting with Pavlica’s children. Pavlica agrees that it is probably the wisest decision and accepts the new portfolio allocation adding that she will need to tell her children about her illness, so they will understand why her medical spending requirements will increase in the near future. She admits to King that her children have been concerned about her spending. King assures her that the new investments will definitely allow her to maintain her lifestyle and meet her higher medical spending needs.
One of the investments selected by King is a small allocation in a private placement offered to him by a brokerage firm that often makes trades for King’s portfolios. The private placement is an equity investment in ShaleCo, a small oil exploration company. In order to make the investment, King sold shares of a publicly traded biotech firm, VNC Technologies. King also held shares of VNC, a fact that he has always disclosed to clients before purchasing VNC for their accounts. An hour before submitting the sell order for the VNC shares in Pavlica’s trust account. King placed an order to sell a portion of his position in VNC stock. By the time Pavlica’s order was sent to the trading floor, the price of VNC had risen, allowing Pavlica to sell her shares at a better price than received by King.
Although King elected not to take any shares in the private placement, he purchased positions for several of his clients, for whom the investment was deemed appropriate in terms of the clients* objectives and constraints as well as the existing composition of the portfolios. In response to the investment support, ShaleCo appointed King to their board of directors. Seeing an opportunity to advance his career while also protecting the value of his clients’ investments in the company, King gladly accepted the offer. King decided that since serving on the board of ShaleCo is in his clients’ best interest, it is not necessary to disclose the directorship to his clients or his employer.
For his portfolio management services, King charges a fixed percentage fee based on the value of assets under management. All fees charged and other terms of service are disclosed to clients as well as prospects. In the past month, however. Rowan Brothers has instituted an incentive program for its portfolio managers. Under the program, the firm will award an all-expense-paid vacation to the Cayman islands for any portfolio manager who generates two consecutive quarterly returns for his clients in excess of 10%. King updates his marketing literature to ensure that his prospective clients are fully aware of his compensation arrangements, but he does not contact current clients to make them aware of the newly created performance incentive.
Does the fee structure at Rowan Brothers and King’s disclosure of the compensation structure violate any
CFA Institute Standards of Professional Conduct?
Fee structure Disclosure
- A . No Yes
- B . Yes No
- C . No No
A
Explanation:
Standard VI(A) Disclosure of Conflicts. Performance compensation such as the one in effect at Rowan Brothers encourages portfolio managers ro act in their own interests instead of their clients’ best interest (a potential conflict of interest) and encourages them to take additional risks to attain the 10% goal. Therefore, this compensation scheme must be totally disclosed to all clients and prospects. By not disclosing the fees to current clients (he only discloses the new fee structure to prospective clients). King has violated the Standard. It is not a violation to have such a compensation program, however, as long as it is disclosed. (Study Session 1, LOS l.b)
Johnny Bracco, CFA, is a portfolio manager in the trust department of Canada National (CNL) in Toronto. CNL is a financial conglomerate with many divisions. In addition to the trust department, the firm sells financial products and has a research department, a trading desk, and an investment banking division. Part of the company’s operating procedures manual contains detailed information on how the firm allocates shares in oversubscribed stock offerings. Allocation is effected on a pro rata basis based upon factors such as the size of a client’s portfolio, suitability, and previous notification to participate in IPOs. Additionally, company policy discloses to clients that any trade needs to meet a minimum transaction size in an effort to control trading costs and to comply with best execution procedures.
One of Bracco’s trust accounts is the Carobilo family trust, which contains a portion of nondiscretionary funds managed by Stephen Carobilo. Carobilo has a friend who runs a brokerage firm called First Trades, to which Carobilo tells Bracco to direct trades from the nondiscretionary accounts. Bracco has learned that First Trades charges a slightly higher trading fee than other brokers providing comparable services, and he discloses this to Carobilo.
Due to high prices and limited supplies of oil, Bracco has been following companies in the energy sector. He believes this area of the economy is in turmoil and should present some mispricing opportunities. One company he has been researching is Stiles Corporation, which is working on a new type of hydrogen fuel cell that uses fusion technology to create energy. To date, no one has been able to successfully sustain a fusion reaction for an extended period of time. Bracco has been in close contact with Stiles’ pubic relations department, has toured their laboratories, and has thoroughly researched fusion technology and Stiles’ competitors. Bracco is convinced from his research, based upon various public sources, that Stiles is on the verge of perfecting this technology and will be the first firm to bring it to the marketplace. Jerry McNulty, CFA and vice president of the investment banking division of CNL, has been working with Stiles to raise new capital via a secondary offering of Stiles common shares. One day Bracco happened to be in a stall in the bathroom when McNulty and a colleague came in and discussed the fact that Stiles had perfected the fuel-cell technology, which will greatly increase the price of Stiles1 stock.
Stiles Corporation’s board of directors includes Dr. Elaine Joachim, who is a physics professor at the University of Toronto. She also works part-time for Stiles Corporation as a consultant in their fusion technology laboratory. Her husband is a materials engineer who recently started performing consulting work for Stiles.
A routine audit by the quality control department at CNL discovered trading errors in several of Bracco’s accounts involving an oversubscribed IPO. Some accounts received shares they should not have and others did not receive shares they should have. Bracco and his supervisor Jaime Gun, CFA, are taking responsibility to reverse the incorrect trades. Bracco told Gun, "I’ll correct the trades based on our clients’ investment policy statements, previous notification of intent, and according to the company’s formula for allocating shares on a pro rata basis. In so doing, we will fairly allocate shares so even small accounts that did not meet minimum size requirements will receive some shares of the IPO." Gun replied to Bracco by saying, "I’ll credit short-term interest back to the accounts that should not have received the shares and subtract interest from the accounts that should have received the shares."
That evening, Bracco and his wife attended the company holiday party for CNL employees and their spouses. Jerry McNulty, whose wife was ill and could not come to the party, arrived drunk from a meeting with Stiles’ upper management. During the party McNulty made inappropriate advances toward many of the female employees and joked about the inadequacies of Stiles’ managers.
Has Bracco violated any soft dollar standards regarding the Carobilo family trust? Bracco has:
- A . violated soft dollar standards because he did not satisfy the requirement of best execution.
- B . violated the soft dollar standards because client brokerage is to be used only for research purposes to benefit the client.
- C . not violated any soft dollar standards since Carobilo directed the trades to a specific broker.
C
Explanation:
Bracco has not violated any soft dollar standards. This is an example of client-directed brokerage where the client, in this case Stephen Carobilo, is allowed to direct the investment manager to use a specific broker to execute trades. Moreover, one could take the view that the client benefits in the sense that Stephen Carobilo knows he is helping his friend at First Trades Brokerage by utilizing them as the broker. A commingled fund is a fund that is comprised of different client’s funds. (Study Session 1, LOS Lb)
Johnny Bracco, CFA, is a portfolio manager in the trust department of Canada National (CNL) in Toronto. CNL is a financial conglomerate with many divisions. In addition to the trust department, the firm sells financial products and has a research department, a trading desk, and an investment banking division. Part of the company’s operating procedures manual contains detailed information on how the firm allocates shares in oversubscribed stock offerings. Allocation is effected on a pro rata basis based upon factors such as the size of a client’s portfolio, suitability, and previous notification to participate in IPOs. Additionally, company policy discloses to clients that any trade needs to meet a minimum transaction size in an effort to control trading costs and to comply with best execution procedures.
One of Bracco’s trust accounts is the Carobilo family trust, which contains a portion of nondiscretionary funds managed by Stephen Carobilo. Carobilo has a friend who runs a brokerage firm called First Trades, to which Carobilo tells Bracco to direct trades from the nondiscretionary accounts. Bracco has learned that First Trades charges a slightly higher trading fee than other brokers providing comparable services, and he discloses this to Carobilo.
Due to high prices and limited supplies of oil, Bracco has been following companies in the energy sector. He believes this area of the economy is in turmoil and should present some mispricing opportunities. One company he has been researching is Stiles Corporation, which is working on a new type of hydrogen fuel cell that uses fusion technology to create energy. To date, no one has been able to successfully sustain a fusion reaction for an extended period of time. Bracco has been in close contact with Stiles’ pubic relations department, has toured their laboratories, and has thoroughly researched fusion technology and Stiles’ competitors. Bracco is convinced from his research, based upon various public sources, that Stiles is on the verge of perfecting this technology and will be the first firm to bring it to the marketplace. Jerry McNulty, CFA and vice president of the investment banking division of CNL, has been working with Stiles to raise new capital via a secondary offering of Stiles common shares. One day Bracco happened to be in a stall in the bathroom when McNulty and a colleague came in and discussed the fact that Stiles had perfected the fuel-cell technology, which will greatly increase the price of Stiles1 stock.
Stiles Corporation’s board of directors includes Dr. Elaine Joachim, who is a physics professor at the University of Toronto. She also works part-time for Stiles Corporation as a consultant in their fusion technology laboratory. Her husband is a materials engineer who recently started performing consulting work for Stiles.
A routine audit by the quality control department at CNL discovered trading errors in several of Bracco’s accounts involving an oversubscribed IPO. Some accounts received shares they should not have and others did not receive shares they should have. Bracco and his supervisor Jaime Gun, CFA, are taking responsibility to reverse the incorrect trades. Bracco told Gun, "I’ll correct the trades based on our clients’ investment policy statements, previous notification of intent, and according to the company’s formula for allocating shares on a pro rata basis. In so doing, we will fairly allocate shares so even small accounts that did not meet minimum size requirements will receive some shares of the IPO." Gun replied to Bracco by saying, "I’ll credit short-term interest back to the accounts that should not have received the shares and subtract interest from the accounts that should have received the shares."
That evening, Bracco and his wife attended the company holiday party for CNL employees and their spouses. Jerry McNulty, whose wife was ill and could not come to the party, arrived drunk from a meeting with Stiles’ upper management. During the party McNulty made inappropriate advances toward many of the female employees and joked about the inadequacies of Stiles’ managers.
If after overhearing McNulty’s conversation in the bathroom Bracco placed trades to purchase shares of the Stiles Corporation for some of his clients, would Bracco have violated any of the Standards of Professional conduct?
- A . No, because the information regarding the Stiles Corporation was not acquired in a breach of confidence.
- B . No, since he performed his own research and is allowed to trade based on the mosaic theory.
- C . Yes, since he possesses insider information he is not allowed to trade based on this information.
C
Explanation:
Bracco is in violation of Standard 11(A) Material Nonpublic Information, which states that members and candidates cannot trade or cause others to trade based on material nonpublic information that could affect the value of an investment. Even though Bracco has performed his own research and the information he acquired from McNulty and his colleague was an accident, it was nonetheless material nonpublic
information and therefore cannot be traded upon. (Study Session 1, LOS l.b)
Johnny Bracco, CFA, is a portfolio manager in the trust department of Canada National (CNL) in Toronto. CNL is a financial conglomerate with many divisions. In addition to the trust department, the firm sells financial products and has a research department, a trading desk, and an investment banking division. Part of the company’s operating procedures manual contains detailed information on how the firm allocates shares in oversubscribed stock offerings. Allocation is effected on a pro rata basis based upon factors such as the size of a client’s portfolio, suitability, and previous notification to participate in IPOs. Additionally, company policy discloses to clients that any trade needs to meet a minimum transaction size in an effort to control trading costs and to comply with best execution procedures.
One of Bracco’s trust accounts is the Carobilo family trust, which contains a portion of nondiscretionary funds managed by Stephen Carobilo. Carobilo has a friend who runs a brokerage firm called First Trades, to which Carobilo tells Bracco to direct trades from the nondiscretionary accounts. Bracco has learned that First Trades charges a slightly higher trading fee than other brokers providing comparable services, and he discloses this to Carobilo.
Due to high prices and limited supplies of oil, Bracco has been following companies in the energy sector. He believes this area of the economy is in turmoil and should present some mispricing opportunities. One company he has been researching is Stiles Corporation, which is working on a new type of hydrogen fuel cell that uses fusion technology to create energy. To date, no one has been able to successfully sustain a fusion reaction for an extended period of time. Bracco has been in close contact with Stiles’ pubic relations department, has toured their laboratories, and has thoroughly researched fusion technology and Stiles’ competitors. Bracco is convinced from his research, based upon various public sources, that Stiles is on the verge of perfecting this technology and will be the first firm to bring it to the marketplace. Jerry McNulty, CFA and vice president of the investment banking division of CNL, has been working with Stiles to raise new capital via a secondary offering of Stiles common shares. One day Bracco happened to be in a stall in the bathroom when McNulty and a colleague came in and discussed the fact that Stiles had perfected the fuel-cell technology, which will greatly increase the price of Stiles1 stock.
Stiles Corporation’s board of directors includes Dr. Elaine Joachim, who is a physics professor at the University of Toronto. She also works part-time for Stiles Corporation as a consultant in their fusion technology laboratory. Her husband is a materials engineer who recently started performing consulting work for Stiles.
A routine audit by the quality control department at CNL discovered trading errors in several of Bracco’s accounts involving an oversubscribed IPO. Some accounts received shares they should not have and others did not receive shares they should have. Bracco and his supervisor Jaime Gun, CFA, are taking responsibility to reverse the incorrect trades. Bracco told Gun, "I’ll correct the trades based on our clients’ investment policy statements, previous notification of intent, and according to the company’s formula for allocating shares on a pro rata basis. In so doing, we will fairly allocate shares so even small accounts that did not meet minimum size requirements will receive some shares of the IPO." Gun replied to Bracco by saying, "I’ll credit short-term interest back to the accounts that should not have received the shares and subtract interest from the accounts that should have received the shares."
That evening, Bracco and his wife attended the company holiday party for CNL employees and their spouses. Jerry McNulty, whose wife was ill and could not come to the party, arrived drunk from a meeting with Stiles’ upper management. During the party McNulty made inappropriate advances toward many of the female employees and joked about the inadequacies of Stiles’ managers.
Which of the following statements regarding Elaine Joachim’s participation on the board of directors of
Stiles Corporation is most accurate? Joachim’s participation:
- A . does not violate effective corporate governance policies because she provides relevant expertise to the board.
- B . does not violate effective corporate governance policies since boards are allowed to hire outside consultants when making decisions.
- C . violates effective corporate governance policies because she is paid by the company as a consultant and is therefore not independent.
C
Explanation:
The board of directors plays a critical role in effective corporate governance. The board should be composed primarily of independent directors who do not have a material relationship with the company, which includes not being an employee or a consultant of the company. This independence ensures that the board can make objective decisions that are in the best interests of shareholders.
While Dr. Joachim does provide relevant expertise to the board (as indicated in option A), and while it’s true that boards are allowed to hire outside consultants (as indicated in option B), the fact that she is paid by the company as a consultant compromises her independence and thus violates effective corporate governance policies.
Johnny Bracco, CFA, is a portfolio manager in the trust department of Canada National (CNL) in Toronto. CNL is a financial conglomerate with many divisions. In addition to the trust department, the firm sells financial products and has a research department, a trading desk, and an investment banking division. Part of the company’s operating procedures manual contains detailed information on how the firm allocates shares in oversubscribed stock offerings. Allocation is effected on a pro rata basis based upon factors such as the size of a client’s portfolio, suitability, and previous notification to participate in IPOs. Additionally, company policy discloses to clients that any trade needs to meet a minimum transaction size in an effort to control trading costs and to comply with best execution procedures.
One of Bracco’s trust accounts is the Carobilo family trust, which contains a portion of nondiscretionary funds managed by Stephen Carobilo. Carobilo has a friend who runs a brokerage firm called First Trades, to which Carobilo tells Bracco to direct trades from the nondiscretionary accounts. Bracco has learned that First Trades charges a slightly higher trading fee than other brokers providing comparable services, and he discloses this to Carobilo.
Due to high prices and limited supplies of oil, Bracco has been following companies in the energy sector. He believes this area of the economy is in turmoil and should present some mispricing opportunities. One company he has been researching is Stiles Corporation, which is working on a new type of hydrogen fuel cell that uses fusion technology to create energy. To date, no one has been able to successfully sustain a fusion reaction for an extended period of time. Bracco has been in close contact with Stiles’ pubic relations department, has toured their laboratories, and has thoroughly researched fusion technology and Stiles’ competitors. Bracco is convinced from his research, based upon various public sources, that Stiles is on the verge of perfecting this technology and will be the first firm to bring it to the marketplace. Jerry McNulty, CFA and vice president of the investment banking division of CNL, has been working with Stiles to raise new capital via a secondary offering of Stiles common shares. One day Bracco happened to be in a stall in the bathroom when McNulty and a colleague came in and discussed the fact that Stiles had perfected the fuel-cell technology, which will greatly increase the price of Stiles1 stock.
