Reading - 2 - LOS a, b: Q66-Q70

66、Which of the following statements regarding Standard IV(A): Loyalty to Employer is TRUE?

A)   By accepting compensation for his role in the medical study, Taylor is violating the Standard.

B)   Taylor’s use of rival analysts’ reports in his own research violates the Standard.

C)   Neither Taylor nor Montpier is in violation of the Standard.

D)   Despite getting written permission from her client to consult, Montpier is not in compliance with the Standard.

The correct answer was D)

Montpier needs to get permission from both the client and her employer before she can begin to consult. Thus, Montpier is not in compliance, as she has not received permission from World Class. Neither Taylor’s use of rivals’ research nor his participation in a medical study violate the Standard. Standard IV(A) addresses outside income, not research methods. And while the medical-study payment is certainly income, it is not in competition with his firm, and as such does not violate the Standard.

67、Taylor’s actions regarding Breakthrough Corp.:

A)   do not violate Standard II(A): Material Nonpublic Information because he was only confirming what he already suspected.

B)   did not violate Standard I(D): Misconduct because he did not misappropriate the information.

C)   violate Standard II(A): Material Nonpublic Information because the information was not in the public domain.

D)   violate Standard IV(A): Loyalty to Employer because he is being compensated for the work.

The correct answer was C)

Taylor’s use of the material nonpublic information provided to him in confidence by a researcher is a clear violation of Standard II(A). The professional-misconduct Standard prohibits actions that reflect negative on “professional reputation, integrity, or competence”. Since Taylor has signed a confidentiality agreement, his violation of the agreement definitely says something about his honesty. Thus, he is in violation of Standard I(D). Standard IV(A) only applies to work in competition with the employer.

68、Your manager, Nathan Green, is asking you about "fiduciary duty." Green asks you to give examples of this fundamental concept. You show him a series of statements that might be made by a CFA Institute member who is an investment manager for a pension plan operating under the provisions of ERISA, the Employee Retirement Income Security Act of 1974. This U.S. legislation established guidelines and requirements for fiduciary conduct and sets standards for many aspects of all private and some public pension plans in the United States. Together with the CFA Institute Code of Ethics and Standards of Practice, the ERISA prescriptions may serve as a model for appropriate fiduciary conduct worldwide.

Note: Respond to the following question from the viewpoint of a "plan fiduciary" whose conduct is governed by the CFA Institute Code and Standards. In addition, assume that the referenced individuals, as investment professionals, have full investment authority over the portion of the pension portfolio they manage.

Concerning an investment manager's responsibility to vote proxies, which of the following statements is TRUE?

A)   The investment manager must vote all proxies unless there are bona fide reasons, consistent with the interests of the plan participants and beneficiaries, for not doing so.

B)   The investment manager must vote all proxies.

C)   The investment manager must vote all proxies in agreement with management or the investment should be sold.

D)   The investment manager is only required to vote proxies in support of anti-management votes. When in agreement with management, no vote is required.

The correct answer was A)     

Plan fiduciaries cannot be passive shareholders. Proxy voting rights are considered assets of a pension plan, and as such, proxy voting involves the exercise of fiduciary responsibility. Votes must be cast in a way that the fiduciary believes will maximize the economic value of plan holdings. The fiduciary has a duty to make investment decisions solely in the interest of participants and beneficiaries and exclusively for the purpose of providing benefits to the participants and beneficiaries.

69、Which of the following statements is FALSE with respect to the new prudent investor rule?

A)   Fiduciaries are required to conduct a thorough and diligent analysis.

B)   Fiduciaries must invest so as to ensure they do not experience negative returns.

C)   Fiduciaries must consider the circumstances prevailing.

D)   Fiduciaries must consider the risk return tradeoff.

The correct answer was B)

Courts have based findings of imprudence less on the type of investment at issue than on the fiduciary's failure to undertake a thorough and diligent analysis of the merits of an investment that may have revealed its unsuitability or the existence of alternative investments offering a more favorable risk/return trade-off. The emphasis is on competence and process, not resulting investment performance. A key question might be, "Did the investment manager have a set of well-reasoned investment policies and were those guidelines followed?"

70、To the extent that pension plan documents spelling out investment guidelines are inconsistent with the requirements of ERISA:

A)   the plan documents should be followed.

B)   ERISA requirements should be followed.

C)   the firm's compliance officer should determine which will govern plan administration.

D)   the differences may be ignored.

The correct answer was B)

Members and Candidates must be knowledgeable of the applicable laws. A plan must be administered according to the documents governing the plan. However, plan documents are to be followed only to the extent they are consistent with requirements of ERISA. An ERISA fiduciary must not comply with investment provisions or a plan document that contravenes the statutory standards under ERISA. ERISA, therefore, places on the fiduciary the additional burden of investigating whether the plan instrument and investment objectives are permissible under ERISA.