bapswarrior

An analyst thinks that a major change in the tax law will benefit holders of utility company stocks. She immediately begins calling all her clients and telling them of the upside potential of investing in such assets now. Based upon this information, this is most likely:

A) a violation of Standard V(A), Diligence and Reasonable Basis.

B) congruent with Standard V(A), Diligence and Reasonable Basis.

C) a violation of Standard III(C), Suitability.

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According to Standard III(C), the analyst needs to determine the suitability of an investment for each client. It is doubtful that all her clients are identical in their needs. According to the information, the analyst mentions the upside potential but does not mention the downside risk. Although the information says that she thinks that the change in the tax law will benefit holders of utility company stocks and says nothing of how she arrived at this conclusion, we do not know if she has or has not made her decision on a reasonable basis.

bapswarrior

According to CFA Institute Standards of Professional Conduct, when a client asks her portfolio manager to change the current investment strategy of the client’s portfolio, the manager should:

A) explain the implications of the new strategy after the member manager implements the strategy.

B) obey the client's request without question.

C) examine whether the strategy is appropriate for the client and explain the implications of the new strategy before implementing the strategy.

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According to Standard III(C), Suitability, the member manager must determine that an investment is suitable given the client’s objectives/constraints and within the context of the client’s total portfolio. In this case, the member manager must examine the new strategy to see if it is appropriate for the client, even if the client asked for the change. The member should also explain the implications of the strategy to avoid any misrepresentations that may result from omitting details.

bapswarrior

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. Hatfield has been trading on the clients’ behalf with a single brokerage firm for several years. Because of his many years of business, the brokerage firm occasionally gives Hatfield shares in an initial public offering (IPO) to sell to his clients. Hatfield has a policy of allocating the IPO shares equally between the portfolios of the two clients. This policy is:

A) congruent with Standard III(C), Suitability.

B) a violation of Standard III(B), Fair Dealing.

C) a violation of Standard III(C), Suitability.

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According to Standard III(C), the analyst must consider the appropriateness and suitability of an investment recommendation for each portfolio or client. Having a fixed policy of adding investments to portfolios without evaluating their suitability is a violation of Standard III(C). The action does not violate Standard III(B)

bapswarrior

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. One of the clients gets married and the assets of the new spouse and the client are combined. With the larger portfolio of the now married client, Hatfield determines that they can assume a higher level of risk and begins a change in the policy concerning that portfolio. Which of the following would violate Standard III(C), Suitability?

A) Assess the return objectives of the newly married client and his spouse.

B) Implement a similar policy for the other client who did not just get married.

C) Assess the time horizon of the newly married client and his spouse.

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According to Standard III(C), Suitability, the analyst must assess the time horizon, return objectives, tax considerations, and liquidity needs of a client before changing an investment policy. The analyst must notify the client of the new policy. Implementing the policy for the other client may be a violation of the Standard unless that client’s needs are totally reassessed and determined to be identical to the needs of the newly married client.

bapswarrior

Nancy Korthauer, CFA, has launched a new hedge fund called the Korthauer Tautology Fund and is actively soliciting clients from competitor’s firms. Client presentations are necessarily brief and often take place with the prospective client’s current investment advisor in the room. The Code and Standards require that:

A) member or candidate provide (on request) additional detail information which supports the abbreviated presentation.

B) a prospective client’s current investment advisor not participate in meetings.

C) all client presentations provide a thorough review of all elements of the investment management process. Abbreviated presentations are forbidden.

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See Standard III(D). When presentations are brief, additional detail which supports the abbreviated presentation information must be provided on request. Best practice dictates that the member or candidate should make reference to the abbreviated nature of the presentation.

bapswarrior

A money manager is meeting with a prospect. She gives the client a list of stocks and says, “These are the winners I picked this past year for my clients. Their double-digit returns indicate the type of returns I can earn for you.” The list includes stocks the manager had picked for her clients, and each stock has listed with it an accurately measured return that exceeds 10%. Is this a violation of Standard III(D), Performance Presentation?

A) Yes, unless the positions listed constitute a complete presentation (i.e., there were no stocks omitted that did not perform in the double digits).

B) No, because the manager had the historical information in writing.

C) Yes, because the manager cannot reveal historical returns of recent stock picks.

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Standard III(D) requires fair representations concerning past and potential future performance. Unless the list of the “winners” includes all the positions that the firm held, the manager is misrepresenting past performance. The following statement is questionable: “Their double-digit returns indicate the type of returns I can earn for you,” but the action of submitting a partial list is clearly a violation. The manager should have information on past performance in writing.

bapswarrior

While it would be customary to report both five-year and ten-year performance data, Seminole Equity Partners has been in existence for only eight years. Because of this, Kurt Dambach does not report ten-year data but reports for both five years and since the inception of the fund. This he notes in a footnote at the bottom of the information sheet. This action is:

A) a violation of the Standard concerning prohibition against misrepresentation.

B) a violation of the Standard concerning performance presentation.

C) in accordance with the Code and Standards since he has indicated the basis in a footnote.

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Members who communicate performance information must ensure that the information is fair, accurate, and complete. Seminole Equity’s presentation meets this standard.

bapswarrior

A money management firm has created a new junk-bond fund. When the firm advertised the new fund at its issuance, they used care to accurately compute the returns from the past 10 years for all assets in the fund. The firm used the current portfolio weights to determine an average annual historical return equal to 18% and claim an 18% annual historical return in their advertising literature. With respect to Standard III(D), Performance Presentation, this is:

A) in compliance.

B) a violation because the Standard prohibits computing historical returns on risky assets like junk bonds.

C) a violation because the advertisement implies the firm generated this return.

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Reporting the historical returns of all assets now in the fund introduces a survivorship bias. Also, the advertisement is misleading because the fund just came into existence and has no historical record. Thus, the firm has misled the public as to their performance history.

bapswarrior

Trude Front, CFA, is a portfolio manager and works extensive hours. To give her a more flexible work environment, she often works from home on her personal computer and keeps client account information there – in violation of company policy. While away on travel, her home is burglarized and her computer is taken. Rather than disclose the policy violation, she does not notify her company or her clients of the contents of her computer files. Two months later the client account information is used to commit identity theft, costing her clients a total of $58,000 in fraudulent charges. Front is most likely:

A) not in violation of any Standard because the disclosure of confidential information was accidental and unavoidable.

B) in violation of Standard III(E) "Preservation of Confidentiality" for failing to follow company policies and procedures relating to electronic information and security resulting in accidental disclosure of confidential information.

C) not in violation of any Standard because the confidential information was stored on her personal computer for use for work during her personal time.

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Front violated Standard III(E) "Preservation of Confidentiality" by failing to follow company policies and procedures relating to electronic information and security resulting in accidental disclosure of confidential information.

bapswarrior

Greg Stiles, CFA, may withhold from CFA Institute information about a client acquired in the regular performance of his duties:

A) for neither of the reasons listed.

B) only if Stiles is a relative of the client.

C) only if Stiles has a special confidentiality agreement with the client.

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According to Standard III(E), Preservation of Confidentiality, Stiles may not withhold information under any of the listed reasons. The reason is that CFA Institute will keep the information confidential.