Stiles Corporation’s board of directors includes Dr. Elaine Joachim, who is a physics professor at the University of Toronto. She also works part-time for Stiles Corporation as a consultant in their fusion technology laboratory. Her husband is a materials engineer who recently started performing consulting work for Stiles.
A routine audit by the quality control department at CNL discovered trading errors in several of Bracco’s accounts involving an oversubscribed IPO. Some accounts received shares they should not have and others did not receive shares they should have. Bracco and his supervisor Jaime Gun, CFA, are taking responsibility to reverse the incorrect trades. Bracco told Gun, "I’ll correct the trades based on our clients’ investment policy statements, previous notification of intent, and according to the company’s formula for allocating shares on a pro rata basis. In so doing, we will fairly allocate shares so even small accounts that did not meet minimum size requirements will receive some shares of the IPO." Gun replied to Bracco by saying, "I’ll credit short-term interest back to the accounts that should not have received the shares and subtract interest from the accounts that should have received the shares."
That evening, Bracco and his wife attended the company holiday party for CNL employees and their spouses. Jerry McNulty, whose wife was ill and could not come to the party, arrived drunk from a meeting with Stiles’ upper management. During the party McNulty made inappropriate advances toward many of the female employees and joked about the inadequacies of Stiles’ managers.
Regarding the statements made by Bracco and Gun on how to correct the trading errors:
- A . only Gun’s statement is correct.
- B . only Bracco’s statement is correct.
- C . both are correct or both are incorrect.
B
Explanation:
Bracco stated that he would correct the trades based on clients’ investment policy statements, previous notification of intent, and according to the company’s formula for allocating shares on a pro rata basis. He also stated that even small accounts that did not meet minimum size requirements will receive some shares of the IPO. This approach seems consistent with CNL’s policy of pro rata allocation based on the size of a client’s portfolio, suitability, and previous notification to participate in IPOs. Furthermore, it also addresses the issue of fair allocation to small accounts.
However, Gun’s approach of crediting short-term interest back to the accounts that should not have received shares and subtracting interest from the accounts that should have received shares doesn’t directly address the allocation error. The primary issue at hand is the incorrect allocation of IPO shares, not the interest gained or lost in the short term due to this error. Fixing the incorrect allocations should be the priority, as Bracco suggests. While compensating for interest might be part of the solution, it doesn’t directly resolve the error.
Johnny Bracco, CFA, is a portfolio manager in the trust department of Canada National (CNL) in Toronto. CNL is a financial conglomerate with many divisions. In addition to the trust department, the firm sells financial products and has a research department, a trading desk, and an investment banking division. Part of the company’s operating procedures manual contains detailed information on how the firm allocates shares in oversubscribed stock offerings. Allocation is effected on a pro rata basis based upon factors such as the size of a client’s portfolio, suitability, and previous notification to participate in IPOs. Additionally, company policy discloses to clients that any trade needs to meet a minimum transaction size in an effort to control trading costs and to comply with best execution procedures.
One of Bracco’s trust accounts is the Carobilo family trust, which contains a portion of nondiscretionary funds managed by Stephen Carobilo. Carobilo has a friend who runs a brokerage firm called First Trades, to which Carobilo tells Bracco to direct trades from the nondiscretionary accounts. Bracco has learned that First Trades charges a slightly higher trading fee than other brokers providing comparable services, and he discloses this to Carobilo.
Due to high prices and limited supplies of oil, Bracco has been following companies in the energy sector. He believes this area of the economy is in turmoil and should present some mispricing opportunities. One company he has been researching is Stiles Corporation, which is working on a new type of hydrogen fuel cell that uses fusion technology to create energy. To date, no one has been able to successfully sustain a fusion reaction for an extended period of time. Bracco has been in close contact with Stiles’ pubic relations department, has toured their laboratories, and has thoroughly researched fusion technology and Stiles’ competitors. Bracco is convinced from his research, based upon various public sources, that Stiles is on the verge of perfecting this technology and will be the first firm to bring it to the marketplace. Jerry McNulty, CFA and vice president of the investment banking division of CNL, has been working with Stiles to raise new capital via a secondary offering of Stiles common shares. One day Bracco happened to be in a stall in the bathroom when McNulty and a colleague came in and discussed the fact that Stiles had perfected the fuel-cell technology, which will greatly increase the price of Stiles1 stock.
Stiles Corporation’s board of directors includes Dr. Elaine Joachim, who is a physics professor at the University of Toronto. She also works part-time for Stiles Corporation as a consultant in their fusion technology laboratory. Her husband is a materials engineer who recently started performing consulting work for Stiles.
A routine audit by the quality control department at CNL discovered trading errors in several of Bracco’s accounts involving an oversubscribed IPO. Some accounts received shares they should not have and others did not receive shares they should have. Bracco and his supervisor Jaime Gun, CFA, are taking responsibility to reverse the incorrect trades. Bracco told Gun, "I’ll correct the trades based on our clients’ investment policy statements, previous notification of intent, and according to the company’s formula for allocating shares on a pro rata basis. In so doing, we will fairly allocate shares so even small accounts that did not meet minimum size requirements will receive some shares of the IPO." Gun replied to Bracco by saying, "I’ll credit short-term interest back to the accounts that should not have received the shares and subtract interest from the accounts that should have received the shares."
That evening, Bracco and his wife attended the company holiday party for CNL employees and their spouses. Jerry McNulty, whose wife was ill and could not come to the party, arrived drunk from a meeting with Stiles’ upper management. During the party McNulty made inappropriate advances toward many of the female employees and joked about the inadequacies of Stiles’ managers.
Did McNulty’s behavior at the holiday party violate the:
Code of Ethics? Standards of Professional Conduct?
- A . Yes Yes
- B . No Yes
- C . Yes No
A
Explanation:
McNulty has violated both the Code of Ethics and the Standards of Professional Conduct. The Code of Ethics states in part that members of CFA Institute must act with integrity, competence, diligence, respect, and in an ethical manner with employees and colleagues in the investment profession. The inappropriate behavior has violated the Code. The unethical behavior also violates Standard 1(D) Misconduct. The Standard states in part that members and candidates must not commit any act that reflects adversely on their professional reputation, integrity, or competence. The inappropriate behavior has violated this Standard- (Study Session I, LOS l.b)
Johnny Bracco, CFA, is a portfolio manager in the trust department of Canada National (CNL) in Toronto. CNL is a financial conglomerate with many divisions. In addition to the trust department, the firm sells financial products and has a research department, a trading desk, and an investment banking division. Part of the company’s operating procedures manual contains detailed information on how the firm allocates shares in oversubscribed stock offerings. Allocation is effected on a pro rata basis based upon factors such as the size of a client’s portfolio, suitability, and previous notification to participate in IPOs. Additionally, company policy discloses to clients that any trade needs to meet a minimum transaction size in an effort to control trading costs and to comply with best execution procedures.
One of Bracco’s trust accounts is the Carobilo family trust, which contains a portion of nondiscretionary funds managed by Stephen Carobilo. Carobilo has a friend who runs a brokerage firm called First Trades, to which Carobilo tells Bracco to direct trades from the nondiscretionary accounts. Bracco has learned that First Trades charges a slightly higher trading fee than other brokers providing comparable services, and he discloses this to Carobilo.
Due to high prices and limited supplies of oil, Bracco has been following companies in the energy sector. He believes this area of the economy is in turmoil and should present some mispricing opportunities. One company he has been researching is Stiles Corporation, which is working on a new type of hydrogen fuel cell that uses fusion technology to create energy. To date, no one has been able to successfully sustain a fusion reaction for an extended period of time. Bracco has been in close contact with Stiles’ pubic relations department, has toured their laboratories, and has thoroughly researched fusion technology and Stiles’ competitors. Bracco is convinced from his research, based upon various public sources, that Stiles is on the verge of perfecting this technology and will be the first firm to bring it to the marketplace. Jerry McNulty, CFA and vice president of the investment banking division of CNL, has been working with Stiles to raise new capital via a secondary offering of Stiles common shares. One day Bracco happened to be in a stall in the bathroom when McNulty and a colleague came in and discussed the fact that Stiles had perfected the fuel-cell technology, which will greatly increase the price of Stiles1 stock.
Stiles Corporation’s board of directors includes Dr. Elaine Joachim, who is a physics professor at the University of Toronto. She also works part-time for Stiles Corporation as a consultant in their fusion technology laboratory. Her husband is a materials engineer who recently started performing consulting work for Stiles.
A routine audit by the quality control department at CNL discovered trading errors in several of Bracco’s accounts involving an oversubscribed IPO. Some accounts received shares they should not have and others did not receive shares they should have. Bracco and his supervisor Jaime Gun, CFA, are taking responsibility to reverse the incorrect trades. Bracco told Gun, "I’ll correct the trades based on our clients’ investment policy statements, previous notification of intent, and according to the company’s formula for allocating shares on a pro rata basis. In so doing, we will fairly allocate shares so even small accounts that did not meet minimum size requirements will receive some shares of the IPO." Gun replied to Bracco by saying, "I’ll credit short-term interest back to the accounts that should not have received the shares and subtract interest from the accounts that should have received the shares."
That evening, Bracco and his wife attended the company holiday party for CNL employees and their spouses. Jerry McNulty, whose wife was ill and could not come to the party, arrived drunk from a meeting with Stiles’ upper management. During the party McNulty made inappropriate advances toward many of the female employees and joked about the inadequacies of Stiles’ managers.
Was McNulty’s behavior at the holiday party a violation of a moral absolute?
- A . Yes, since this behavior, if witnessed by a client of the firm, would most likely be viewed negatively.
- B . No. Since there were no clients at the holiday party, a moral absolute was not breeched.
- C . Yes, since any unethical behavior constitutes a moral absolute violation.
C
Explanation:
A "moral absolute" refers to ethical standards that are universally recognized and should always be adhered to, irrespective of the circumstances. These moral principles apply to all people, in all places, at all times.
In this case, McNulty’s inappropriate and disrespectful behavior towards his colleagues would be seen as a violation of a moral absolute, as it lacks respect and professionalism, which are universally recognized ethical standards. His actions were inappropriate, regardless of whether clients were present at the party or not. His behavior would likely be viewed as unethical in any professional or social setting, thereby constituting a violation of a moral absolute.
Jacques Lepage, CFA, is a portfolio manager for MontBlanc Securities and holds 4 million shares of AirCon in client portfolios. Lepage issues periodic research reports on AirCon to both discretionary and nondiscretionary accounts. In his October investment report, Lepage stated, "In my opinion, AirCon is entering a phase, which could put it ‘in play’ as a takeover target. Nonetheless, this possibility appears to be fully reflected in the market value of the stock."
One month has passed since Lepage’s October report and AirCon has just announced the firm’s executive compensation packages, which include stock options (50% of which expire in one year), personal use of corporate aircraft (which can be used in conjunction with paid vacation days), and a modest base salary that constitutes a small proportion of the overall package. While he has not asked, he believes that the directors of MontBlanc will find the compensation excessive and sells the entire position immediately after the news. Unbeknownst to Lepage, three days earlier an announcement was made via Reuters and other financial news services that AirCon had produced record results that were far beyond expectations. Moreover, the firm has established a dominant position in a promising new market that is expected to generate above-average firm growth for the next five years.
A few weeks after selling the AirCon holdings, Lepage bought 2.5 million shares of Spectra Vision over a period of four days. The typical trading volume of this security is about 1.3 million shares per day, and his purchases drove the price up 9% over the 4-day period. These trades were designated as appropriate for 13 accounts of differing sizes, including performance-based accounts, charitable trusts, and private accounts. The shares were allocated to the accounts on a pro rata basis at the end of each day at the average price for the day.
One of the investment criteria used in evaluating equity holdings is the corporate governance structure of the issuing company. Because Lepage has dealt with this topic extensively, he has been asked to present a talk of corporate governance issues to the firm’s portfolio managers and analysts at the next monthly meeting. At the meeting, Lepage makes the following comments:
"When evaluating the corporate governance policies of a company, you should begin by assessing the responsibilities of the company’s board of directors. In general, the board should have the responsibility to set long-term objectives that are consistent with shareholders’ interests. In addition, the board must be responsible for hiring the CEO and setting his or her compensation package such that the CEO’s interests are aligned with those of the shareholders. In that way the board can spend its time on matters other than monitoring the CEO. A firm with good corporate governance policies should also have an audit committee made up of independent board members that are experienced in auditing and related legal matters. The audit committee should have full access to the firm’s financial statements and the ability to question auditors hired by the committee."
According to the CFA Institute Standards, Lepage’s statement that AirCon could be put in play is:
- A . permissible.
- B . not permissible since it blurs the distinction between opinion and fact.
- C . permissible if he is aware that a client of MontBlanc’s M&A division is secretly preparing a tender offer for AirCon.
A
Explanation:
According to Standard V(B) Communication with Clients and Prospective Clients, he is required to distinguish between fact and opinion in his research reports. He has fully conformed to this requirement. The statement is in accordance with CFA Institute Standards. (Study Session 1, LOS l.b)
Jacques Lepage, CFA, is a portfolio manager for MontBlanc Securities and holds 4 million shares of AirCon in client portfolios. Lepage issues periodic research reports on AirCon to both discretionary and nondiscretionary accounts. In his October investment report, Lepage stated, "In my opinion, AirCon is
entering a phase, which could put it ‘in play’ as a takeover target. Nonetheless, this possibility appears to be fully reflected in the market value of the stock."
One month has passed since Lepage’s October report and AirCon has just announced the firm’s executive compensation packages, which include stock options (50% of which expire in one year), personal use of corporate aircraft (which can be used in conjunction with paid vacation days), and a modest base salary that constitutes a small proportion of the overall package. While he has not asked, he believes that the directors of MontBlanc will find the compensation excessive and sells the entire position immediately after the news. Unbeknownst to Lepage, three days earlier an announcement was made via Reuters and other financial news services that AirCon had produced record results that were far beyond expectations. Moreover, the firm has established a dominant position in a promising new market that is expected to generate above-average firm growth for the next five years.
A few weeks after selling the AirCon holdings, Lepage bought 2.5 million shares of Spectra Vision over a period of four days. The typical trading volume of this security is about 1.3 million shares per day, and his purchases drove the price up 9% over the 4-day period. These trades were designated as appropriate for 13 accounts of differing sizes, including performance-based accounts, charitable trusts, and private accounts. The shares were allocated to the accounts on a pro rata basis at the end of each day at the average price for the day.
One of the investment criteria used in evaluating equity holdings is the corporate governance structure of the issuing company. Because Lepage has dealt with this topic extensively, he has been asked to present a talk of corporate governance issues to the firm’s portfolio managers and analysts at the next monthly meeting. At the meeting, Lepage makes the following comments:
"When evaluating the corporate governance policies of a company, you should begin by assessing the responsibilities of the company’s board of directors. In general, the board should have the responsibility to set long-term objectives that are consistent with shareholders’ interests. In addition, the board must be responsible for hiring the CEO and setting his or her compensation package such that the CEO’s interests are aligned with those of the shareholders. In that way the board can spend its time on matters other than monitoring the CEO. A firm with good corporate governance policies should also have an audit committee made up of independent board members that are experienced in auditing and related legal matters. The audit committee should have full access to the firm’s financial statements and the ability to question auditors hired by the committee."
Which of the following is a correct assessment of Lepage’s decision to sell the shares of AirCon? Lepage’s decision to sell the shares was:
- A . an appropriate discharge of his duties as portfolio manager if the details of the compensation structure had not previously been made public.
- B . an appropriate discharge of his duties as portfolio manager if the details of the compensation structure had previously been made public.
- C . not an appropriate discharge of his duties as portfolio manager.
C
Explanation:
His action is not supported by reasonable and adequate basis in fact, and thus constitutes a violation of Standard V(A) Diligence and Reasonable Basis. In fact he totally missed the Reuters report, which would indicate a lack of due diligence. (Study Session 1, LOS l.b)
Jacques Lepage, CFA, is a portfolio manager for MontBlanc Securities and holds 4 million shares of AirCon in client portfolios. Lepage issues periodic research reports on AirCon to both discretionary and nondiscretionary accounts. In his October investment report, Lepage stated, "In my opinion, AirCon is entering a phase, which could put it ‘in play’ as a takeover target. Nonetheless, this possibility appears to be fully reflected in the market value of the stock."
One month has passed since Lepage’s October report and AirCon has just announced the firm’s executive compensation packages, which include stock options (50% of which expire in one year), personal use of corporate aircraft (which can be used in conjunction with paid vacation days), and a modest base salary that constitutes a small proportion of the overall package. While he has not asked, he believes that the directors of MontBlanc will find the compensation excessive and sells the entire position immediately after the news. Unbeknownst to Lepage, three days earlier an announcement was made via Reuters and other financial news services that AirCon had produced record results that were far beyond expectations.
