Q2. 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 firm’s policies have not changed with the times, so he has hired Kratz to review all of the rules and bring the firm 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 office 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 at less than $50 provided that they notify their supervisors in writing, but must receive written consent from the compliance officer 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 firm’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 files to consider. William Westmoreland believes the firm has not acted correctly, and wants Kratz’s opinion.

The first file relates to the matter of Justin Yeats, a wealthy and flamboyant 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 purchase stock in Flimflam Films. He told me that the CEO of Flimflam spoke at a large fund-raiser the night before and provided some enticing sales figures for the firm’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 offered amenities not found elsewhere. He then did some research, talking to the resort manager to assess his qualifications and entrepreurial business approach, and reviewing the company’s mission statement and financials. After all that, he concluded that Blanton was hiring the right people to grow the business.

“After Yeats hung up, I looked up Flimflam 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 Flimflam 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 files.”

The second file 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.

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

1.       Allocation procedures.

2.       Qualifications of account managers.

3.       Asset-valuation methods.

4.       Proxy-voting policies.

Which of Kratz’s four suggested additions to the disclosure policy goes beyond the recommendations set down by the Code?

A)   2.

B)   3.

C)   1.

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答案和详解如下：

Correct answer is A)

The suggested disclosures include allocation procedures, valuations methods, and proxy policies, but not qualifications of employees.

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