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发表于 2012-3-22 10:33
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Michael Pennington is Senior Vice President of equity investments at Alpha Investment Advisors, Inc. (AIA). He manages a team of analysts and portfolio managers and is responsible for maintaining and developing client relationships. AIA is located in Belgium and provides investment management services to high net work individuals. Pennington is also a Level III Candidate for the CFA designation.
One of Pennington’s clients is the Flanders family. Pennington had a long relationship with Helmut Flanders. Before Flanders’s untimely death, he gave Pennington full discretion over his portfolio based on an investment policy statement that had been refined continuously over the years. - Flanders was the president of a publicly traded manufacturing company, Allux, and 20% of his portfolio’s assets were invested in Allux equity. His contract with Allux prohibited selling his Allux shares while he was employed.
- Flanders had little liquidity needs. His children were grown, and his salary at Allux was sufficient to cover his annual expenditures as well as contribute to his investment portfolio.
- A former accountant, Flanders had been extremely knowledgeable and comfortable with the investment decision-making process.
- Pennington owns 10,000 shares of Allux and serves on Allux’s board.
- Pennington played gold with Flanders on a regular basis and, with Flanders’s help, developed many client relationships from these outings.
AIA has an agreement with a local brokerage firm, First Brokerage, owned by Pennington’s sister to place all AIA trades through First Brokerage.- Flanders agreed in writing that all trades in his portfolio would be directed to First Brokerage.
- Pennington purchased new carpets for his office with soft dollars. He believes that his managers make better investment decisions when their environment is pleasant and comfortable.
- Pennington attended an industry conference in the Bahamas with soft dollars. The program is devoted to improving management of the investment advisory firm. He believes that a well-run firm makes better investment decisions.
- Pennington consistently uses soft dollars to purchase research reports from an independent research firm that does in-depth analysis of a company’s financial reporting. Several of his managers have commented on the quality and usefulness of these reports to their analysis and decision making.
Pennington has an appointment to meet with Flanders’s widow, Elise, who, as an artist, left management of their financial assets to her husband. She is meeting with Pennington to better understand her financial position. Which of the following Standards is most relevant regarding Pennington’s meeting with Elise? A)
| Standard III(A), Loyalty, Prudence, and Care. |
| B)
| Standard III(E), Preservation of Confidentiality. |
| C)
| Standard III(C), Suitability. |
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Standard III(C), Suitability, is most relevant for Pennington’s meeting with Elise. This Standard requires Pennington to make a reasonable inquiry into Elise’s financial situation, investment experience, and investment objectives prior to making any recommendations about her portfolio. Pennington must also consider the appropriateness of the existing portfolio and investment policy statement for Elise. Standard III(A) also has some relevance since Pennington is in a position of trust with respect to Elise, and Pennington must ensure that his and AIA’s goals do not conflict with Elise’s.
Standard VI(A), Disclosures of Conflicts, requires Pennington to disclose all matters, including beneficial ownership of securities of other investments, that could be expected to impair the member’s ability to make unbiased and objective recommendations. Which of the following matters would least likely be disclosed to Elise? A)
| Pennington owns shares in Allux. |
| B)
| Pennington played golf with Helmut Flanders on a regular basis and developed client relationships from those golf outings. |
| C)
| AIA has a soft dollar arrangement with a brokerage firm owned by Pennington’s sister. |
|
Pennington playing golf with Elise’s husband Helmut Flanders is not a conflict with respect to his relationship with Elsie and he need not disclose to her that he played golf with Flanders. Flanders was his client at the time and there was full disclosure that Pennington developed new client relationships. Al the other matters must be disclosed.
Which of the following best describes Pennington’s compliance with the CFA Institute Standards regarding his use of soft dollars? The purchase of: A)
| both research reports and carpeting are allowable uses of soft dollars. |
| B)
| research reports and attending the conference are allowable uses of soft dollars. |
| C)
| research reports is an allowable use of soft dollars. |
|
Brokerage is commission generated from trades and is an asset of the client not the investment manager. Soft dollars is the use of brokerage to purchase research services that benefit the client in the investment decision-making process. The investment manager has an ongoing responsibility to seek to obtain best execution, minimize transaction costs, and use client brokerage to benefit clients. Consequently, contingent on disclosure of a soft dollar arrangement to clients whose portfolios might be affected, the CFA Institute Standards permit client brokerage only to be used to purchase research; that is, goods and services, the primary use of which directly assists the investment manager in the investment decision making process and not in the management of the firm.
Pennington would like to continue to direct trades from Elise’s portfolio to his sister’s brokerage firm. In order to continue with this arrangement and comply with the CFA Institute Standards, which of the following disclosures are required? A)
| Pennington must disclose policies with respect to all soft dollar arrangements and receive written consent from Elise that she understands the consequences if he is not seeking best price and execution through First Brokerage. |
| B)
| Pennington must clearly disclose that his duty as the investment manager is to continue to seek to obtain best execution. |
| C)
| Pennington must disclose that directed brokerage arrangements that require the investment manager to commit a certain percentage of brokerage might affect his ability to seek to obtain best execution. |
|
Investment managers are required to disclose policies with respect to soft dollar arrangements. Standard III(A), Loyalty, Prudence, and Care, requires Pennington to seek best price and execution with his trades and if he directs trades through a broker in which he may not receive best price and execution he must get a written statement from his clients that they are aware that he is not seeking best price and execution and the consequences for their accounts.
After determining Elise’s risk and return objectives, liquidity needs, tax considerations, and unique circumstances, Pennington has decided the he must reduce Elise’s holding of Allux shares. He has several other clients, whom he met through Flanders, who also have significant holdings in Allux. Pennington has also decided to reduce his own holdings in Allux since his term as a director of Allux will be up in June. He does not plan to seek reappointment, but as a member of the audit committee, he is privy to information about a tender offer. Pennington realizes this is a complex situation.
Of the following Standards, determine which would least likely help Pennington decide what actions with respect to selling shares of Allux would be in compliance with the CFA Institute Standards of Practice.A)
| Standard III(B), Fair Dealing. |
| B)
| Standard III(C), Suitability. |
| C)
| Standard VI(A), Disclosure of Conflicts. |
|
Standard III(C), Suitability, is least likely to provide Pennington with guidance when he considers selling Elise’s holdings of Allux. This standard describes members’ responsibilities in developing appropriate recommendations and taking suitable actions. To reach the point where he has decided to sell Elise’s shares, Pennington would already have met these requirements. He has determined Elise’s and his other clients’ requirements and has recommended an appropriate and suitable investment action. His concern is how to implement his recommendation and be in compliance with the Standards of Professional Conduct.
Pennington has several problems with respect to selling shares of Allux from Elise’s portfolio and the portfolios of his other clients. First, he must comply with Standard III(B) and deal fairly and objectively with all clients and prospects when taking this investment action. Pennington must disclose his ownership of Allux to all affected clients according to Standard VI(A) and ensure that transactions for clients take precedence over transactions on his own behalf according to Standard VI(B).
Since Pennington is a director of Allux and a member of the audit committee, what additional Standard is specifically applicable to Pennington’s decision to sell his and his clients’ shares of Allux? A)
| Standard IV, Duties to Employers. |
| B)
| Standard VII, Responsibilities as a CFA Institute Member or CFA Candidate. |
| C)
| Standard II, Integrity of Capital Markets. |
|
As a director and member of Allux’s audit committee, Pennington possesses material nonpublic information about a tender offer. Therefore, Pennington must be particularly concerned about complying with Standard II(A), Material Nonpublic Information. |
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