Moreover, the firm has established a dominant position in a promising new market that is expected to generate above-average firm growth for the next five years.
A few weeks after selling the AirCon holdings, Lepage bought 2.5 million shares of Spectra Vision over a period of four days. The typical trading volume of this security is about 1.3 million shares per day, and his purchases drove the price up 9% over the 4-day period. These trades were designated as appropriate for 13 accounts of differing sizes, including performance-based accounts, charitable trusts, and private accounts. The shares were allocated to the accounts on a pro rata basis at the end of each day at the average price for the day.
One of the investment criteria used in evaluating equity holdings is the corporate governance structure of the issuing company. Because Lepage has dealt with this topic extensively, he has been asked to present a talk of corporate governance issues to the firm’s portfolio managers and analysts at the next monthly meeting. At the meeting, Lepage makes the following comments:
"When evaluating the corporate governance policies of a company, you should begin by assessing the responsibilities of the company’s board of directors. In general, the board should have the responsibility to set long-term objectives that are consistent with shareholders’ interests. In addition, the board must be responsible for hiring the CEO and setting his or her compensation package such that the CEO’s interests are aligned with those of the shareholders. In that way the board can spend its time on matters other than monitoring the CEO. A firm with good corporate governance policies should also have an audit committee made up of independent board members that are experienced in auditing and related legal matters. The audit committee should have full access to the firm’s financial statements and the ability to question auditors hired by the committee."
According to the CFA Institute Code and Standards, Lepage’s ignorance of AirCon’s press release to
Reuters three days before he sold shares of the company:
- A . constitutes a violation.
- B . is not a violation because he does not have access to Reuters at MontBlanc Securities.
- C . constitutes a violation because, by trading on the information, Lepage would have traded on information that was already incorporated into the stock price and, thus, would have constituted an unwarranted trade.
A
Explanation:
Under CFA Institute Standard V(A) Diligence and Reasonable Basis, Lepage is required to exercise due diligence and thoroughness. His ignorance of information that is of material (disseminated before Lepage’s decision to sell the shares of AirCon) is an obvious violation of the Standard. (Study Session 1, LOS Lb)
Jacques Lepage, CFA, is a portfolio manager for MontBlanc Securities and holds 4 million shares of AirCon in client portfolios. Lepage issues periodic research reports on AirCon to both discretionary and nondiscretionary accounts. In his October investment report, Lepage stated, "In my opinion, AirCon is entering a phase, which could put it ‘in play’ as a takeover target. Nonetheless, this possibility appears to be fully reflected in the market value of the stock."
One month has passed since Lepage’s October report and AirCon has just announced the firm’s executive compensation packages, which include stock options (50% of which expire in one year), personal use of corporate aircraft (which can be used in conjunction with paid vacation days), and a modest base salary that constitutes a small proportion of the overall package. While he has not asked, he believes that the directors of MontBlanc will find the compensation excessive and sells the entire position immediately after the news. Unbeknownst to Lepage, three days earlier an announcement was made via Reuters and other financial news services that AirCon had produced record results that were far beyond expectations. Moreover, the firm has established a dominant position in a promising new market that is expected to generate above-average firm growth for the next five years.
A few weeks after selling the AirCon holdings, Lepage bought 2.5 million shares of Spectra Vision over a period of four days. The typical trading volume of this security is about 1.3 million shares per day, and his purchases drove the price up 9% over the 4-day period. These trades were designated as appropriate for 13 accounts of differing sizes, including performance-based accounts, charitable trusts, and private accounts. The shares were allocated to the accounts on a pro rata basis at the end of each day at the average price for the day.
One of the investment criteria used in evaluating equity holdings is the corporate governance structure of
the issuing company. Because Lepage has dealt with this topic extensively, he has been asked to present a talk of corporate governance issues to the firm’s portfolio managers and analysts at the next monthly meeting. At the meeting, Lepage makes the following comments:
"When evaluating the corporate governance policies of a company, you should begin by assessing the responsibilities of the company’s board of directors. In general, the board should have the responsibility to set long-term objectives that are consistent with shareholders’ interests. In addition, the board must be responsible for hiring the CEO and setting his or her compensation package such that the CEO’s interests are aligned with those of the shareholders. In that way the board can spend its time on matters other than monitoring the CEO. A firm with good corporate governance policies should also have an audit committee made up of independent board members that are experienced in auditing and related legal matters. The audit committee should have full access to the firm’s financial statements and the ability to question auditors hired by the committee."
Which of the following statements correctly characterizes Lepage’s method of distributing the shares of
Spectra Vision to the 13 relevant accounts? Lepage’s allocation method:
- A . does not violate CFA Institute Standards on fair dealing.
- B . violates CFA Institute Standards since he obtained the shares through trades that altered the market price of the stock.
- C . violates CFA Institute Standards since he has a fiduciary responsibility to see that the charitable trusts receive full allocations prior to the performance-based fee accounts.
A
Explanation:
CFA Institute Standard III(B) Fair Dealing requires that members and candidates deal fairly with clients when taking investment actions (including trade allocations). Recommended procedures to comply with this Standard include allocating trades on a pro rata basis when the entire order is being filled over time such that the prices are the same in all accounts. Lepage has conformed with the Standards in his execution and allocation of the shares of Spectra Vision. (Study Session 1, LOS l.b)
Jacques Lepage, CFA, is a portfolio manager for MontBlanc Securities and holds 4 million shares of AirCon in client portfolios. Lepage issues periodic research reports on AirCon to both discretionary and nondiscretionary accounts. In his October investment report, Lepage stated, "In my opinion, AirCon is entering a phase, which could put it ‘in play’ as a takeover target. Nonetheless, this possibility appears to be fully reflected in the market value of the stock."
One month has passed since Lepage’s October report and AirCon has just announced the firm’s executive compensation packages, which include stock options (50% of which expire in one year), personal use of corporate aircraft (which can be used in conjunction with paid vacation days), and a modest base salary that constitutes a small proportion of the overall package. While he has not asked, he believes that the directors of MontBlanc will find the compensation excessive and sells the entire position immediately after the news. Unbeknownst to Lepage, three days earlier an announcement was made via Reuters and other financial news services that AirCon had produced record results that were far beyond expectations. Moreover, the firm has established a dominant position in a promising new market that is expected to generate above-average firm growth for the next five years.
A few weeks after selling the AirCon holdings, Lepage bought 2.5 million shares of Spectra Vision over a period of four days. The typical trading volume of this security is about 1.3 million shares per day, and his purchases drove the price up 9% over the 4-day period. These trades were designated as appropriate for 13 accounts of differing sizes, including performance-based accounts, charitable trusts, and private accounts. The shares were allocated to the accounts on a pro rata basis at the end of each day at the average price for the day.
One of the investment criteria used in evaluating equity holdings is the corporate governance structure of the issuing company. Because Lepage has dealt with this topic extensively, he has been asked to present a talk of corporate governance issues to the firm’s portfolio managers and analysts at the next monthly meeting. At the meeting, Lepage makes the following comments:
"When evaluating the corporate governance policies of a company, you should begin by assessing the responsibilities of the company’s board of directors. In general, the board should have the responsibility to set long-term objectives that are consistent with shareholders’ interests. In addition, the board must be responsible for hiring the CEO and setting his or her compensation package such that the CEO’s interests
are aligned with those of the shareholders. In that way the board can spend its time on matters other than monitoring the CEO. A firm with good corporate governance policies should also have an audit committee made up of independent board members that are experienced in auditing and related legal matters. The audit committee should have full access to the firm’s financial statements and the ability to question auditors hired by the committee."
Which of the following statements regarding the compensation packages given to executives at AirCon is most correct?
- A . The base salary should make up a larger portion of the compensation package.
- B . The use of the corporate aircraft does not pose any problems for shareholder interests.
- C . The stock options cause a potential misalignment between management and shareholder interests.
C
Explanation:
Shareholders are most often concerned wich the long-term prospects for the company. Giving management a large number of options that expite in the current year creates strong incentive for management to engage in behavior that puts the long-term value of the company at risk in favor of short-term gains in the stock price (thus maximizing the value of management’s stock options). The base salary should be a small proportion of the overall compensation package and can be supplemented by performance based bonuses (nor a guaranteed bonus structure). Use of company assets for personal use should be restricted, whether or not the manager does a good job for the shareholders. (Study Session 1, LOS I.b)
Jacques Lepage, CFA, is a portfolio manager for MontBlanc Securities and holds 4 million shares of AirCon in client portfolios. Lepage issues periodic research reports on AirCon to both discretionary and nondiscretionary accounts. In his October investment report, Lepage stated, "In my opinion, AirCon is entering a phase, which could put it ‘in play’ as a takeover target. Nonetheless, this possibility appears to be fully reflected in the market value of the stock."
One month has passed since Lepage’s October report and AirCon has just announced the firm’s executive compensation packages, which include stock options (50% of which expire in one year), personal use of corporate aircraft (which can be used in conjunction with paid vacation days), and a modest base salary that constitutes a small proportion of the overall package. While he has not asked, he believes that the directors of MontBlanc will find the compensation excessive and sells the entire position immediately after the news. Unbeknownst to Lepage, three days earlier an announcement was made via Reuters and other financial news services that AirCon had produced record results that were far beyond expectations. Moreover, the firm has established a dominant position in a promising new market that is expected to generate above-average firm growth for the next five years.
A few weeks after selling the AirCon holdings, Lepage bought 2.5 million shares of Spectra Vision over a period of four days. The typical trading volume of this security is about 1.3 million shares per day, and his purchases drove the price up 9% over the 4-day period. These trades were designated as appropriate for 13 accounts of differing sizes, including performance-based accounts, charitable trusts, and private accounts. The shares were allocated to the accounts on a pro rata basis at the end of each day at the average price for the day.
One of the investment criteria used in evaluating equity holdings is the corporate governance structure of the issuing company. Because Lepage has dealt with this topic extensively, he has been asked to present a talk of corporate governance issues to the firm’s portfolio managers and analysts at the next monthly meeting. At the meeting, Lepage makes the following comments:
"When evaluating the corporate governance policies of a company, you should begin by assessing the responsibilities of the company’s board of directors. In general, the board should have the responsibility to set long-term objectives that are consistent with shareholders’ interests. In addition, the board must be responsible for hiring the CEO and setting his or her compensation package such that the CEO’s interests are aligned with those of the shareholders. In that way the board can spend its time on matters other than monitoring the CEO. A firm with good corporate governance policies should also have an audit committee made up of independent board members that are experienced in auditing and related legal matters. The audit committee should have full access to the firm’s financial statements and the ability to question auditors hired by the committee."
Determine whether Lepage’s statements in his presentation to MontBlanc’s portfolio managers and analysts regarding the responsibilities of the board of directors and the audit committee are correct or incorrect.
- A . Only the statement regarding the board is correct.
- B . Only the statement regarding the audit committee is correct.
- C . Both statements are correct or both statements are incorrect.
C
Explanation:
Lepage’s comments on the responsibilities of the board of directors and the audit committee align well with best practices for corporate governance.
The board of directors’ role includes setting long-term objectives, ensuring they are consistent with shareholders’ interests, and overseeing the hiring and compensation of the CEO. Good corporate governance also involves aligning the CEO’s interests with those of shareholders, thereby minimizing the need for constant monitoring of the CEO by the board.
Regarding the audit committee, it is indeed good practice for the committee to comprise independent board members with experience in auditing and related legal matters. They should also have full access to the firm’s financial statements and have the power to question auditors hired by the committee. This ensures an independent and thorough examination of the company’s financials, promoting transparency and trust among investors.
Hilda Olson covers the chemical industry for Bern Securities. Based on conversations with two executives of InterChem, a major producer of synthetic fabrics, she issues a generalized sector report claiming that "according to a survey of industry executives, rayon feedstocks will be in short supply for at least the next 12 months." In addition, Olson recommends Han Chemical, a major producer of rayon, which has routinely reported higher profits than its competitors and should be well positioned to gain further from reduced supply.
In her efforts to learn more about Han Chemical and support her recommendation, Olson scrambles to compile a research report on the firm. She reproduces financial data provided in a research report by Standard & Poor’s (S&P) and the Bank of Korea (BOK), the Korean government’s central bank. She also obtains two research reports from brokerage firms with operations in Korea, and incorporates portions of the text and charts from these reports into her research report.
Olson describes Han Chemical in her research report as "low risk," even though she knows that the operating risk of the chemical industry is above average and that Han has a higher debt-to-equity ratio than its average competitor. She justifies this to her supervisor by saying that since the market for rayon feedstocks is tight, an investment in Han has a very low risk of suffering a loss in the near term. Olson’s supervisor accepts her explanation as valid and the report is issued to the firm’s clients.
Shortly after issuing her research report, Olson visited Han Chemical’s operations in New Jersey. During her conversation with the firm’s vice president of operations, who is also one of Bern’s personal trust clients, she was told in confidence that Han Chemical’s profit margins are higher than its competitors, partly because they routinely discharge untreated chemical waste into the Delaware River in order to reduce production costs. Such action is a direct violation of U.S. environmental laws.
When Olson returns from her trip to New Jersey, Wolfgang Hundt, director of research at Bern Securities, requests a meeting. Hundt has developed a compliance procedure and has provided relevant written information to employees. Every quarter, he issues written reminders regarding the program to Olson and her peers, so when Olson tells Hundt of Han’s chemical dumping, he immediately begins an investigation into the violation.
With regard to the statement concerning rayon feedstocks, Olson has:
- A . not violated CFA Institute Standards.
- B . violated CFA Institute Standards since she has failed to use reasonable judgment in gathering her information.
- C . violated CFA Institute Standards since she is not permitted to project supply and demand conditions in the industry.
A
Explanation:
The information Olson used to make the statement about rayon feedstocks came from her conversations with industry executives. This suggests that she used reliable sources and was diligent in her information gathering. The CFA Institute Standards do not prohibit analysts from projecting supply and demand conditions in an industry, so long as the projection is based on thorough analysis and reasonable judgment. There is no evidence to suggest that Olson failed to use reasonable judgment in gathering her information or that the projection was not based on a thorough analysis. Therefore, she did not violate the Standards in this regard.
Hilda Olson covers the chemical industry for Bern Securities. Based on conversations with two executives of InterChem, a major producer of synthetic fabrics, she issues a generalized sector report claiming that "according to a survey of industry executives, rayon feedstocks will be in short supply for at least the next 12 months." In addition, Olson recommends Han Chemical, a major producer of rayon, which has routinely reported higher profits than its competitors and should be well positioned to gain further from reduced supply.
In her efforts to learn more about Han Chemical and support her recommendation, Olson scrambles to compile a research report on the firm. She reproduces financial data provided in a research report by Standard & Poor’s (S&P) and the Bank of Korea (BOK), the Korean government’s central bank. She also obtains two research reports from brokerage firms with operations in Korea, and incorporates portions of the text and charts from these reports into her research report.
Olson describes Han Chemical in her research report as "low risk," even though she knows that the operating risk of the chemical industry is above average and that Han has a higher debt-to-equity ratio than its average competitor. She justifies this to her supervisor by saying that since the market for rayon feedstocks is tight, an investment in Han has a very low risk of suffering a loss in the near term. Olson’s supervisor accepts her explanation as valid and the report is issued to the firm’s clients.
Shortly after issuing her research report, Olson visited Han Chemical’s operations in New Jersey. During her conversation with the firm’s vice president of operations, who is also one of Bern’s personal trust clients, she was told in confidence that Han Chemical’s profit margins are higher than its competitors, partly because they routinely discharge untreated chemical waste into the Delaware River in order to reduce production costs. Such action is a direct violation of U.S. environmental laws.
When Olson returns from her trip to New Jersey, Wolfgang Hundt, director of research at Bern Securities, requests a meeting. Hundt has developed a compliance procedure and has provided relevant written information to employees. Every quarter, he issues written reminders regarding the program to Olson and her peers, so when Olson tells Hundt of Han’s chemical dumping, he immediately begins an investigation into the violation.
In her report on Han Chemical, Olson has utilized data from S&P and the BOK. With regard to this data,
Olson is allowed to use:
- A . both sources of data, but must acknowledge the sources of the data.
- B . both sources of data, and need not acknowledge the sources of the data.
- C . the S&P data, but not the BOK data, and she must acknowledge the source.
