2019 CFA level 3 qbank reading 4 asset manager code of professional conduct answers

Study Session 2, Module 4.1, LOS 4.c Related Material SchweserNotes - Book 1 Question #2 of 24 With regard to the Flim am stock, the Code was: A broken when Jung purchased Flim am shares

Trang 1

Kendall Kratz is consulting for Westmoreland Financial Services Kratz was brought in by William

J Westmoreland IV, grandson of the company's founder, to address concerns about ethics

Westmoreland Financial does not have a centralized ethics code, but rather a series of rules of

conduct, most of which were instituted more than 20 years ago William Westmoreland is

worried that the rm's policies have not changed with the times, so he has hired Kratz to review

all of the rules and bring the rm into compliance with the Asset Manager Code of Professional

Conduct

As soon as he arrives at Westmoreland Financial, Kratz receives a copy of all the rules of

conduct for his review Every client receives a copy of these rules Kratz settles down in a vacant

o ce to read and writes down the following

IPO's are distributed to about 60 percent of client accounts in proportion to account size, but the remaining 40 percent do not receive any allocation

All investment policy statements are reviewed on an annual basis

Portfolio managers may accept any gift valued up to $200 provided that they notify their supervisors in writing, but must receive written consent from the compliance o cer in advance before accepting anything more expensive

Most stock research is done in-house About 30 percent of Westmoreland Financial clients do not own bonds, but substantially all of client brokerage pays for bond research

Westmoreland Financial employees must receive preauthorization before buying stocks

in the company's portfolio model, and are not to buy stocks in advance of recommending them for addition to the portfolio model

In a later discussion with William Westmoreland, he learns that all of the rm's trades are

conducted through Babel Brokerage, a business owned by William Westmoreland's nephew

Babel provides best pricing and execution

After making some recommendations regarding rules changes, Kratz is given two les to

consider William Westmoreland believes the rm has not acted correctly, and wants Kratz's

opinion

The rst le relates to the matter of Justin Yeats, a wealthy and amboyant movie actor with

more than $15 million under management at Westmoreland Financial Veronica Jung, who

manages the Yeats account, wrote this account of what happened:

"Yeats called me at 8 a.m Eastern time, an hour before the market opened He wanted me to

www.ombookcentre.in

Trang 2

raiser the night before and provided some enticing sales gures for the rm's latest movie.

"Yeats, who is a bit of a stock junkie, also told me to purchase shares of Blanton Resorts He

said he recently stayed in a Blanton Resort and found it o ered amenities not found elsewhere

He then did some research, talking to the resort manager to assess his quali cations and

entrepreurial business approach, and reviewing the company's mission statement and

nancials After all that, he concluded that Blanton was hiring the right people to grow the

business

"After Yeats hung up, I looked up Flim am and discovered that the shares looked cheap I then

checked news reports, but found only one story about the fund-raiser on the society page The

CEO's comments were not discussed I also did some research on Blanton and learned that the

stock's volume was low, and only one analyst covered it The stock appeared very cheap relative

to earnings and book value I immediately recommended Blanton for addition to the portfolio

model and submitted a purchase order for Blanton for all of my accounts before the market

opened, knowing it would not be executed until after the stock was approved by the investment

director in the afternoon

"I bought shares of Flim am for Yeats, and then picked up a few shares for myself, but I did not

buy Blanton for Yeats until the larger order was submitted, because I did not want to give Yeats

preferential treatment

"Later that day, Agent Cornelius Fillmore of the Internal Revenue Service (IRS) called to request

Yeats' trading records for a tax audit In accordance with company policy, I refused, citing

privacy concerns Fillmore did not take the news well and said the agency's attorneys would be

in touch After the legal threat, I reconsidered and sent him the les."

The second le contains Westmoreland's disclosure policy:

All returns disclosure will be presented net of fees

All returns will be calculated on a quarterly basis, with monthly results available upon request

Any legal action taken against the analyst who manages the client account will be disclosed

All clients will receive a summary of our investment strategy and information about the risks of the investments in their portfolios

Reports will contain information about our use of soft dollars, referral fees, sales incentives, brokerage arrangements, and a breakdown of our employees' holdings of stocks' in the client's portfolio

www.ombookcentre.in

Trang 3

After reading the disclosure policy, Kratz recommends that the company add four items to the

disclosure policy:

1 Allocation procedures

2 Quali cations of account managers

3 Asset-valuation methods

4 Proxy-voting policies

Question #1 of 24

Which of Kratz's four suggested additions to the disclosure policy goes beyond the

recommendations set down by the Code?

A) Recommendation 3.

B) Recommendation 2.

C) Recommendation 1.

