Reading 10: Prudence in Perspective-LOS b 习题精选 2011, statements, standards, fiduciary, following

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Session 2: Ethical and Professional Standards: Application
Reading 10: Prudence in Perspective

LOS b: Explain the general fiduciary standards to which a trustee must adhere.

 

 

With regard to diversification, which of the following statements best summarizes a manager’s fiduciary responsibility under the Prudent Investor Rule (PIR)?

A) The manager has a duty to diversify client assets unless it is in the client’s best interests not to diversify.

B) The manager always has a duty to diversify in a way that no more than 5% of the client’s assets are in the securities of a single issuer, with the exception of sovereign debt such as U.S. government securities.

C) The manager always has a duty to diversify in a way that no more than 5% of the client’s assets are in the securities of a single issuer.

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The PIR requires the manager to diversify unless it is in the client’s interest not to diversify. For example, the client may have a small business exposure that he seeks to offset by going short in a set of securities that are concentrated in a specific industry. This would be permissible if the lack of diversification were deemed to be in the best interest of the client.

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Which of the following fiduciary standards is carried over from the old Prudent Man Rule to the new Prudent Investor Rule?

A) Partiality.

B) Professionalism.

C) Loyalty.

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Loyalty is the only term listed that is included. Loyalty means the absence of conflicts of interest and acting in the best interest of beneficiaries.

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Xavier Newsome, CFA, serves as trustee for the Block Corporation's trust. Newsome is 31 years old. The trust requires a certain amount of current income to support Mr. Block's widow. After her death, the trust proceeds will go to the Block grandchildren. Newsome is a member of a running club as are several of the Block grandchildren. As part of his duties as trustee, Newsome makes portfolio decisions that favor growth of the principal and puts the current income at risk. Has he violated any fiduciary standards?

A) Yes, because he did not act impartially.

B) No, because he acted impartially.

C) Yes, because he did not use caution.

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Newsome was not impartial with respect to the current income beneficiary relative to the remaindermen interests. (Remaindermen refers to the group that is to receive the remainder of the trust once its term is complete. Of course, some trusts never expire so not every trust has remaindermen.) This could also be perceived as a loyalty violation in that he did not act in the best interest of all beneficiaries. Caution deals with the investment decisions of the portfolio.

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The Standard on portfolio investment recommendation and actions requires a degree of diligence and expertise that is closest to the:

A) New Prudent Investor Rule.

B) Prudence Man Rule.

C) Diligent Person Rule.

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The Standard requires elements of portfolio theory and expertise that are foundations of the New Prudent Investor Rule.

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When we describe fiduciary duty as being process-oriented and dynamic this means that the fiduciary responsibility will be properly discharged if the manager:

A) develops an investment policy statement that is suitable for the client and reviews the client's situation on a regular basis.

B) implements a process that views asset risk in isolation and updates these risk estimates on a regular basis.

C) implements a process that yields returns that are above average on a risk-return basis and updates the process over time.

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Process-oriented means that there is a focus on the investment process, and that this is embodied in an investment policy statement that considers the client’s circumstances and risk-tolerance. Dynamic means that the investment process should change over time to take into account changes in the client’s circumstances. A review of the client’s circumstances is mandated to occur no less frequently than annually–more often if there is a major change in circumstances.

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A given client has specified that her primary concern is preservation of principal. Last year the value of this client’s account has declined by 8%. Which of the following statements is CORRECT?

A) This constitutes a violation of the manager's fiduciary responsibility only if the manager deviated from a properly constructed investment policy for this account.

B) This does not constitute a violation of the manager's fiduciary responsibility, regardless of the nature of the investment policy statement for the account.

C) This constitutes a violation of the manager's fiduciary responsibility regardless of whether the manager deviated from a properly constructed investment policy for this account.

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The key concept is that the portfolio investment decision must be process-oriented. The nature of the process is a function of the client’s specific situation and tolerance for risk, and this is embodied in an investment policy statement. So long as the investment policy statement is properly conceived and is adhered to by the manager, there is no violation of fiduciary responsibility.

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At the time a client relationship is established, assume that an appropriate investment policy statement has been developed. Which of the following statements is CORRECT regarding the Prudent Investor Rule (PIR)? The PIR requires that the fiduciary:

A) periodically review the client circumstances and make appropriate changes in the investment policy as warranted.

B) develop an appropriate investment policy statement when the client relationship is established and update the investment policy only as is deemed necessary by the fiduciary.

C) review the client circumstances and make changes when asked to do so by the client and make changes in the investment policy as warranted.

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The PIR requires that an investment policy statement be developed when the relationship is established, and that such a statement be updated no less frequently than annually (more frequently if there is a major change in client circumstances).

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Erica Barnes, CFA, is a trustee for a pension fund. Which of the following is an example of Barnes' failure to follow general fiduciary standards set forth in the new Prudent Investor Rule? She recommends the fund should:

A) hire an outside manager when they lack the in-house expertise to manage a small cap portfolio.

B) hire her relative to manage a new high yield portfolio.

C) consider the need for future growth while maintaining current income obligations.

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Trustees must exercise care, skill, caution, loyalty, and impartiality. Recommending that the trustees approve her relative as new portfolio manager endangers Barnes' ability to avoid conflicts of interest and hence her duty of loyalty.

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Miles Turner, a CFA candidate, oversees a union pension fund. He got this job because of family connections as he is just learning the investment management business. Subsequently, he realizes that he is not ready to make the necessary decisions about the fund. He hires several portfolio managers. Under the Prudent Investor Rule, Turner is:

A) not in compliance because he did not put in writing that funds were managed in-house prior to the hiring of outside managers.

B) in compliance. Delegation of authority is allowed.

C) not in compliance. Delegation of authority is not allowed.

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Delegation of authority is allowed under the Prudent Investor Rule. There is no stipulation that Turner must try to do the job himself first.

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A trustee must adhere to the following general fiduciary standards EXCEPT:

A) caution.

B) skill.

C) partiality.

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Trustees must adhere to the standard of impartiality, not partiality.