A
Explanation:
According to the CFA Institute’s Standards of Professional Conduct, any material used in a research report that is not the original work of the analyst must be cited. This includes data, forecasts, or any other information from outside sources. So, while Olson can use the data from both S&P and the BOK, she must provide proper acknowledgement of these sources in her report. Failing to acknowledge the sources of data could mislead readers into thinking that the data is Olson’s original work, which would violate the CFA Institute’s Standards on misrepresentation and plagiarism.
Hilda Olson covers the chemical industry for Bern Securities. Based on conversations with two executives of InterChem, a major producer of synthetic fabrics, she issues a generalized sector report claiming that "according to a survey of industry executives, rayon feedstocks will be in short supply for at least the next 12 months." In addition, Olson recommends Han Chemical, a major producer of rayon, which has routinely reported higher profits than its competitors and should be well positioned to gain further from reduced supply.
In her efforts to learn more about Han Chemical and support her recommendation, Olson scrambles to compile a research report on the firm. She reproduces financial data provided in a research report by Standard & Poor’s (S&P) and the Bank of Korea (BOK), the Korean government’s central bank. She also obtains two research reports from brokerage firms with operations in Korea, and incorporates portions of the text and charts from these reports into her research report.
Olson describes Han Chemical in her research report as "low risk," even though she knows that the operating risk of the chemical industry is above average and that Han has a higher debt-to-equity ratio than its average competitor. She justifies this to her supervisor by saying that since the market for rayon feedstocks is tight, an investment in Han has a very low risk of suffering a loss in the near term. Olson’s supervisor accepts her explanation as valid and the report is issued to the firm’s clients.
Shortly after issuing her research report, Olson visited Han Chemical’s operations in New Jersey. During her conversation with the firm’s vice president of operations, who is also one of Bern’s personal trust clients, she was told in confidence that Han Chemical’s profit margins are higher than its competitors, partly because they routinely discharge untreated chemical waste into the Delaware River in order to reduce production costs. Such action is a direct violation of U.S. environmental laws.
When Olson returns from her trip to New Jersey, Wolfgang Hundt, director of research at Bern Securities, requests a meeting. Hundt has developed a compliance procedure and has provided relevant written information to employees. Every quarter, he issues written reminders regarding the program to Olson and her peers, so when Olson tells Hundt of Han’s chemical dumping, he immediately begins an investigation into the violation.
In her report on Han Chemical, Olson has also utilized two brokerage firms’ reports. With regard to these sources, Olson is:
- A . allowed to use the text and charts, but must acknowledge the sources.
- B . allowed to use the text and charts, and need not acknowledge the sources.
- C . not allowed to use the text and charts from other reports.
A
Explanation:
Under CFA Institute Standard 1(C) Misrepresentation, members and candidates are required to acknowledge the sources of information that they incorporate into their own work that do not originate from a recognized financial/statistical reporting service. Therefore, Olson must properly cite the information obtained from the brokerage reports in order to comply with Standard 1(C). (Study Session 1, LOS l.b)
Hilda Olson covers the chemical industry for Bern Securities. Based on conversations with two executives of InterChem, a major producer of synthetic fabrics, she issues a generalized sector report claiming that "according to a survey of industry executives, rayon feedstocks will be in short supply for at least the next 12 months." In addition, Olson recommends Han Chemical, a major producer of rayon, which has routinely reported higher profits than its competitors and should be well positioned to gain further from reduced supply.
In her efforts to learn more about Han Chemical and support her recommendation, Olson scrambles to compile a research report on the firm. She reproduces financial data provided in a research report by Standard & Poor’s (S&P) and the Bank of Korea (BOK), the Korean government’s central bank. She also obtains two research reports from brokerage firms with operations in Korea, and incorporates portions of the text and charts from these reports into her research report.
Olson describes Han Chemical in her research report as "low risk," even though she knows that the operating risk of the chemical industry is above average and that Han has a higher debt-to-equity ratio than its average competitor. She justifies this to her supervisor by saying that since the market for rayon feedstocks is tight, an investment in Han has a very low risk of suffering a loss in the near term. Olson’s supervisor accepts her explanation as valid and the report is issued to the firm’s clients.
Shortly after issuing her research report, Olson visited Han Chemical’s operations in New Jersey. During her conversation with the firm’s vice president of operations, who is also one of Bern’s personal trust clients, she was told in confidence that Han Chemical’s profit margins are higher than its competitors, partly because they routinely discharge untreated chemical waste into the Delaware River in order to reduce production costs. Such action is a direct violation of U.S. environmental laws.
When Olson returns from her trip to New Jersey, Wolfgang Hundt, director of research at Bern Securities, requests a meeting. Hundt has developed a compliance procedure and has provided relevant written
information to employees. Every quarter, he issues written reminders regarding the program to Olson and her peers, so when Olson tells Hundt of Han’s chemical dumping, he immediately begins an investigation into the violation.
Olson’s characterization of the risks associated with an investment in Han Chemical is:
- A . acceptable since it is clearly an opinion.
- B . acceptable since it is supported with facts regarding industry supply and demand.
- C . unacceptable since she has not provided enough information for investors to assess Han’s risk.
C
Explanation:
Olson’s report mischaracterizes the level of risk inherent in the investment. As such, this constitutes a violation of Standard V(B) Communication with Clients and Prospective Clients. Olson has also violated Standard 1(C) Misrepresentation by misleading investors as to the true nature of the risk associated with an investment in Han Chemical. (Study Session L, LOS l.b)
Hilda Olson covers the chemical industry for Bern Securities. Based on conversations with two executives of InterChem, a major producer of synthetic fabrics, she issues a generalized sector report claiming that "according to a survey of industry executives, rayon feedstocks will be in short supply for at least the next 12 months." In addition, Olson recommends Han Chemical, a major producer of rayon, which has routinely reported higher profits than its competitors and should be well positioned to gain further from reduced supply.
In her efforts to learn more about Han Chemical and support her recommendation, Olson scrambles to compile a research report on the firm. She reproduces financial data provided in a research report by Standard & Poor’s (S&P) and the Bank of Korea (BOK), the Korean government’s central bank. She also obtains two research reports from brokerage firms with operations in Korea, and incorporates portions of the text and charts from these reports into her research report.
Olson describes Han Chemical in her research report as "low risk," even though she knows that the operating risk of the chemical industry is above average and that Han has a higher debt-to-equity ratio than its average competitor. She justifies this to her supervisor by saying that since the market for rayon feedstocks is tight, an investment in Han has a very low risk of suffering a loss in the near term. Olson’s supervisor accepts her explanation as valid and the report is issued to the firm’s clients.
Shortly after issuing her research report, Olson visited Han Chemical’s operations in New Jersey. During her conversation with the firm’s vice president of operations, who is also one of Bern’s personal trust clients, she was told in confidence that Han Chemical’s profit margins are higher than its competitors, partly because they routinely discharge untreated chemical waste into the Delaware River in order to reduce production costs. Such action is a direct violation of U.S. environmental laws.
When Olson returns from her trip to New Jersey, Wolfgang Hundt, director of research at Bern Securities, requests a meeting. Hundt has developed a compliance procedure and has provided relevant written information to employees. Every quarter, he issues written reminders regarding the program to Olson and her peers, so when Olson tells Hundt of Han’s chemical dumping, he immediately begins an investigation into the violation.
With regard to the information Olson received from Han Chemical’s Vice President of Operations, the most appropriate course of action for Olson to take would be to:
- A . not divulge such information in her client research since she now lacks independence and objectivity.
- B . divulge the information to her employer because, even though received in confidence, it involves an illegal act.
- C . divulge the information in her client’s research department in order to demonstrate due diligence in performing her research.
B
Explanation:
In most cases, it would be a violation of CFA Institute Standards to divulge information, which was transmitted in confidence.
However, under Standard III(E) Preservation of Confidentiality, an exception is made for information pertaining to an illegal act. Especially since she has issued a research report and buy order for Han, she is compelled under the Standard to divulge such information. She should address the matter with Bern’s chief compliance officer as the first step in the process. (Study Session 1, LOS Lb)
Hilda Olson covers the chemical industry for Bern Securities. Based on conversations with two executives of InterChem, a major producer of synthetic fabrics, she issues a generalized sector report claiming that "according to a survey of industry executives, rayon feedstocks will be in short supply for at least the next 12 months." In addition, Olson recommends Han Chemical, a major producer of rayon, which has routinely reported higher profits than its competitors and should be well positioned to gain further from reduced supply.
In her efforts to learn more about Han Chemical and support her recommendation, Olson scrambles to compile a research report on the firm. She reproduces financial data provided in a research report by Standard & Poor’s (S&P) and the Bank of Korea (BOK), the Korean government’s central bank. She also obtains two research reports from brokerage firms with operations in Korea, and incorporates portions of the text and charts from these reports into her research report.
Olson describes Han Chemical in her research report as "low risk," even though she knows that the operating risk of the chemical industry is above average and that Han has a higher debt-to-equity ratio than its average competitor. She justifies this to her supervisor by saying that since the market for rayon feedstocks is tight, an investment in Han has a very low risk of suffering a loss in the near term. Olson’s supervisor accepts her explanation as valid and the report is issued to the firm’s clients.
Shortly after issuing her research report, Olson visited Han Chemical’s operations in New Jersey. During her conversation with the firm’s vice president of operations, who is also one of Bern’s personal trust clients, she was told in confidence that Han Chemical’s profit margins are higher than its competitors, partly because they routinely discharge untreated chemical waste into the Delaware River in order to reduce production costs. Such action is a direct violation of U.S. environmental laws.
When Olson returns from her trip to New Jersey, Wolfgang Hundt, director of research at Bern Securities, requests a meeting. Hundt has developed a compliance procedure and has provided relevant written information to employees. Every quarter, he issues written reminders regarding the program to Olson and her peers, so when Olson tells Hundt of Han’s chemical dumping, he immediately begins an investigation into the violation.
Olson is concerned that Hundt’s compliance actions as director of the firm’s research department are inconsistent with CFA Institute Standards.
Which of the following properly characterize Hundt’s compliance activities? Hundt’s actions are:
- A . consistent with CFA Institute Standards.
- B . improper with respect to both the investigation procedures and the periodic reminders.
- C . improper regarding the periodic reminders, as these do not constitute regular training.
A
Explanation:
All of Hundt’s actions are consistent with CFA Institute Standard IV(C) Responsibilities of Supervisors. According to this Standard, supervisors exercise reasonable supervision by ensuring that employees follow the written compliance procedures established by their supervisor. Supervisors have a responsibility to disseminate the compliance procedures to employees and it is recommended that they regularly update procedures and continually educate personnel subject to the procedures- If a supervisor knows of a violation, he or she must promptly begin an investigation into the matter. (Study Session 1, LOS l.b) Sample Scoring Key: 3 points for each correct response.
Dynamic Investment Services (DIS) is a global, full-service investment advisory firm based in the United States. Although the firm provides numerous investment services, DIS specializes in portfolio management for individual and institutional clients and only deals in publicly traded debt, equity, and derivative instruments. Walter Fried, CFA, is a portfolio manager and the director of DIS’s offices in Austria. For several years, Fried has maintained a relationship with a local tax consultant. The consultant provides a DIS marketing brochure with Fried’s contact information to his clients seeking investment advisory services, and in return. Fried manages the consultant’s personal portfolio and informs the consultant of potential tax issues in the referred clients’ portfolios as they occur. Because he cannot personally manage all of the inquiring clients’ assets, Fried generally passes the client information along to one of his employees but never discloses his relationship with the tax accountant. Fried recently forwarded information on the prospective Jones Family Trust account to Beverly Ulster, CFA, one of his newly hired portfolio managers.
Upon receiving the information, Ulster immediately set up a meeting with Terrence Phillips, the trustee of the Jones Family Trust. Ulster began the meeting by explaining DIS’s investment services as detailed in the firm’s approved marketing and public relations literature. Ulster also had Phillips complete a very detailed questionnaire regarding the risk and return objectives, investment constraints, and other information related to the trust beneficiaries, which Phillips is not. While reading the questionnaire, Ulster learned that Phillips heard about DIS’s services through a referral from his tax consultant. Upon further investigation, Ulster discovered the agreement set up between Fried and the tax consultant, which is legal according to Austrian law but was not disclosed by either party Ulster took a break from the meeting to get more details from Fried. With full information on the referral arrangement, Ulster immediately makes full disclosure to the Phillips. Before the meeting with Phillips concluded, Ulster began formalizing the investment policy statement (IPS) for the Jones Family Trust and agreed to Phillips’ request that the IPS should explicitly forbid derivative positions in the Trust portfolio.
A few hours after meeting with the Jones Family Trust representative, Ulster accepted another new referral client, Steven West, from Fried. Following DIS policy, Ulster met with West to address his investment objectives and constraints and explain the firm’s services. During the meeting, Ulster informed West that DIS offers three levels of account status, each with an increasing fee based on the account’s asset value. The first level has the lowest account fees but receives oversubscribed domestic IPO allocations only after the other two levels receive IPO allocations. The second-level clients have the same priority as third-level clients with respect to oversubscribed domestic IPO allocations and receive research with significantly greater detail than first-level clients. Clients who subscribe to the third level of DIS services receive the most detailed research reports and are allowed to participate in both domestic and international IPOs. All clients receive research and recommendations at approximately the same lime. West decided to engage DIS’s services as a second-level client. While signing the enrollment papers, West told Ulster, "If you can give me the kind of performance I am looking for, I may move the rest of my assets to DIS." When Ulster inquired about the other accounts, West would not specify how much or what type of assets he held in other accounts. West also noted that a portion of the existing assets to be transferred to Ulster’s control were private equity investments in small start-up companies, which DIS would need to manage. Ulster assured him that DIS would have no problem managing the private equity investments.
After her meeting with West, Ulster attended a weekly strategy session held by DIS. All managers were required to attend this particular meeting since the focus was on a new strategy designed to reduce portfolio volatility while slightly enhancing return using a combination of futures and options on various asset classes. Intrigued by the idea, Ulster implemented the strategy for all of her clients and achieved positive results for all portfolios. Ulster’s average performance results after one year of using the new strategy are presented in Figure 1. For comparative purposes, performance figures without the new strategy are also presented.
At the latest strategy meeting, DIS economists were extremely pessimistic about emerging market economies and suggested that the firm’s portfolio managers consider selling emerging market securities out of their portfolios and avoid these investments for the next 12 to 15 months. Fried placed a limit order to sell his personal holdings of an emerging market fund at a price 5% higher than the market price at the time. He then began selling his clients’ (all of whom have discretionary accounts with DIS) holdings of the same emerging market fund using market orders. All of his clients’ trade orders were completed just before the price of the fund declined sharply by 13%, causing Fried’s order to remain unfilled.
Did Ulster violate CFA Institute Standards of Professional Conduct by accepting either Phillips or West as new clients?
- A . Standards were violated in accepting both Phillips and West as clients.
- B . There was no violation in accepting Phillips, but there was a violation in accepting West.
- C . There were no Standards violations in accepting either client.
B
Explanation:
Ai the time Ulster accepted Phillips (and the Jones Family Trust) as a client, she was unaware of the referral arrangement between Fried and the tax consultant. In addition, Ulster informed the client of the referral agreement terms after being fully briefed on the matter. No other information in the case indicates that her acceptance of Phillips as a client violated the Standards. Given the full disclosure, it is understood that Phillips approves of Fried’s need to periodically advise the tax consultant of potential tax issues relating to the client’s portfolio. After discovering, however, that Fried has been violating Standard V1(C) Referral Fees by not disclosing the arrangement with the tax consultant, she should not have accepted additional clients from Fried. Standard 1(A) Knowledge of the Law requires that members and candidates not knowingly participate or assist in any activity that violates applicable law, rules, and regulations, including the Code and Standards. If a member or candidate knows of a violation, they must dissociate from the activity. Members and candidates may find it necessary to report the violation to their supervisor or compliance officer as part of their attempt to dissociate from the violating activity. By accepting West as a client, Ulster has violated Standard 1(A). (Study Session l,LOS2.a)
Dynamic Investment Services (DIS) is a global, full-service investment advisory firm based in the United States. Although the firm provides numerous investment services, DIS specializes in portfolio management for individual and institutional clients and only deals in publicly traded debt, equity, and derivative instruments. Walter Fried, CFA, is a portfolio manager and the director of DIS’s offices in Austria. For several years, Fried has maintained a relationship with a local tax consultant. The consultant provides a DIS marketing brochure with Fried’s contact information to his clients seeking investment advisory services, and in return. Fried manages the consultant’s personal portfolio and informs the consultant of potential tax issues in the referred clients’ portfolios as they occur. Because he cannot personally manage all of the inquiring clients’ assets, Fried generally passes the client information along to one of his employees but never discloses his relationship with the tax accountant. Fried recently forwarded information on the prospective Jones Family Trust account to Beverly Ulster, CFA, one of his newly hired portfolio managers.