Explanation

The suggested disclosures include allocation procedures, valuations methods, and proxy

policies, but not quali cations of employees

(Study Session 2, Module 4.1, LOS 4.c)

Related Material

SchweserNotes - Book 1

With regard to the Flim am stock, the Code was:

A) broken when Jung purchased Flim am shares for herself, but not when she

purchased the shares for Yeats or when Yeats tipped her o about Flim am

B) broken when Jung purchased Flim am for herself, and when she purchased

Flim am for Yeats, but not when Yeats tipped her o about Flim am

C) not broken.

Explanation

www.ombookcentre.in

Trang 4

A speech at a fund-raiser is most likely a public event When a reporter is there, the issue of

disclosure is moot, regardless of whether the reporter thought to write about the business

news Yeats' tip is legitimate, and barring any rules about preauthorization, of which we have

no knowledge, Jung's purchase of Flim am shares for Yeats, then afterward for herself,

seems ethically sound

With regard to Babel Brokerage, Westmoreland Financial:

A) can comply with the Code only if it receives permission from clients.

B) can comply with the Code only if it switches a di erent brokerage.

C) is in compliance with the Code.

Explanation

While the use of Babel Brokerage may not look good, the holy grail of brokerage is best

pricing and execution If clients are receiving the best service possible, the fact that William

Westmoreland's nephew owns the company does not put Westmoreland Financial in violation

of the Code However, the rm would be wise to either switch brokerages or disclose the

relationship to clients and receive permission

How many items on Westmoreland's disclosure policy are insu cient to satisfy the Code?

A) 1 item.

B) 2 items.

C) 3 items.

Explanation

www.ombookcentre.in

Trang 5

Standard 4.A.14 says that rms must disclose all signi cant events that would help a

prospective client interpret the compliant presentation thus legal disclosure should include

information about action taken against the rm not just the investment advisor Firms are

required to present either gross or net of fees as long as it is properly labeled so this is not a

violation of the GIPS It is a recommendatin that returns should be presented gross of fees.

The other three statements satisfy the Code

With regard to the Yeats account, Jung broke the Code:

A) only when she sent the trading records to the IRS.

B) when she failed to purchase Blanton shares for Yeats in the morning, but not when

she recommended Blanton shares for purchase

C) when she recommended Blanton shares for purchase, and when she failed to

purchase Blanton shares for Yeats in the morning

Explanation

Jung violated the investment-process rules when she recommended Blanton stock for

purchase based on nothing more than a recommendation from a client and a few minutes of

analysis She received a phone call an hour before the market opened, yet managed to talk to

her client and research two stocks before the hour was up She did not meet the standard,

"Thoroughly investigate and research di erent investment options to have a reasonable basis

for a recommendation." As for Yeats' shares, while she did not have enough information to

recommend Blanton, she did have Yeats' instructions to purchase the stock for himself There

appear to be no insider-trading issues, as the only nonpublic information he cited was an

informal conversation with the manager, which is not likely to be material So Jung should

have purchased the shares for Yeats immediately, but not recommended them for anyone

else until she had researched the company thoroughly Based on her reasoning for not

buying Flim am, Jung was apparently allowed to purchase speci c stocks at the request of

investors without submitting them for approval by the investment director, so no matter

what she thought about Blanton, there was no reason to wait on buying shares for Yeats

Regarding the IRS, con dentiality rules do not necessarily apply to o cial legal investigations

www.ombookcentre.in

Trang 6

Which of the rules Kratz wrote down is most likely in violation of the Code?

A) Portfolio managers may accept any gift valued up to $200 provided that they notify

their supervisors in writing, but must receive written consent from the compliance

B) IPO’s are distributed to about 60 percent of client accounts in proportion to account

size, but the remaining 40 percent do not receive any allocation

C) Most stock research is done in-house About 30 percent of Westmoreland Financial

clients do not own bonds, but substantially all of client brokerage pays for bond

h

Explanation

The Code prohibits the acceptance of gifts other than of a modest value There is no dollar

amount stipulated in the standards although most likely $200 could be considered excessive

The other requirements in the gift policy appear to conform The IPO allocation looks bad

from the start, but the Code says investments must be fairly distributed among the accounts

for which they are suitable IPO's are not for everyone, and it is certainly plausible that 40

percent of client accounts are too conservative for such securities An annual review of

investment policy statements is su cient Regarding soft dollars, the Code and Standards

acknowledges that not every client will bene t from the all research Such mismatches are

unavoidable from a practical standpoint, and as long as brokerage is allocated toward

research alone, the rm should be covered

Which of the following is part of the general principles of conduct related to the Asset Manager

Code of Professional Conduct?

