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发表于 2012-3-22 11:04
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Bonnie Tully, CFA, is a supervisor with Bonn Financial Advisors. Tully has been assigned by Bonn’s governing board to design procedures to minimize potential conflicts of interest that can arise during the course of the firm’s business. Specific areas of interest include when the firm’s representatives trade in the same securities as their clients, fair treatment of clients when disseminating recommendations, and ensuring that recommendations to clients are appropriate. All of Bonn’s representatives have a working knowledge of the Code and Standards, so the goal is for Tully to lay out the details for compliance.
Tully has generated a list of eight specific goals she feels are the most important. | 1) | Creating guidelines for representatives when they trade for their own account. | | 2) |
Defining material, nonpublic information. | | 3) |
Drafting a common investment policy statement that representatives must sign and apply to all clients. | | 4) |
Creating guidelines for the use of nonpublic information concerning a tender offer. | | 5) |
Developing an effective means for disclosure to clients information regarding relationships between Bonn and its representatives and corporations whose securities are being recommended by Bonn. | | 6) |
Drafting a written policy on soft dollars. | | 7) |
Creating guidelines on how to treat gifts and benefits from external sources to representatives. | | 8) |
Creating a restricted list of publicly traded companies. |
The governing board of Bonn has asked Tully to examine and comment on two current situations. The first situation concerns Midland Investment Banking (MIB), a subsidiary of Bonn Financial. MIB has issued a prospectus for its open-end Midland Gold Fund. In the prospectus, the investment policy was disclosed as, "We will maintain an investment posture of 50 percent or more in gold stocks and/or bullion, depending upon market conditions." This policy was adhered to until the price of gold fell by 20 percent, leaving the fund 40 percent invested in gold stocks and bullion. MIB Management has decided that since the allocation was effected by market conditions, no action—either to change the investment policy or to rebalance the portfolio—is required on their part.
The second situation concerns Toby Waller, CFA, who is an employee of Bonn Financial. Bonn is a major shareholder in Stepp Company. Stepp appears likely to be the target of a tender offer from Joshua Manufacturing. Stepp Shareholders have been asked to vote on whether to implement a “poison pill” that would effectively prevent any merger or buy-out. Prior to the vote, Waller receives a phone call from Joshua Manufacturing’s director of corporate communications, Danielle Jones. Jones offers to pay Waller’s airfare and hotel expenses so that he can attend a dinner meeting at Joshua’s headquarters in Philadelphia. At this meeting the firm’s CEO and General Counsel plan to explain their position on the offer and answer questions. In the meantime, Stepp’s management has announced that it will hold a half-day seminar for analysts and major shareholders, where its attorneys and industry experts will discuss management’s reasons for promoting the “poison pill.” Lunch will be provided to all attendees, and Waller’s office is close to Stepp’s headquarters so he can easily attend the meeting. Which of the following items from Tully’s list of eight goals will probably require the least amount of effort to complete?
The guideline for compliance of #4, how to use inside information concerning a tender offer, would only require one sentence: You cannot use this information under any circumstances. The other items would require more detail concerning the specific actions that are and are not allowed. (Study Session 2, LOS 5.a,b)
Which item on the list, if completed by Tully, would most likely be a violation of the Code and Standards?
The drafting of a common investment statement for all clients would most likely be a violation of the Code and Standards. Each client should have an investment policy statement that reflects their own particular circumstances. (Study Session 2, LOS 5.a,b)
For goal #2, in defining “material nonpublic information,” the term "material" refers to information that is likely to significantly affect the market price of the issuing company's securities or that is: A)
| likely to preclude the financial analyst or analyst's firm from rendering unbiased or objective advice. |
| B)
| acquired by the financial analyst from a special or confidential relationship with the issuing company. |
| C)
| likely to be considered important by reasonable investors in determining whether to trade a particular security. |
|
“Material” refers to information that is likely to significantly affect the market price of the issuing company's securities or that would be considered useful information by reasonable investors in their determining whether to trade a particular security. (Study Session 2, LOS 3.a)
The following applies to goal #6. If some of the available brokers are offering soft dollars that are only of general benefit to Bonn, Tully should recommend that Bonn should choose the broker with which of the following characteristics: A)
| good price and execution and low soft dollars. |
| B)
| good price and execution and good soft dollars. |
| C)
| best price and execution but no soft dollars. |
|
Standard III(A), Loyalty, Prudence, and Care, requires members to act for the benefit of their clients and to place client interests ahead of their own interests. Best price and execution is always in the client’s interest. Members who obtain best price and execution from a firm that allocates soft dollars may use that firm as long as the soft dollar research benefits clients and the practice is disclosed to clients. (Study Session 2, LOS 3.b)
MIB Management has: A)
| violated the Code and Standards by allowing the value of the Gold Fund to decline, but not by not rebalancing it. |
| B)
| not violated the Code and Standards by allowing the value of the Gold Fund to decline, nor by not rebalancing it. |
| C)
| not violated the Code and Standards by allowing the value of the Gold Fund to decline, but did violate the Code and Standards by not by rebalancing it. |
|
As long as MIB was managing the Gold Fund in accordance to its prospectus, a decline in value does not mean that a violation has occurred. However, the prospectus does specify a certain allocation in gold. Standard V(B), Communication with Clients and Prospective Clients, requires members to disclose "general principles and investment processes" to clients and to "promptly disclose to clients and prospects any changes that might significantly affect those processes." Under the Standard, Midland management is required either to: - rebalance the portfolio in a timely manner so as to maintain compliance with the investment policy, or
- communicate an intended change in that policy well in advance of the actual change so as to afford investors time to act prior to the change in investment policy taking place.
Midland is in violation of the Standard by not rebalancing the portfolio. (Study Session 2, LOS 3.b)
With respect to the invitations Waller has received from the management of Stepp and Joshua, to comply with the Code and Standards, Waller: A)
| may attend the Joshua meeting and may not attend the Stepp meeting under any circumstances. |
| B)
| may attend the Stepp meeting and may not attend the Joshua meeting under any circumstances. |
| C)
| must not attend the Joshua Manufacturing meeting unless Waller pays his own expenses. |
|
Standard I(B), Independence and Objectivity, requires that “members shall use reasonable care and judgment to achieve and maintain independence and objectivity in making investment recommendations or taking investment action.” This Standard specifically addresses special cost arrangements, and precludes members from accepting payment for commercial transportation and hotel charges. Since the meeting is in Philadelphia, regular commercial air service is available, and Waller cannot accept payment for this expense. He is also prohibited from accepting payment for ordinary hotel charges. Hence, he may only attend the meeting with Joshua if his firm pays his expenses. Accepting the lunch provided by Stepp, because its value is token, would not be a violation of the Standard. (Study Session 2, LOS 3.b) |
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