Upon receiving the information, Ulster immediately set up a meeting with Terrence Phillips, the trustee of the Jones Family Trust. Ulster began the meeting by explaining DIS’s investment services as detailed in the firm’s approved marketing and public relations literature. Ulster also had Phillips complete a very detailed questionnaire regarding the risk and return objectives, investment constraints, and other information related to the trust beneficiaries, which Phillips is not. While reading the questionnaire, Ulster learned that Phillips heard about DIS’s services through a referral from his tax consultant. Upon further investigation, Ulster discovered the agreement set up between Fried and the tax consultant, which is legal according to Austrian law but was not disclosed by either party Ulster took a break from the meeting to get more details from Fried. With full information on the referral arrangement, Ulster immediately makes full disclosure to the Phillips. Before the meeting with Phillips concluded, Ulster began formalizing the investment policy statement (IPS) for the Jones Family Trust and agreed to Phillips’ request that the IPS should explicitly forbid derivative positions in the Trust portfolio.
A few hours after meeting with the Jones Family Trust representative, Ulster accepted another new referral client, Steven West, from Fried. Following DIS policy, Ulster met with West to address his investment objectives and constraints and explain the firm’s services. During the meeting, Ulster informed West that DIS offers three levels of account status, each with an increasing fee based on the account’s asset value. The first level has the lowest account fees but receives oversubscribed domestic IPO allocations only after the other two levels receive IPO allocations. The second-level clients have the same priority as third-level clients with respect to oversubscribed domestic IPO allocations and receive research with significantly greater detail than first-level clients. Clients who subscribe to the third level of DIS services receive the most detailed research reports and are allowed to participate in both domestic and international IPOs. All clients receive research and recommendations at approximately the same lime. West decided to engage
DIS’s services as a second-level client. While signing the enrollment papers, West told Ulster, "If you can give me the kind of performance I am looking for, I may move the rest of my assets to DIS." When Ulster inquired about the other accounts, West would not specify how much or what type of assets he held in other accounts. West also noted that a portion of the existing assets to be transferred to Ulster’s control were private equity investments in small start-up companies, which DIS would need to manage. Ulster assured him that DIS would have no problem managing the private equity investments.
After her meeting with West, Ulster attended a weekly strategy session held by DIS. All managers were required to attend this particular meeting since the focus was on a new strategy designed to reduce portfolio volatility while slightly enhancing return using a combination of futures and options on various asset classes. Intrigued by the idea, Ulster implemented the strategy for all of her clients and achieved positive results for all portfolios. Ulster’s average performance results after one year of using the new strategy are presented in Figure 1. For comparative purposes, performance figures without the new strategy are also presented.
At the latest strategy meeting, DIS economists were extremely pessimistic about emerging market economies and suggested that the firm’s portfolio managers consider selling emerging market securities out of their portfolios and avoid these investments for the next 12 to 15 months. Fried placed a limit order to sell his personal holdings of an emerging market fund at a price 5% higher than the market price at the time. He then began selling his clients’ (all of whom have discretionary accounts with DIS) holdings of the same emerging market fund using market orders. All of his clients’ trade orders were completed just before the price of the fund declined sharply by 13%, causing Fried’s order to remain unfilled.
Does the referral agreement between Fried and the tax consultant violate any CFA Institute Standards of Professional Conduct?
- A . No.
- B . Yes, because client confidentiality is being undermined by the arrangement.
- C . Yes, because it involves non-monetary compensation with no observable cost.
C
Explanation:
The referral agreement between Fried and the tax consultant violates Standard VI(B) – Compensation Arrangements from the CFA Institute Standards of Professional Conduct, which states that investment professionals must fully disclose to their employer any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.
In this case, Fried has a referral agreement with the tax consultant that involves non-monetary compensation (managing the consultant’s personal portfolio and informing the consultant of potential tax issues in the referred clients’ portfolios). However, Fried has not disclosed this referral agreement to either his employer or to the clients who have been referred. This lack of disclosure violates the standards.
The answer is not B because there’s no indication in the text that client confidentiality is being undermined by the arrangement.
Dynamic Investment Services (DIS) is a global, full-service investment advisory firm based in the United States. Although the firm provides numerous investment services, DIS specializes in portfolio management for individual and institutional clients and only deals in publicly traded debt, equity, and derivative instruments. Walter Fried, CFA, is a portfolio manager and the director of DIS’s offices in Austria. For several years, Fried has maintained a relationship with a local tax consultant. The consultant provides a
DIS marketing brochure with Fried’s contact information to his clients seeking investment advisory services, and in return. Fried manages the consultant’s personal portfolio and informs the consultant of potential tax issues in the referred clients’ portfolios as they occur. Because he cannot personally manage all of the inquiring clients’ assets, Fried generally passes the client information along to one of his employees but never discloses his relationship with the tax accountant. Fried recently forwarded information on the prospective Jones Family Trust account to Beverly Ulster, CFA, one of his newly hired portfolio managers.
Upon receiving the information, Ulster immediately set up a meeting with Terrence Phillips, the trustee of the Jones Family Trust. Ulster began the meeting by explaining DIS’s investment services as detailed in the firm’s approved marketing and public relations literature. Ulster also had Phillips complete a very detailed questionnaire regarding the risk and return objectives, investment constraints, and other information related to the trust beneficiaries, which Phillips is not. While reading the questionnaire, Ulster learned that Phillips heard about DIS’s services through a referral from his tax consultant. Upon further investigation, Ulster discovered the agreement set up between Fried and the tax consultant, which is legal according to Austrian law but was not disclosed by either party Ulster took a break from the meeting to get more details from Fried. With full information on the referral arrangement, Ulster immediately makes full disclosure to the Phillips. Before the meeting with Phillips concluded, Ulster began formalizing the investment policy statement (IPS) for the Jones Family Trust and agreed to Phillips’ request that the IPS should explicitly forbid derivative positions in the Trust portfolio.
A few hours after meeting with the Jones Family Trust representative, Ulster accepted another new referral client, Steven West, from Fried. Following DIS policy, Ulster met with West to address his investment objectives and constraints and explain the firm’s services. During the meeting, Ulster informed West that DIS offers three levels of account status, each with an increasing fee based on the account’s asset value. The first level has the lowest account fees but receives oversubscribed domestic IPO allocations only after the other two levels receive IPO allocations. The second-level clients have the same priority as third-level clients with respect to oversubscribed domestic IPO allocations and receive research with significantly greater detail than first-level clients. Clients who subscribe to the third level of DIS services receive the most detailed research reports and are allowed to participate in both domestic and international IPOs. All clients receive research and recommendations at approximately the same lime. West decided to engage DIS’s services as a second-level client. While signing the enrollment papers, West told Ulster, "If you can give me the kind of performance I am looking for, I may move the rest of my assets to DIS." When Ulster inquired about the other accounts, West would not specify how much or what type of assets he held in other accounts. West also noted that a portion of the existing assets to be transferred to Ulster’s control were private equity investments in small start-up companies, which DIS would need to manage. Ulster assured him that DIS would have no problem managing the private equity investments.
After her meeting with West, Ulster attended a weekly strategy session held by DIS. All managers were required to attend this particular meeting since the focus was on a new strategy designed to reduce portfolio volatility while slightly enhancing return using a combination of futures and options on various asset classes. Intrigued by the idea, Ulster implemented the strategy for all of her clients and achieved positive results for all portfolios. Ulster’s average performance results after one year of using the new strategy are presented in Figure 1. For comparative purposes, performance figures without the new strategy are also presented.
At the latest strategy meeting, DIS economists were extremely pessimistic about emerging market economies and suggested that the firm’s portfolio managers consider selling emerging market securities out of their portfolios and avoid these investments for the next 12 to 15 months. Fried placed a limit order to sell his personal holdings of an emerging market fund at a price 5% higher than the market price at the time. He then began selling his clients’ (all of whom have discretionary accounts with DIS) holdings of the same emerging market fund using market orders. All of his clients’ trade orders were completed just before the price of the fund declined sharply by 13%, causing Fried’s order to remain unfilled.
During her initial meeting with West, did Ulster violate any CFA Institute Standards of Professional Conduct?
- A . Yes.
- B . No, because she developed a detailed investment policy to ensure the suitability of investment choices for the client’s account.
- C . No, because she ensured that all conflicts of interest were disclosed to the client before the investment policy statement was created.
B
Explanation:
In her initial meeting with West, Ulster appropriately performed her duty as a CFA charterholder by meeting with the client to discuss their investment objectives and constraints, and to explain the services offered by DIS. She also informed West about the different levels of account status and what each entails. Furthermore, Ulster created a detailed investment policy statement that reflected the needs and preferences of the client, ensuring that future investment decisions would be suitable for the client’s account.
There is no indication in the scenario provided that Ulster violated any CFA Institute Standards of Professional Conduct. She demonstrated professionalism and due diligence, which are both required by the standards.
Answer C is not correct because there was no explicit mention of any conflicts of interest that were disclosed to the client. While it’s true that conflicts should be disclosed, the question did not indicate any that were relevant to this specific situation. Therefore, the focus is more on the development of a detailed investment policy, which aligns with answer B.
Dynamic Investment Services (DIS) is a global, full-service investment advisory firm based in the United States. Although the firm provides numerous investment services, DIS specializes in portfolio management for individual and institutional clients and only deals in publicly traded debt, equity, and derivative instruments. Walter Fried, CFA, is a portfolio manager and the director of DIS’s offices in Austria. For several years, Fried has maintained a relationship with a local tax consultant. The consultant provides a DIS marketing brochure with Fried’s contact information to his clients seeking investment advisory services, and in return. Fried manages the consultant’s personal portfolio and informs the consultant of potential tax issues in the referred clients’ portfolios as they occur. Because he cannot personally manage all of the inquiring clients’ assets, Fried generally passes the client information along to one of his employees but never discloses his relationship with the tax accountant. Fried recently forwarded information on the prospective Jones Family Trust account to Beverly Ulster, CFA, one of his newly hired portfolio managers.
Upon receiving the information, Ulster immediately set up a meeting with Terrence Phillips, the trustee of the Jones Family Trust. Ulster began the meeting by explaining DIS’s investment services as detailed in the firm’s approved marketing and public relations literature. Ulster also had Phillips complete a very detailed questionnaire regarding the risk and return objectives, investment constraints, and other information related to the trust beneficiaries, which Phillips is not. While reading the questionnaire, Ulster learned that Phillips heard about DIS’s services through a referral from his tax consultant. Upon further investigation, Ulster discovered the agreement set up between Fried and the tax consultant, which is legal according to Austrian law but was not disclosed by either party Ulster took a break from the meeting to get more details from Fried. With full information on the referral arrangement, Ulster immediately makes full disclosure to the Phillips. Before the meeting with Phillips concluded, Ulster began formalizing the investment policy statement (IPS) for the Jones Family Trust and agreed to Phillips’ request that the IPS should explicitly forbid derivative positions in the Trust portfolio.
A few hours after meeting with the Jones Family Trust representative, Ulster accepted another new referral client, Steven West, from Fried. Following DIS policy, Ulster met with West to address his investment objectives and constraints and explain the firm’s services. During the meeting, Ulster informed West that DIS offers three levels of account status, each with an increasing fee based on the account’s asset value. The first level has the lowest account fees but receives oversubscribed domestic IPO allocations only after the other two levels receive IPO allocations. The second-level clients have the same priority as third-level clients with respect to oversubscribed domestic IPO allocations and receive research with significantly greater detail than first-level clients. Clients who subscribe to the third level of DIS services receive the most detailed research reports and are allowed to participate in both domestic and international IPOs. All clients receive research and recommendations at approximately the same lime. West decided to engage DIS’s services as a second-level client. While signing the enrollment papers, West told Ulster, "If you can give me the kind of performance I am looking for, I may move the rest of my assets to DIS." When Ulster inquired about the other accounts, West would not specify how much or what type of assets he held in other accounts. West also noted that a portion of the existing assets to be transferred to Ulster’s control were private equity investments in small start-up companies, which DIS would need to manage. Ulster
assured him that DIS would have no problem managing the private equity investments.
After her meeting with West, Ulster attended a weekly strategy session held by DIS. All managers were required to attend this particular meeting since the focus was on a new strategy designed to reduce portfolio volatility while slightly enhancing return using a combination of futures and options on various asset classes. Intrigued by the idea, Ulster implemented the strategy for all of her clients and achieved positive results for all portfolios. Ulster’s average performance results after one year of using the new strategy are presented in Figure 1. For comparative purposes, performance figures without the new strategy are also presented.
At the latest strategy meeting, DIS economists were extremely pessimistic about emerging market economies and suggested that the firm’s portfolio managers consider selling emerging market securities out of their portfolios and avoid these investments for the next 12 to 15 months. Fried placed a limit order to sell his personal holdings of an emerging market fund at a price 5% higher than the market price at the time. He then began selling his clients’ (all of whom have discretionary accounts with DIS) holdings of the same emerging market fund using market orders. All of his clients’ trade orders were completed just before the price of the fund declined sharply by 13%, causing Fried’s order to remain unfilled.
According to CFA Institute Standards of Professional Conduct, which of the following statements regarding
Ulster’s meeting with West is most accurate? Ulster may:
- A . offer the different service levels and may accept the account without full knowledge of West’s other accounts.
- B . not offer the different service levels but may accept the account without full knowledge of West’s other accounts.
- C . not offer the different service levels and may not accept the account without full knowledge of West’s other accounts.
A
Explanation:
According to the CFA Institute Standards of Professional Conduct, it is not mandatory for a portfolio manager or an investment advisor to have full knowledge of a client’s other accounts before accepting their account. While understanding a client’s overall financial situation and the contents of their other accounts can be useful in providing comprehensive financial advice, it is not always feasible or necessary, especially if the client chooses not to disclose that information.
Moreover, Ulster is not prohibited from offering different service levels to clients. This practice is quite common in the investment management industry, where firms offer tiered services based on account size, investment objectives, risk tolerance, or other factors. As long as the tiers are transparently communicated and equitably managed, this is permissible. In the case of Ulster and West, she clearly explained the service levels and what each entails, ensuring transparency in their professional relationship.
Dynamic Investment Services (DIS) is a global, full-service investment advisory firm based in the United States. Although the firm provides numerous investment services, DIS specializes in portfolio management for individual and institutional clients and only deals in publicly traded debt, equity, and derivative instruments. Walter Fried, CFA, is a portfolio manager and the director of DIS’s offices in Austria. For several years, Fried has maintained a relationship with a local tax consultant. The consultant provides a DIS marketing brochure with Fried’s contact information to his clients seeking investment advisory
services, and in return. Fried manages the consultant’s personal portfolio and informs the consultant of potential tax issues in the referred clients’ portfolios as they occur. Because he cannot personally manage all of the inquiring clients’ assets, Fried generally passes the client information along to one of his employees but never discloses his relationship with the tax accountant. Fried recently forwarded information on the prospective Jones Family Trust account to Beverly Ulster, CFA, one of his newly hired portfolio managers.
Upon receiving the information, Ulster immediately set up a meeting with Terrence Phillips, the trustee of the Jones Family Trust. Ulster began the meeting by explaining DIS’s investment services as detailed in the firm’s approved marketing and public relations literature. Ulster also had Phillips complete a very detailed questionnaire regarding the risk and return objectives, investment constraints, and other information related to the trust beneficiaries, which Phillips is not. While reading the questionnaire, Ulster learned that Phillips heard about DIS’s services through a referral from his tax consultant. Upon further investigation, Ulster discovered the agreement set up between Fried and the tax consultant, which is legal according to Austrian law but was not disclosed by either party Ulster took a break from the meeting to get more details from Fried. With full information on the referral arrangement, Ulster immediately makes full disclosure to the Phillips. Before the meeting with Phillips concluded, Ulster began formalizing the investment policy statement (IPS) for the Jones Family Trust and agreed to Phillips’ request that the IPS should explicitly forbid derivative positions in the Trust portfolio.