A) Disclosing con icts of interest.

B) Communicating with clients in an accurate and timely manner.

C) Seeking best execution.

Explanation

www.ombookcentre.in

Trang 7

The general principles of conduct related to the Asset Manager Code of Professional Conduct

are:

Act in a professional and ethical manner at all times;

Act for the bene t of the clients;

Act with independence and objectivity;

Act with skill, competence, and diligence;

Communicate with clients in a timely and accurate manner; and Uphold the applicable rules governing capital markets

The other answer choices deal with speci c sections of the Asset Manager Code but are not

considered part of the general principles of conduct

(Study Session 2, Module 4.1, LOS 4.b)

Which of the following is NOT part of the ethical responsibilities related to the Asset Manager

A) Act in an objective manner.

B) Do not engage in market manipulation of security prices.

C) Communicate with clients in an accurate manner.

Explanation

The ethical responsibilities related to the Code are:

Always act ethically and professionally;

Act in the best interest of the client;

Act in an objective and independent manner;

Perform actions using skill, competence, and diligence;

communicate accurately with clients on a regular basis; and comply with all legal and regulatory requirements

Not engaging in market manipulation of security prices is part of the Investment Process

and Actions section of the Code and is not considered one of the ethical responsibilities.

www.ombookcentre.in

Trang 8

A) Maintain the con dentiality of client information.

B) Always act in a professional manner.

C) Maintain your independence.

Explanation

Maintaining the con dentiality of client information is part of the section of the Code dealing

with Loyalty and is not considered one of the ethical responsibilities.

A) Communicating with clients on a regular basis.

B) Trading regarding insider information, priority of transactions, soft dollars, and best

execution

C) Acting in an independent manner.

Explanation

www.ombookcentre.in

Trang 9

Trading is not speci cally mentioned in the ethical responsibilities section of the Asset

Manager Code and is instead one of the six components of the Asset Manager Code

speci cally regarding trading which deals with insider information, fair dealing, soft dollars,

best execution, and the allocation of shares

Which of the following least likely represents a purpose of the Asset Manager Code (AMC)?

A) Foster a culture of ethical and professional behavior throughout the rm.

B) Provide guidance for asset managers to provide services in a fair, professional

manner, with full disclosure

C) Provide a check list for how to implement the AMC.

Explanation

The purpose of the Asset Manager Code is to foster a culture of ethical and professional

behavior throughout the rm that protects the interests of investors, protect and enhance

the reputation of the rm, and provide a useful framework for asset management rms to

provide services in a fair and professional manner with full disclosure

(Study Session 2, Module 4.1, LOS 4.a)

www.ombookcentre.in

Trang 10

Establishing information barriers between departments would fall under which section of the

Code?

A) Investment Process and Actions.

B) Compliance and Support.

C) Trading.

Explanation

Establishing information barriers falls under the Trading section of the Code and is meant to

restrict the ow of material nonpublic information so as to limit the potential misuse of this

information for insider trading

(Study Session 2, Module 4.1, LOS 4.d)

Georgette Litman, CFA, is an employee of Cooper and Grey Financial Consultants She has had

the responsibility for several client portfolios over several years Litman was recently promoted

to a senior management position with the idea of establishing guidelines to help ensure

compliance with the Chartered Financial Analyst Institute Code and Standards and also the CFAI

Asset Manager Code of Professional Conduct in the rm's portfolio management business To

help in this task of compliance, Cooper and Grey Financial Consultants has hired Jack Book to

help institute a set of procedures that will help Cooper and Grey Financial Consultants achieve

their goal Book has a legal background and is a new employee at Cooper and Grey Financial

Consultants Litman hopes that Book can help by providing a new and outside perspective to

the process Although Book is not a member of CFAI and has no immediate plans for joining

CFAI and taking the Level I exam, Book brings a wealth of knowledge and experience

Understandably, Book must take some time to understand many details, e.g., the reasons for a

separate conduct code for asset managers that is in addition to the CFAI Code of Professional

Conduct

Litman wants to know what the clients of Cooper and Grey Financial Consultants are thinking

and get their perspective on how the rm is doing She knows that many of the employees of

Cooper and Grey Financial Consultants have close relationships with the clients and that gifts

have been exchanged on occasion She asks Book to look into this activity She tells Book that it

is acceptable for "token" gifts of any kind (except illegal substances) to be exchanged as long as

the employees inform her of the gift She sits down with Book to compose a list of all the recent

gifts that Cooper and Grey Financial Consultants employees have told her they have received

www.ombookcentre.in

Định dạng
Số trang	18
Dung lượng	744,79 KB