A few hours after meeting with the Jones Family Trust representative, Ulster accepted another new referral client, Steven West, from Fried. Following DIS policy, Ulster met with West to address his investment objectives and constraints and explain the firm’s services. During the meeting, Ulster informed West that DIS offers three levels of account status, each with an increasing fee based on the account’s asset value. The first level has the lowest account fees but receives oversubscribed domestic IPO allocations only after the other two levels receive IPO allocations. The second-level clients have the same priority as third-level clients with respect to oversubscribed domestic IPO allocations and receive research with significantly greater detail than first-level clients. Clients who subscribe to the third level of DIS services receive the most detailed research reports and are allowed to participate in both domestic and international IPOs. All clients receive research and recommendations at approximately the same lime. West decided to engage DIS’s services as a second-level client. While signing the enrollment papers, West told Ulster, "If you can give me the kind of performance I am looking for, I may move the rest of my assets to DIS." When Ulster inquired about the other accounts, West would not specify how much or what type of assets he held in other accounts. West also noted that a portion of the existing assets to be transferred to Ulster’s control were private equity investments in small start-up companies, which DIS would need to manage. Ulster assured him that DIS would have no problem managing the private equity investments.
After her meeting with West, Ulster attended a weekly strategy session held by DIS. All managers were required to attend this particular meeting since the focus was on a new strategy designed to reduce portfolio volatility while slightly enhancing return using a combination of futures and options on various asset classes. Intrigued by the idea, Ulster implemented the strategy for all of her clients and achieved positive results for all portfolios. Ulster’s average performance results after one year of using the new strategy are presented in Figure 1. For comparative purposes, performance figures without the new strategy are also presented.
At the latest strategy meeting, DIS economists were extremely pessimistic about emerging market economies and suggested that the firm’s portfolio managers consider selling emerging market securities out of their portfolios and avoid these investments for the next 12 to 15 months. Fried placed a limit order to sell his personal holdings of an emerging market fund at a price 5% higher than the market price at the time. He then began selling his clients’ (all of whom have discretionary accounts with DIS) holdings of the same emerging market fund using market orders. All of his clients’ trade orders were completed just before the price of the fund declined sharply by 13%, causing Fried’s order to remain unfilled.
By utilizing the futures and options strategy as suggested by DIS’s economists, did Ulster violate any CFA
Institute Standards of Professional Conduct?
- A . Yes.
- B . No, because she acted in her clients best interest by reducing portfolio risk while increasing portfolio return.
- C . No, because she treated all clients fairly by applying the strategy to both individual and institutional clients.
A
Explanation:
Ulster has failed to recognize chat while the derivative strategy successfully lowered the volatilities of her clients’ portfolios and raised the returns, the strategy may not have been suitable for all portfolios. In particular, the Jones Family Trust investment policy statement strictly forbids the use of derivative instruments, and therefore the derivatives strategy is unsuitable for the account. Ulster should not have used the strategy for the Jones Family Trust account or for any other account that would deem the strategy unsuitable and has thus violated Standard III(C) Suitability. (Study Session 1, LOS 2.a)
Dynamic Investment Services (DIS) is a global, full-service investment advisory firm based in the United States. Although the firm provides numerous investment services, DIS specializes in portfolio management for individual and institutional clients and only deals in publicly traded debt, equity, and derivative instruments. Walter Fried, CFA, is a portfolio manager and the director of DIS’s offices in Austria. For several years, Fried has maintained a relationship with a local tax consultant. The consultant provides a DIS marketing brochure with Fried’s contact information to his clients seeking investment advisory services, and in return. Fried manages the consultant’s personal portfolio and informs the consultant of potential tax issues in the referred clients’ portfolios as they occur. Because he cannot personally manage all of the inquiring clients’ assets, Fried generally passes the client information along to one of his employees but never discloses his relationship with the tax accountant. Fried recently forwarded information on the prospective Jones Family Trust account to Beverly Ulster, CFA, one of his newly hired portfolio managers.
Upon receiving the information, Ulster immediately set up a meeting with Terrence Phillips, the trustee of the Jones Family Trust. Ulster began the meeting by explaining DIS’s investment services as detailed in the firm’s approved marketing and public relations literature. Ulster also had Phillips complete a very detailed questionnaire regarding the risk and return objectives, investment constraints, and other information related to the trust beneficiaries, which Phillips is not. While reading the questionnaire, Ulster learned that Phillips heard about DIS’s services through a referral from his tax consultant. Upon further investigation, Ulster discovered the agreement set up between Fried and the tax consultant, which is legal according to Austrian law but was not disclosed by either party Ulster took a break from the meeting to get more details from Fried. With full information on the referral arrangement, Ulster immediately makes full disclosure to the Phillips. Before the meeting with Phillips concluded, Ulster began formalizing the investment policy statement (IPS) for the Jones Family Trust and agreed to Phillips’ request that the IPS should explicitly forbid derivative positions in the Trust portfolio.
A few hours after meeting with the Jones Family Trust representative, Ulster accepted another new referral client, Steven West, from Fried. Following DIS policy, Ulster met with West to address his investment objectives and constraints and explain the firm’s services. During the meeting, Ulster informed West that DIS offers three levels of account status, each with an increasing fee based on the account’s asset value. The first level has the lowest account fees but receives oversubscribed domestic IPO allocations only after the other two levels receive IPO allocations. The second-level clients have the same priority as third-level clients with respect to oversubscribed domestic IPO allocations and receive research with significantly greater detail than first-level clients. Clients who subscribe to the third level of DIS services receive the most detailed research reports and are allowed to participate in both domestic and international IPOs. All clients receive research and recommendations at approximately the same lime. West decided to engage DIS’s services as a second-level client. While signing the enrollment papers, West told Ulster, "If you can give me the kind of performance I am looking for, I may move the rest of my assets to DIS." When Ulster inquired about the other accounts, West would not specify how much or what type of assets he held in other accounts. West also noted that a portion of the existing assets to be transferred to Ulster’s control were private equity investments in small start-up companies, which DIS would need to manage. Ulster assured him that DIS would have no problem managing the private equity investments.
After her meeting with West, Ulster attended a weekly strategy session held by DIS. All managers were
required to attend this particular meeting since the focus was on a new strategy designed to reduce portfolio volatility while slightly enhancing return using a combination of futures and options on various asset classes. Intrigued by the idea, Ulster implemented the strategy for all of her clients and achieved positive results for all portfolios. Ulster’s average performance results after one year of using the new strategy are presented in Figure 1. For comparative purposes, performance figures without the new strategy are also presented.
At the latest strategy meeting, DIS economists were extremely pessimistic about emerging market economies and suggested that the firm’s portfolio managers consider selling emerging market securities out of their portfolios and avoid these investments for the next 12 to 15 months. Fried placed a limit order to sell his personal holdings of an emerging market fund at a price 5% higher than the market price at the time. He then began selling his clients’ (all of whom have discretionary accounts with DIS) holdings of the same emerging market fund using market orders. All of his clients’ trade orders were completed just before the price of the fund declined sharply by 13%, causing Fried’s order to remain unfilled.
According to CFA Institute Standards of Professional Conduct, should Fried have taken a different course of action with respect to the limit order on the emerging market fund?
- A . No.
- B . Yes, Fried should not have sold any shares of the emerging market fund.
- C . Yes, Fried should have waited to place the limit order until after the market orders were filled.
C
Explanation:
Fried has violated Standard VI(B) Priority of Transactions by placing his own sell order ahead of his clients’ sell orders. Even though Fried has used a limit order with a 5% premium to the current stock price (and his order never gets executed), he has still acted in his own interest before acting in his clients’ interest. Fried should have placed his clients’ trades before placing his own. (Study Session 1, LOS 2.a)
Shirley Riley, CFA, has just been promoted, from vice president of trading to chief investment officer (CIO) at Crane & Associates, LLC (CA), a large investment management firm. Riley has been with CA for eight years, but she has much to learn as she assumes her new duties as CIO. Riley has decided to hire Denny Simpson, CFA, as the new compliance officer for CA, Riley and Simpson have been reviewing procedures and policies throughout the firm and have discovered several potential issues.
Communications with Clients
Portfolio managers are encouraged to communicate with clients on a regular basis. At a minimum,
managers are expected to contact clients on a quarterly basis to review portfolio performance. Each client
must have an investment policy statement (IPS) created when their account is opened, specifying the
objectives and constraints for their portfolio. IPSs are reviewed at client request at any time. Any time
market conditions dictate a change in the investment style or strategy of a client portfolio, the client is
notified immediately by phone or email.
Employee Incentive Program
CA offers several incentive programs to employees. One of the most popular of these programs is the CA IPO program. Whenever CA is involved in an initial public offering (IPO), portfolio managers are allowed to participate. The structure is simple―for every 100 shares purchased on behalf of a client, the manager is awarded five shares for his own account. The manager is thus rewarded for getting an IPO sold and at the same time is able to share in the results of the IPO. Any-time shares are remaining 72 hours before the IPO goes public, other employees are allowed to participate on a first-come, first-serve basis. Employees seem to appreciate this opportunity, but CA does not have exact numbers on employee participation in the program.
Private Equity Fund
CA has a private equity fund that is internally managed. This fund is made available only to clients with more than $5 million in assets managed by CA, a policy that is fully disclosed in CA’s marketing materials. Roughly one-third of the fund’s assets are invested in companies that are either very small capitalization or thinly traded (or both). The pricing of these securities for monthly account statements is often difficult. CA support staff get information from different sources―sometimes using third party services, sometimes using CA valuation models. In some instances, a manager of the private equity fund will enter an order during the last trading hour of the month to purchase 100 shares of one of these small securities at a modest premium to the last trade price. If the trade gets executed, that price can then be used on the account statements. The small size of these trades does not significantly affect the fund’s overall position in any particular company holding, which is typically several thousand shares.
Soft Dollar Usage
Several different managers at CA use independent research in developing investment ideas. One of the more popular research services among CA managers is "Beneath the Numbers (BTN)," which focuses on potential accounting abuses at prominent companies. This service often provides early warnings of problems with a stock, allowing CA managers the opportunity to sell their clients’ positions before a negative surprise lowers the price. Stocks covered by BTN are typically widely held in CA client accounts. Managers at CA have been so happy with BTN that they have also subscribed to a new research product provided by the same authors―"Beneath the Radar (BTR)." BTR recommends small capitalization securities that are not large enough to attract much attention from large institutional investors. The results of BTR’s recommendations are mixed thus far, but CA managers are willing to be patient.
As they discuss these issues, Riley informs Simpson that she is determined to bring CA into full compliance with the CFA Institute’s "Asset Manager Code of Professional Conduct." The following questions should be answered with the Asset Manager Code as a guide.
Indicate whether CA’s policies related to investment policy statement (IPS) reviews and notification of changes in investment style/strategy are consistent with the Asset Manager Code of Professional Conduct.
- A . The IPS review policy is adequate, but the policy on communicating changes in style / strategy is inadequate.
- B . Both policies are inadequate.
- C . Both policies are consistent with the Asset Manager Code of Professional Conduct.
A
Explanation:
The Asset Manager Code of Professional Conduct states that managers should regularly review a client’s investment policy statement (IPS) and update it as necessary, not only upon a client’s request. It also states that the investment manager should communicate effectively with clients and keep them informed of significant changes affecting their investments.
In this case, the policy of only reviewing IPS at a client’s request does comply with the Code. The IPS should be reviewed regularly, regardless of whether the client requests a review or not, as the client’s investment objectives or constraints could change over time.
Regarding the notification of changes in investment style/strategy, while it is good that they notify clients immediately, the policy does not mention anything about obtaining client consent before making such changes. In accordance with the Asset Manager Code, clients should be notified and their consent should be obtained before making any significant changes to the investment style or strategy.
Shirley Riley, CFA, has just been promoted, from vice president of trading to chief investment officer (CIO) at Crane & Associates, LLC (CA), a large investment management firm. Riley has been with CA for eight years, but she has much to learn as she assumes her new duties as CIO. Riley has decided to hire Denny Simpson, CFA, as the new compliance officer for CA, Riley and Simpson have been reviewing procedures and policies throughout the firm and have discovered several potential issues.
Communications with Clients
Portfolio managers are encouraged to communicate with clients on a regular basis. At a minimum, managers are expected to contact clients on a quarterly basis to review portfolio performance. Each client must have an investment policy statement (IPS) created when their account is opened, specifying the objectives and constraints for their portfolio. IPSs are reviewed at client request at any time. Any time
market conditions dictate a change in the investment style or strategy of a client portfolio, the client is
notified immediately by phone or email.
Employee Incentive Program
CA offers several incentive programs to employees. One of the most popular of these programs is the CA IPO program. Whenever CA is involved in an initial public offering (IPO), portfolio managers are allowed to participate. The structure is simple―for every 100 shares purchased on behalf of a client, the manager is awarded five shares for his own account. The manager is thus rewarded for getting an IPO sold and at the same time is able to share in the results of the IPO. Any-time shares are remaining 72 hours before the IPO goes public, other employees are allowed to participate on a first-come, first-serve basis. Employees seem to appreciate this opportunity, but CA does not have exact numbers on employee participation in the program.
Private Equity Fund
CA has a private equity fund that is internally managed. This fund is made available only to clients with more than $5 million in assets managed by CA, a policy that is fully disclosed in CA’s marketing materials. Roughly one-third of the fund’s assets are invested in companies that are either very small capitalization or thinly traded (or both). The pricing of these securities for monthly account statements is often difficult. CA support staff get information from different sources―sometimes using third party services, sometimes using CA valuation models. In some instances, a manager of the private equity fund will enter an order during the last trading hour of the month to purchase 100 shares of one of these small securities at a modest premium to the last trade price. If the trade gets executed, that price can then be used on the account statements. The small size of these trades does not significantly affect the fund’s overall position in any particular company holding, which is typically several thousand shares.
Soft Dollar Usage
Several different managers at CA use independent research in developing investment ideas. One of the more popular research services among CA managers is "Beneath the Numbers (BTN)," which focuses on potential accounting abuses at prominent companies. This service often provides early warnings of problems with a stock, allowing CA managers the opportunity to sell their clients’ positions before a negative surprise lowers the price. Stocks covered by BTN are typically widely held in CA client accounts. Managers at CA have been so happy with BTN that they have also subscribed to a new research product provided by the same authors―"Beneath the Radar (BTR)." BTR recommends small capitalization securities that are not large enough to attract much attention from large institutional investors. The results of BTR’s recommendations are mixed thus far, but CA managers are willing to be patient.
As they discuss these issues, Riley informs Simpson that she is determined to bring CA into full compliance with the CFA Institute’s "Asset Manager Code of Professional Conduct." The following questions should be answered with the Asset Manager Code as a guide.
Indicate whether CA’s policies related to its IPO program, specifically allowing portfolio manager participation and employee participation, are consistent with the Asset Manager Code of Professional Conduct.
- A . Policies on both portfolio manager and employee participation in IPOs are not consistent with the Asset Manager Code of Professional Conduct.
- B . The employee participation in IPOs policy is consistent with the Asset Manager Code, as is the portfolio manager’s policy on participation in IPOs.
- C . The portfolio manager’s policy on IPOs is not consistent with the Asset Manager Code, however the employee policy on IPOs is consistent with the Asset Manager Code.
A
Explanation:
The IPO program creates a substantial conflict of interest between managers and clients. Managers wanting to boost their participation in an IPO would be likely to place orders in accounts where such an investment might not be appropriate. The employee participation in and of itself might be acceptable, so long as clients’ interests were placed ahead of employees’. In this case, there is no evidence of such a priority of transactions, and further, the fact that CA has no exact numbers on the program indicates that the firm is not tracking employee trading activity, which is poor policy. (Study Session 2, LOS 6.b)
Shirley Riley, CFA, has just been promoted, from vice president of trading to chief investment officer (CIO) at Crane & Associates, LLC (CA), a large investment management firm. Riley has been with CA for eight years, but she has much to learn as she assumes her new duties as CIO. Riley has decided to hire Denny Simpson, CFA, as the new compliance officer for CA, Riley and Simpson have been reviewing procedures and policies throughout the firm and have discovered several potential issues.
Communications with Clients
Portfolio managers are encouraged to communicate with clients on a regular basis. At a minimum,
managers are expected to contact clients on a quarterly basis to review portfolio performance. Each client
must have an investment policy statement (IPS) created when their account is opened, specifying the
objectives and constraints for their portfolio. IPSs are reviewed at client request at any time. Any time
market conditions dictate a change in the investment style or strategy of a client portfolio, the client is
notified immediately by phone or email.
Employee Incentive Program
CA offers several incentive programs to employees. One of the most popular of these programs is the CA IPO program. Whenever CA is involved in an initial public offering (IPO), portfolio managers are allowed to participate. The structure is simple―for every 100 shares purchased on behalf of a client, the manager is awarded five shares for his own account. The manager is thus rewarded for getting an IPO sold and at the same time is able to share in the results of the IPO. Any-time shares are remaining 72 hours before the IPO goes public, other employees are allowed to participate on a first-come, first-serve basis. Employees seem to appreciate this opportunity, but CA does not have exact numbers on employee participation in the program.
Private Equity Fund
CA has a private equity fund that is internally managed. This fund is made available only to clients with more than $5 million in assets managed by CA, a policy that is fully disclosed in CA’s marketing materials. Roughly one-third of the fund’s assets are invested in companies that are either very small capitalization or thinly traded (or both). The pricing of these securities for monthly account statements is often difficult. CA support staff get information from different sources―sometimes using third party services, sometimes using CA valuation models. In some instances, a manager of the private equity fund will enter an order during the last trading hour of the month to purchase 100 shares of one of these small securities at a modest premium to the last trade price. If the trade gets executed, that price can then be used on the account statements. The small size of these trades does not significantly affect the fund’s overall position in any particular company holding, which is typically several thousand shares.
Soft Dollar Usage
Several different managers at CA use independent research in developing investment ideas. One of the more popular research services among CA managers is "Beneath the Numbers (BTN)," which focuses on potential accounting abuses at prominent companies. This service often provides early warnings of problems with a stock, allowing CA managers the opportunity to sell their clients’ positions before a negative surprise lowers the price. Stocks covered by BTN are typically widely held in CA client accounts. Managers at CA have been so happy with BTN that they have also subscribed to a new research product provided by the same authors―"Beneath the Radar (BTR)." BTR recommends small capitalization securities that are not large enough to attract much attention from large institutional investors. The results of BTR’s recommendations are mixed thus far, but CA managers are willing to be patient.
As they discuss these issues, Riley informs Simpson that she is determined to bring CA into full compliance with the CFA Institute’s "Asset Manager Code of Professional Conduct." The following questions should be answered with the Asset Manager Code as a guide.
Participation in CA’s private equity fund is limited to clients with $5 million under management. This policy:
- A . docs not violate the Asset Manager Code of Professional Conduct.
- B . would be acceptable so long as a similar investment vehicle was made available to all clients.
- C . is not consistent with the Asset Manager Code of Professional Conduct.
A
Explanation:
It is perfectly reasonable for CA to offer certain services or products only to clients meeting specified criteria, such as assets under management. (Study Session 2, LOS 6.b)
Shirley Riley, CFA, has just been promoted, from vice president of trading to chief investment officer (CIO) at Crane & Associates, LLC (CA), a large investment management firm. Riley has been with CA for eight years, but she has much to learn as she assumes her new duties as CIO. Riley has decided to hire Denny Simpson, CFA, as the new compliance officer for CA, Riley and Simpson have been reviewing procedures and policies throughout the firm and have discovered several potential issues.
Communications with Clients
Portfolio managers are encouraged to communicate with clients on a regular basis. At a minimum,
managers are expected to contact clients on a quarterly basis to review portfolio performance. Each client
must have an investment policy statement (IPS) created when their account is opened, specifying the
objectives and constraints for their portfolio. IPSs are reviewed at client request at any time. Any time
market conditions dictate a change in the investment style or strategy of a client portfolio, the client is
notified immediately by phone or email.
Employee Incentive Program
CA offers several incentive programs to employees. One of the most popular of these programs is the CA IPO program. Whenever CA is involved in an initial public offering (IPO), portfolio managers are allowed to participate. The structure is simple―for every 100 shares purchased on behalf of a client, the manager is awarded five shares for his own account. The manager is thus rewarded for getting an IPO sold and at the same time is able to share in the results of the IPO. Any-time shares are remaining 72 hours before the IPO goes public, other employees are allowed to participate on a first-come, first-serve basis. Employees seem to appreciate this opportunity, but CA does not have exact numbers on employee participation in the program.
Private Equity Fund
CA has a private equity fund that is internally managed. This fund is made available only to clients with more than $5 million in assets managed by CA, a policy that is fully disclosed in CA’s marketing materials. Roughly one-third of the fund’s assets are invested in companies that are either very small capitalization or thinly traded (or both). The pricing of these securities for monthly account statements is often difficult. CA support staff get information from different sources―sometimes using third party services, sometimes using CA valuation models. In some instances, a manager of the private equity fund will enter an order during the last trading hour of the month to purchase 100 shares of one of these small securities at a modest premium to the last trade price. If the trade gets executed, that price can then be used on the account statements. The small size of these trades does not significantly affect the fund’s overall position in any particular company holding, which is typically several thousand shares.
Soft Dollar Usage
Several different managers at CA use independent research in developing investment ideas. One of the more popular research services among CA managers is "Beneath the Numbers (BTN)," which focuses on potential accounting abuses at prominent companies. This service often provides early warnings of problems with a stock, allowing CA managers the opportunity to sell their clients’ positions before a negative surprise lowers the price. Stocks covered by BTN are typically widely held in CA client accounts. Managers at CA have been so happy with BTN that they have also subscribed to a new research product provided by the same authors―"Beneath the Radar (BTR)." BTR recommends small capitalization securities that are not large enough to attract much attention from large institutional investors. The results of BTR’s recommendations are mixed thus far, but CA managers are willing to be patient.
As they discuss these issues, Riley informs Simpson that she is determined to bring CA into full compliance with the CFA Institute’s "Asset Manager Code of Professional Conduct." The following questions should be answered with the Asset Manager Code as a guide.
In discussing the pricing of thinly traded securities in the private equity fund, Riley suggested that CA should choose one pricing method and apply it consistently, thus avoiding the need to disclose specific pricing methods to clients. Simpson responded that using third party sources or internal valuation models was acceptable, so long as the pricing sources are fully disclosed to clients. Indicate whether Riley’s comment or Simpson’s response are correct or incorrect.
- A . Both Riley’s comment and Simpson’s response are correct.
- B . Riley’s comment is not correct; however Simpson’s response is correct.
- C . Riley is correct, while Simpson is not correct.
B
Explanation:
Riley was incorrect. The pricing methodology should be disclosed to clients, whether one or multiple
sources are used. Simpson was correct. Multiple sources are acceptable, so long as full disclosure is made. (Study Session 2, LOS 6.b)
Shirley Riley, CFA, has just been promoted, from vice president of trading to chief investment officer (CIO) at Crane & Associates, LLC (CA), a large investment management firm. Riley has been with CA for eight years, but she has much to learn as she assumes her new duties as CIO. Riley has decided to hire Denny Simpson, CFA, as the new compliance officer for CA, Riley and Simpson have been reviewing procedures and policies throughout the firm and have discovered several potential issues.
Communications with Clients
Portfolio managers are encouraged to communicate with clients on a regular basis. At a minimum,
managers are expected to contact clients on a quarterly basis to review portfolio performance. Each client
must have an investment policy statement (IPS) created when their account is opened, specifying the
objectives and constraints for their portfolio. IPSs are reviewed at client request at any time. Any time
market conditions dictate a change in the investment style or strategy of a client portfolio, the client is
notified immediately by phone or email.
Employee Incentive Program
CA offers several incentive programs to employees. One of the most popular of these programs is the CA IPO program. Whenever CA is involved in an initial public offering (IPO), portfolio managers are allowed to participate. The structure is simple―for every 100 shares purchased on behalf of a client, the manager is awarded five shares for his own account. The manager is thus rewarded for getting an IPO sold and at the same time is able to share in the results of the IPO. Any-time shares are remaining 72 hours before the IPO goes public, other employees are allowed to participate on a first-come, first-serve basis. Employees seem to appreciate this opportunity, but CA does not have exact numbers on employee participation in the program.
Private Equity Fund
CA has a private equity fund that is internally managed. This fund is made available only to clients with more than $5 million in assets managed by CA, a policy that is fully disclosed in CA’s marketing materials. Roughly one-third of the fund’s assets are invested in companies that are either very small capitalization or thinly traded (or both). The pricing of these securities for monthly account statements is often difficult. CA support staff get information from different sources―sometimes using third party services, sometimes using CA valuation models. In some instances, a manager of the private equity fund will enter an order during the last trading hour of the month to purchase 100 shares of one of these small securities at a modest premium to the last trade price. If the trade gets executed, that price can then be used on the account statements. The small size of these trades does not significantly affect the fund’s overall position in any particular company holding, which is typically several thousand shares.
Soft Dollar Usage
Several different managers at CA use independent research in developing investment ideas. One of the more popular research services among CA managers is "Beneath the Numbers (BTN)," which focuses on potential accounting abuses at prominent companies. This service often provides early warnings of problems with a stock, allowing CA managers the opportunity to sell their clients’ positions before a negative surprise lowers the price. Stocks covered by BTN are typically widely held in CA client accounts. Managers at CA have been so happy with BTN that they have also subscribed to a new research product provided by the same authors―"Beneath the Radar (BTR)." BTR recommends small capitalization securities that are not large enough to attract much attention from large institutional investors. The results of BTR’s recommendations are mixed thus far, but CA managers are willing to be patient.
As they discuss these issues, Riley informs Simpson that she is determined to bring CA into full compliance with the CFA Institute’s "Asset Manager Code of Professional Conduct." The following questions should be answered with the Asset Manager Code as a guide.
Trading stocks during the last trading hour of a month to establish a fair market price:
- A . does not violate the Asset Manager Code of Professional Conduct.
- B . is acceptable so long as the trade is not material relative to the overall CA position in the security.
- C . is not consistent with the Asset Manager Code of Professional Conduct.
C
Explanation:
This type of trading is clearly market manipulation. Even though the 100 shares may be insignificant, the trade sets the price for the entire position. Such trades, especially entered as buy orders, are an unethical attempt to manipulate prices higher and justify a higher return for the period.
However, even a sell transaction made under similar circumstances would be market manipulation. (Study Session 2, LOS 6.b)
Shirley Riley, CFA, has just been promoted, from vice president of trading to chief investment officer (CIO) at Crane & Associates, LLC (CA), a large investment management firm. Riley has been with CA for eight years, but she has much to learn as she assumes her new duties as CIO. Riley has decided to hire Denny Simpson, CFA, as the new compliance officer for CA, Riley and Simpson have been reviewing procedures and policies throughout the firm and have discovered several potential issues.
Communications with Clients
Portfolio managers are encouraged to communicate with clients on a regular basis. At a minimum,
managers are expected to contact clients on a quarterly basis to review portfolio performance. Each client
must have an investment policy statement (IPS) created when their account is opened, specifying the
objectives and constraints for their portfolio. IPSs are reviewed at client request at any time. Any time
market conditions dictate a change in the investment style or strategy of a client portfolio, the client is
notified immediately by phone or email.
Employee Incentive Program
CA offers several incentive programs to employees. One of the most popular of these programs is the CA IPO program. Whenever CA is involved in an initial public offering (IPO), portfolio managers are allowed to participate. The structure is simple―for every 100 shares purchased on behalf of a client, the manager is awarded five shares for his own account. The manager is thus rewarded for getting an IPO sold and at the same time is able to share in the results of the IPO. Any-time shares are remaining 72 hours before the IPO goes public, other employees are allowed to participate on a first-come, first-serve basis. Employees seem to appreciate this opportunity, but CA does not have exact numbers on employee participation in the program.
Private Equity Fund
CA has a private equity fund that is internally managed. This fund is made available only to clients with more than $5 million in assets managed by CA, a policy that is fully disclosed in CA’s marketing materials. Roughly one-third of the fund’s assets are invested in companies that are either very small capitalization or thinly traded (or both). The pricing of these securities for monthly account statements is often difficult. CA support staff get information from different sources―sometimes using third party services, sometimes using CA valuation models. In some instances, a manager of the private equity fund will enter an order during the last trading hour of the month to purchase 100 shares of one of these small securities at a modest premium to the last trade price. If the trade gets executed, that price can then be used on the account statements. The small size of these trades does not significantly affect the fund’s overall position in any particular company holding, which is typically several thousand shares.
Soft Dollar Usage
Several different managers at CA use independent research in developing investment ideas. One of the more popular research services among CA managers is "Beneath the Numbers (BTN)," which focuses on potential accounting abuses at prominent companies. This service often provides early warnings of problems with a stock, allowing CA managers the opportunity to sell their clients’ positions before a negative surprise lowers the price. Stocks covered by BTN are typically widely held in CA client accounts. Managers at CA have been so happy with BTN that they have also subscribed to a new research product provided by the same authors―"Beneath the Radar (BTR)." BTR recommends small capitalization securities that are not large enough to attract much attention from large institutional investors. The results of BTR’s recommendations are mixed thus far, but CA managers are willing to be patient.
As they discuss these issues, Riley informs Simpson that she is determined to bring CA into full compliance with the CFA Institute’s "Asset Manager Code of Professional Conduct." The following questions should be answered with the Asset Manager Code as a guide.
Simpson has verified that CA has adequate disclosures of its soft dollar usage. Given that full disclosure is made to clients, indicate whether CA’s use of soft dollars for BTN and BTR are consistent with the Asset Manager Code of Professional Conduct.
- A . Given the adequate disclosures, use of soft dollars for both BTN and BTR is acceptable.
- B . Use of soft dollars for BTN is acceptable, but not for BTR.
- C . Neither of these publications provide direct benefit to the client, thus neither may be paid for with soft dollars.
Shirley Riley, CFA, has just been promoted, from vice president of trading to chief investment officer (CIO) at Crane & Associates, LLC (CA), a large investment management firm. Riley has been with CA for eight years, but she has much to learn as she assumes her new duties as CIO. Riley has decided to hire Denny Simpson, CFA, as the new compliance officer for CA, Riley and Simpson have been reviewing procedures and policies throughout the firm and have discovered several potential issues.
Communications with Clients
Portfolio managers are encouraged to communicate with clients on a regular basis. At a minimum,
managers are expected to contact clients on a quarterly basis to review portfolio performance. Each client
must have an investment policy statement (IPS) created when their account is opened, specifying the
objectives and constraints for their portfolio. IPSs are reviewed at client request at any time. Any time
market conditions dictate a change in the investment style or strategy of a client portfolio, the client is
notified immediately by phone or email.
Employee Incentive Program
CA offers several incentive programs to employees. One of the most popular of these programs is the CA IPO program. Whenever CA is involved in an initial public offering (IPO), portfolio managers are allowed to participate. The structure is simple―for every 100 shares purchased on behalf of a client, the manager is awarded five shares for his own account. The manager is thus rewarded for getting an IPO sold and at the same time is able to share in the results of the IPO. Any-time shares are remaining 72 hours before the IPO goes public, other employees are allowed to participate on a first-come, first-serve basis. Employees seem to appreciate this opportunity, but CA does not have exact numbers on employee participation in the program.
Private Equity Fund
CA has a private equity fund that is internally managed. This fund is made available only to clients with more than $5 million in assets managed by CA, a policy that is fully disclosed in CA’s marketing materials. Roughly one-third of the fund’s assets are invested in companies that are either very small capitalization or thinly traded (or both). The pricing of these securities for monthly account statements is often difficult. CA support staff get information from different sources―sometimes using third party services, sometimes using CA valuation models. In some instances, a manager of the private equity fund will enter an order during the last trading hour of the month to purchase 100 shares of one of these small securities at a modest premium to the last trade price. If the trade gets executed, that price can then be used on the account statements. The small size of these trades does not significantly affect the fund’s overall position in any particular company holding, which is typically several thousand shares.
Soft Dollar Usage
Several different managers at CA use independent research in developing investment ideas. One of the more popular research services among CA managers is "Beneath the Numbers (BTN)," which focuses on potential accounting abuses at prominent companies. This service often provides early warnings of problems with a stock, allowing CA managers the opportunity to sell their clients’ positions before a negative surprise lowers the price. Stocks covered by BTN are typically widely held in CA client accounts. Managers at CA have been so happy with BTN that they have also subscribed to a new research product provided by the same authors―"Beneath the Radar (BTR)." BTR recommends small capitalization securities that are not large enough to attract much attention from large institutional investors. The results of BTR’s recommendations are mixed thus far, but CA managers are willing to be patient.
As they discuss these issues, Riley informs Simpson that she is determined to bring CA into full compliance with the CFA Institute’s "Asset Manager Code of Professional Conduct." The following questions should be answered with the Asset Manager Code as a guide.
Simpson has verified that CA has adequate disclosures of its soft dollar usage. Given that full disclosure is made to clients, indicate whether CA’s use of soft dollars for BTN and BTR are consistent with the Asset Manager Code of Professional Conduct.
- A . Given the adequate disclosures, use of soft dollars for both BTN and BTR is acceptable.
- B . Use of soft dollars for BTN is acceptable, but not for BTR.
- C . Neither of these publications provide direct benefit to the client, thus neither may be paid for with soft dollars.
Shirley Riley, CFA, has just been promoted, from vice president of trading to chief investment officer (CIO) at Crane & Associates, LLC (CA), a large investment management firm. Riley has been with CA for eight years, but she has much to learn as she assumes her new duties as CIO. Riley has decided to hire Denny Simpson, CFA, as the new compliance officer for CA, Riley and Simpson have been reviewing procedures and policies throughout the firm and have discovered several potential issues.
Communications with Clients
Portfolio managers are encouraged to communicate with clients on a regular basis. At a minimum,
managers are expected to contact clients on a quarterly basis to review portfolio performance. Each client
must have an investment policy statement (IPS) created when their account is opened, specifying the
objectives and constraints for their portfolio. IPSs are reviewed at client request at any time. Any time
market conditions dictate a change in the investment style or strategy of a client portfolio, the client is
notified immediately by phone or email.
Employee Incentive Program
CA offers several incentive programs to employees. One of the most popular of these programs is the CA IPO program. Whenever CA is involved in an initial public offering (IPO), portfolio managers are allowed to participate. The structure is simple―for every 100 shares purchased on behalf of a client, the manager is awarded five shares for his own account. The manager is thus rewarded for getting an IPO sold and at the same time is able to share in the results of the IPO. Any-time shares are remaining 72 hours before the IPO goes public, other employees are allowed to participate on a first-come, first-serve basis. Employees seem to appreciate this opportunity, but CA does not have exact numbers on employee participation in the program.
Private Equity Fund
CA has a private equity fund that is internally managed. This fund is made available only to clients with more than $5 million in assets managed by CA, a policy that is fully disclosed in CA’s marketing materials. Roughly one-third of the fund’s assets are invested in companies that are either very small capitalization or thinly traded (or both). The pricing of these securities for monthly account statements is often difficult. CA support staff get information from different sources―sometimes using third party services, sometimes using CA valuation models. In some instances, a manager of the private equity fund will enter an order during the last trading hour of the month to purchase 100 shares of one of these small securities at a modest premium to the last trade price. If the trade gets executed, that price can then be used on the account statements. The small size of these trades does not significantly affect the fund’s overall position in any particular company holding, which is typically several thousand shares.
Soft Dollar Usage
Several different managers at CA use independent research in developing investment ideas. One of the more popular research services among CA managers is "Beneath the Numbers (BTN)," which focuses on potential accounting abuses at prominent companies. This service often provides early warnings of problems with a stock, allowing CA managers the opportunity to sell their clients’ positions before a negative surprise lowers the price. Stocks covered by BTN are typically widely held in CA client accounts. Managers at CA have been so happy with BTN that they have also subscribed to a new research product provided by the same authors―"Beneath the Radar (BTR)." BTR recommends small capitalization securities that are not large enough to attract much attention from large institutional investors. The results of BTR’s recommendations are mixed thus far, but CA managers are willing to be patient.
As they discuss these issues, Riley informs Simpson that she is determined to bring CA into full compliance with the CFA Institute’s "Asset Manager Code of Professional Conduct." The following questions should be answered with the Asset Manager Code as a guide.
Simpson has verified that CA has adequate disclosures of its soft dollar usage. Given that full disclosure is made to clients, indicate whether CA’s use of soft dollars for BTN and BTR are consistent with the Asset Manager Code of Professional Conduct.
- A . Given the adequate disclosures, use of soft dollars for both BTN and BTR is acceptable.
- B . Use of soft dollars for BTN is acceptable, but not for BTR.
- C . Neither of these publications provide direct benefit to the client, thus neither may be paid for with soft dollars.
Shirley Riley, CFA, has just been promoted, from vice president of trading to chief investment officer (CIO) at Crane & Associates, LLC (CA), a large investment management firm. Riley has been with CA for eight years, but she has much to learn as she assumes her new duties as CIO. Riley has decided to hire Denny Simpson, CFA, as the new compliance officer for CA, Riley and Simpson have been reviewing procedures and policies throughout the firm and have discovered several potential issues.
Communications with Clients
Portfolio managers are encouraged to communicate with clients on a regular basis. At a minimum,
managers are expected to contact clients on a quarterly basis to review portfolio performance. Each client
must have an investment policy statement (IPS) created when their account is opened, specifying the
objectives and constraints for their portfolio. IPSs are reviewed at client request at any time. Any time
market conditions dictate a change in the investment style or strategy of a client portfolio, the client is
notified immediately by phone or email.
Employee Incentive Program
CA offers several incentive programs to employees. One of the most popular of these programs is the CA IPO program. Whenever CA is involved in an initial public offering (IPO), portfolio managers are allowed to participate. The structure is simple―for every 100 shares purchased on behalf of a client, the manager is awarded five shares for his own account. The manager is thus rewarded for getting an IPO sold and at the same time is able to share in the results of the IPO. Any-time shares are remaining 72 hours before the IPO goes public, other employees are allowed to participate on a first-come, first-serve basis. Employees seem to appreciate this opportunity, but CA does not have exact numbers on employee participation in the program.
Private Equity Fund
CA has a private equity fund that is internally managed. This fund is made available only to clients with more than $5 million in assets managed by CA, a policy that is fully disclosed in CA’s marketing materials. Roughly one-third of the fund’s assets are invested in companies that are either very small capitalization or thinly traded (or both). The pricing of these securities for monthly account statements is often difficult. CA support staff get information from different sources―sometimes using third party services, sometimes using CA valuation models. In some instances, a manager of the private equity fund will enter an order during the last trading hour of the month to purchase 100 shares of one of these small securities at a modest premium to the last trade price. If the trade gets executed, that price can then be used on the account statements. The small size of these trades does not significantly affect the fund’s overall position in any particular company holding, which is typically several thousand shares.
Soft Dollar Usage
Several different managers at CA use independent research in developing investment ideas. One of the more popular research services among CA managers is "Beneath the Numbers (BTN)," which focuses on potential accounting abuses at prominent companies. This service often provides early warnings of problems with a stock, allowing CA managers the opportunity to sell their clients’ positions before a negative surprise lowers the price. Stocks covered by BTN are typically widely held in CA client accounts. Managers at CA have been so happy with BTN that they have also subscribed to a new research product provided by the same authors―"Beneath the Radar (BTR)." BTR recommends small capitalization securities that are not large enough to attract much attention from large institutional investors. The results of BTR’s recommendations are mixed thus far, but CA managers are willing to be patient.
As they discuss these issues, Riley informs Simpson that she is determined to bring CA into full compliance with the CFA Institute’s "Asset Manager Code of Professional Conduct." The following questions should be answered with the Asset Manager Code as a guide.
Simpson has verified that CA has adequate disclosures of its soft dollar usage. Given that full disclosure is made to clients, indicate whether CA’s use of soft dollars for BTN and BTR are consistent with the Asset Manager Code of Professional Conduct.
- A . Given the adequate disclosures, use of soft dollars for both BTN and BTR is acceptable.
- B . Use of soft dollars for BTN is acceptable, but not for BTR.
- C . Neither of these publications provide direct benefit to the client, thus neither may be paid for with soft dollars.
The firm must increase the level of review or restriction of proprietary trading activities during periods in which the firm has knowledge of information that is both material and nonpublic.
Bentley has identified two of Green’s analysts, neither of whom have non-compete contracts, who are preparing to leave Federal Securities and go into competition. The first employee, James Ybarra, CFA, has agreed to take a position with one of Federal’s direct competitors. Ybarra has contacted existing Federal clients using a client list he created with public records. None of the contacted clients have agreed to move their accounts as Ybarra has requested. The second employee, Martha Cliff, CFA, has registered the name Cliff Investment Consulting (CIC), which she plans to use for her independent consulting business. For the new business venture, Cliff has developed and professionally printed marketing literature that compares the new firm’s services to that of Federal Securities and highlights the significant cost savings that will be realized by switching to CIC. After she leaves Federal, Cliff plans to target many of the same prospects that Federal Securities is targeting, using an address list she purchased from a third-party vendor. Bentley decides to call a meeting with Green to discuss his findings.
After discussing the departing analysts. Green asks Bentley how to best handle the disclosure of the following items: (1) although not currently a board member. Green has served in the past on the board of directors of a company he researches and expects that he will do so again in the near future; and (2) Green recently inherited put options on a company for which he has an outstanding buy recommendation. Bentley is contemplating his response to Green.
According to Standard 11(A) Material Nonpublic Information, when Green contacted Volk, he:
- A . violated CFA Institute Standards.
- B . violated of CFA Institute Standards unless the contact was disclosed to his clients.
- C . did not violate CFA Institute Standards since he was conducting a legitimate research activity.
C
Explanation:
There is no evidence co suggest that the contact was inappropriate. Green is crying co gauge investor sentiment relative to technology stocks. While a fire wall within the firm would be advisable, since no company-specific information was exchanged, the contact was relatively harmless. Also, there is no violation of Standard 11(A) Material Nonpublic Information because there was no inside information discussed. (Study Session 1, LOS 2.a)
The firm must increase the level of review or restriction of proprietary trading activities during periods in which the firm has knowledge of information that is both material and nonpublic.
Bentley has identified two of Green’s analysts, neither of whom have non-compete contracts, who are preparing to leave Federal Securities and go into competition. The first employee, James Ybarra, CFA, has agreed to take a position with one of Federal’s direct competitors. Ybarra has contacted existing Federal clients using a client list he created with public records. None of the contacted clients have agreed to move their accounts as Ybarra has requested. The second employee, Martha Cliff, CFA, has registered the name Cliff Investment Consulting (CIC), which she plans to use for her independent consulting business. For the new business venture, Cliff has developed and professionally printed marketing literature that compares the new firm’s services to that of Federal Securities and highlights the significant cost savings that will be realized by switching to CIC. After she leaves Federal, Cliff plans to target many of the same prospects that Federal Securities is targeting, using an address list she purchased from a third-party vendor. Bentley decides to call a meeting with Green to discuss his findings.
After discussing the departing analysts. Green asks Bentley how to best handle the disclosure of the following items: (1) although not currently a board member. Green has served in the past on the board of directors of a company he researches and expects that he will do so again in the near future; and (2) Green recently inherited put options on a company for which he has an outstanding buy recommendation. Bentley is contemplating his response to Green.
According to Standard 11(A) Material Nonpublic Information, when Green contacted Volk, he:
- A . violated CFA Institute Standards.
- B . violated of CFA Institute Standards unless the contact was disclosed to his clients.
- C . did not violate CFA Institute Standards since he was conducting a legitimate research activity.
C
Explanation:
There is no evidence co suggest that the contact was inappropriate. Green is crying co gauge investor sentiment relative to technology stocks. While a fire wall within the firm would be advisable, since no company-specific information was exchanged, the contact was relatively harmless. Also, there is no violation of Standard 11(A) Material Nonpublic Information because there was no inside information discussed. (Study Session 1, LOS 2.a)
The firm must increase the level of review or restriction of proprietary trading activities during periods in which the firm has knowledge of information that is both material and nonpublic.
Bentley has identified two of Green’s analysts, neither of whom have non-compete contracts, who are preparing to leave Federal Securities and go into competition. The first employee, James Ybarra, CFA, has agreed to take a position with one of Federal’s direct competitors. Ybarra has contacted existing Federal clients using a client list he created with public records. None of the contacted clients have agreed to move their accounts as Ybarra has requested. The second employee, Martha Cliff, CFA, has registered the name Cliff Investment Consulting (CIC), which she plans to use for her independent consulting business. For the new business venture, Cliff has developed and professionally printed marketing literature that compares the new firm’s services to that of Federal Securities and highlights the significant cost savings that will be realized by switching to CIC. After she leaves Federal, Cliff plans to target many of the same prospects that Federal Securities is targeting, using an address list she purchased from a third-party vendor. Bentley decides to call a meeting with Green to discuss his findings.
After discussing the departing analysts. Green asks Bentley how to best handle the disclosure of the following items: (1) although not currently a board member. Green has served in the past on the board of directors of a company he researches and expects that he will do so again in the near future; and (2) Green recently inherited put options on a company for which he has an outstanding buy recommendation. Bentley is contemplating his response to Green.
According to Standard 11(A) Material Nonpublic Information, when Green contacted Volk, he:
- A . violated CFA Institute Standards.
- B . violated of CFA Institute Standards unless the contact was disclosed to his clients.
- C . did not violate CFA Institute Standards since he was conducting a legitimate research activity.
C
Explanation:
There is no evidence co suggest that the contact was inappropriate. Green is crying co gauge investor sentiment relative to technology stocks. While a fire wall within the firm would be advisable, since no company-specific information was exchanged, the contact was relatively harmless. Also, there is no violation of Standard 11(A) Material Nonpublic Information because there was no inside information discussed. (Study Session 1, LOS 2.a)
The firm must increase the level of review or restriction of proprietary trading activities during periods in which the firm has knowledge of information that is both material and nonpublic.
Bentley has identified two of Green’s analysts, neither of whom have non-compete contracts, who are preparing to leave Federal Securities and go into competition. The first employee, James Ybarra, CFA, has agreed to take a position with one of Federal’s direct competitors. Ybarra has contacted existing Federal clients using a client list he created with public records. None of the contacted clients have agreed to move their accounts as Ybarra has requested. The second employee, Martha Cliff, CFA, has registered the name Cliff Investment Consulting (CIC), which she plans to use for her independent consulting business. For the new business venture, Cliff has developed and professionally printed marketing literature that compares the new firm’s services to that of Federal Securities and highlights the significant cost savings that will be realized by switching to CIC. After she leaves Federal, Cliff plans to target many of the same prospects that Federal Securities is targeting, using an address list she purchased from a third-party vendor. Bentley decides to call a meeting with Green to discuss his findings.
After discussing the departing analysts. Green asks Bentley how to best handle the disclosure of the following items: (1) although not currently a board member. Green has served in the past on the board of directors of a company he researches and expects that he will do so again in the near future; and (2) Green recently inherited put options on a company for which he has an outstanding buy recommendation. Bentley is contemplating his response to Green.
According to Standard 11(A) Material Nonpublic Information, when Green contacted Volk, he:
- A . violated CFA Institute Standards.
- B . violated of CFA Institute Standards unless the contact was disclosed to his clients.
- C . did not violate CFA Institute Standards since he was conducting a legitimate research activity.
C
Explanation:
There is no evidence co suggest that the contact was inappropriate. Green is crying co gauge investor sentiment relative to technology stocks. While a fire wall within the firm would be advisable, since no company-specific information was exchanged, the contact was relatively harmless. Also, there is no violation of Standard 11(A) Material Nonpublic Information because there was no inside information discussed. (Study Session 1, LOS 2.a)
The firm must increase the level of review or restriction of proprietary trading activities during periods in which the firm has knowledge of information that is both material and nonpublic.
Bentley has identified two of Green’s analysts, neither of whom have non-compete contracts, who are preparing to leave Federal Securities and go into competition. The first employee, James Ybarra, CFA, has agreed to take a position with one of Federal’s direct competitors. Ybarra has contacted existing Federal clients using a client list he created with public records. None of the contacted clients have agreed to move their accounts as Ybarra has requested. The second employee, Martha Cliff, CFA, has registered the name Cliff Investment Consulting (CIC), which she plans to use for her independent consulting business. For the new business venture, Cliff has developed and professionally printed marketing literature that compares the new firm’s services to that of Federal Securities and highlights the significant cost savings that will be realized by switching to CIC. After she leaves Federal, Cliff plans to target many of the same prospects that Federal Securities is targeting, using an address list she purchased from a third-party vendor. Bentley decides to call a meeting with Green to discuss his findings.
After discussing the departing analysts. Green asks Bentley how to best handle the disclosure of the following items: (1) although not currently a board member. Green has served in the past on the board of
directors of a company he researches and expects that he will do so again in the near future; and (2) Green recently inherited put options on a company for which he has an outstanding buy recommendation. Bentley is contemplating his response to Green.
According to CFA Institute Standards of Professional Conduct, which of the following statements regarding Green’s recommendation to Federal Securities’ clients is TRUE?
- A . Green violated the Standards by making a material misrepresentation in his report to Federal Securities’ clients.
- B . Green violated the Standards by failing to preserve the confidentiality of Federal Securities’ investment banking clients.
- C . Green did not violate the Standards since he made a suitable recommendation in the best interest of Federal Securities’ clients.
A
Explanation:
Green has taken a small number of oversubscribed IPOs to represent the entire market for technology IPOs. This is clearly a misrepresentation of the true market situation. Thus, Green has violated Standard 1 (C) Misrepresentations which prohibits such misstatements of fact. Also, IPOs may not be suitable for all accounts, but Green has recommended that all of Federal Securities’ portfolio managers add the IPO shares to their portfolios. Green did not violate the confidentiality of the investment banking clients since he was unaware of, and did not disclose, any details of the upcoming IPOs, Also, Green was not in possession of any material nonpublic information. (Study Session I, LOS2.a)