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William Fleming is an investment advisor for GlobalBank, a large, multinational financial corporation. He is based in the New York office, and his client base consists of medium to large institutional accounts in the United States and Western Europe. Roughly three-quarters of his clients pay performance-based fees, while the remaining one-quarter pay fees based on assets. GlobalBank’s investment banking division is an industry leader, and Fleming is able to offer his clients the opportunity to participate in some of the hottest initial public offerings (IPOs) and secondary offerings brought to market. GlobalBank’s compliance department formulated and distributed to its employees and clients its policy on how to allocate trades among clients.
The policy states that in order to reward customer loyalty, customers that utilize the services of GlobalBank’s divisions other than investment advisory will receive allocations on all trades (including IPOs and secondary offerings) based on the relative size of their order, before clients that utilize only investment advisory services. After filling orders for multi-relationship clients, clients that only utilize investment advisory services will receive trade allocations on all trades, including IPOs and secondary offerings, based on the relative size of their order. This policy reflects GlobalBank’s long-term goal of being a full-service provider of financial products and services to all of its clients.
One of Fleming’s accounts, Waverly Capital Partners, has contacted him regarding an upcoming secondary offering by DCH Corp., for which GlobalBank will serve as lead underwriter. Waverly has already performed its due diligence on the offering and is interested in purchasing a substantial position in the secondary offering in order to employ the company’s current surplus of cash. Waverly’s representative tells Fleming over the phone that they would like to purchase 5,000 shares of the offering but gives no other details of its analysis of the offering. Fleming has not read the prospectus for the offering yet and is not familiar with the details, but because he has confidence in Waverly’s investment expertise, he tells them that he too believes they should participate in the offering. Because Waverly does a significant amount of business with GlobalBank’s other divisions, Fleming assures them that they will be able to obtain their desired allocation of the offering and takes the order.
After taking the purchase order for the Waverly account, Fleming thoroughly reads the prospectus and marketing materials for the offering, as well as past research reports on the issuing company. He determines that DCH shares would be a suitable investment for one of his other clients, The Crockett Foundation. He contacts the Chief Investment Officer (CIO) of the foundation, explains how an investment in DCH would fit with its current risk and return objectives as detailed in the foundation’s investment policy statement (IPS) and provides her with the prospectus for the offering. Fleming tells her that GlobalBank was the lead underwriter for DCH’s initial public offering three years ago and that since then, the stock has outperformed the S&P 500 by at least 15% every year. Fleming also states that the company’s financial position is now even stronger and that the shares will perform at least as well as the lowest return earned on the IPO shares in the last three years. He then proceeds to tell her, “If the foundation is interested in the offering, you should place an order immediately because the issue may be oversubscribed due to strong interest in the offering from Waverly Capital Partners and other clients.” This information is enough to motivate Crocket’s CIO to call a meeting with the foundation’s investment committee.
After a quick meeting with Crockett’s investment committee, the CIO calls Fleming to say that the foundation is interested in the offering and would like to place a purchase order. Crockett does not currently conduct any additional business through GlobalBank’s other divisions. Because of GlobalBank’s trade allocation policy, coupled with the high probability that the offering will be oversubscribed, Crockett is unlikely to be allocated as many shares of the offering as they would like to purchase. In order to obtain the desired number of shares for the client, Fleming devises a plan. He plans to add the Crockett Foundation’s order to Waverly’s order, and once the order is filled he will re-allocate the extra shares back to the foundation’s account at the end of the day. He feels that his action is justified because Crockett has maintained its account with Fleming and GlobalBank for over ten years. In addition, Fleming has traders at GlobalBank sell large blocks of DCH over several days in order to push the stock price lower. The drop in value causes smaller investors at GlobalBank, who are not Fleming’s clients, to withdraw their orders for shares of DCH’s secondary offering. Fleming determines that the fewer number of purchase orders and the plan to piggyback on Waverly’s order will allow Crocket to acquire its desired allocation of shares in DCH’s secondary offering. Having achieved his goal, Fleming allows GlobalBank’s traders to repurchase the firm’s shares of DCH.
Twelve months pass, and the shares of DCH’s secondary offering have declined in price by nearly 20%. The CIO of the Crockett Foundation calls a meeting with Fleming to discuss the poor performance of the security and to review the basis upon which Fleming recommended the investment. Fleming prepares Crockett’s file to take with him to the meeting. The file contains Crockett’s IPS, a detailed account of the purchase order and all conversations held between Fleming and the CIO. In accordance with his own established procedures, however, Fleming maintained the original analysis supporting the purchase of shares in DCH’s secondary offering for nine months after the investment was made.Did GlobalBank’s trade allocation policy violate the CFA Institute’s Standards of Professional Conduct? A)
| No, because the firm fully disclosed its allocation policy to all clients and employees. |
| B)
| No, because the firm is allowed to offer different levels of service to its clients as long as they are disclosed and available to all clients. |
| C)
| Yes, because the policy favors one group of clients over another and will disadvantage those clients that do not have multiple relationships with the firm. |
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The actions of GlobalBank are covered under Standard III(B)—Fair Dealing. According to Standard III(B), members must deal fairly and objectively with all clients. Trade allocation procedures must be fair and equitable to ensure that investment opportunities are available to all clients. A firm may offer different levels of service to its clients, but a policy may not favor clients that have multiple relationships with the firm over those that do not. The Standards also recommend that a pro rata system, rather than an ad hoc system, be utilized in order to avoid conflict of interest. (Study Session 1, LOS 2.a,b)
According to the CFA Institute’s Standards of Professional Conduct, Fleming’s execution of Waverly’s trade order after confirming the appropriateness of the trade is most likely in violation of: A)
| Standard V(B)—Communication with Clients and Prospective Clients for not separating fact from opinion, but is not in violation of Standard I(C)—Misrepresentation because his guarantee of future investment performance was not a written representation. |
| B)
| Standard I(C)—Misrepresentation for not disclosing to Waverly that he did not read the marketing materials, but is not in violation of Standard III(C)—Suitability because the client analyzed the investment thoroughly. |
| C)
| Standard V(A)—Diligence and Reasonable Basis for not exercising diligence and thoroughness in his analysis of the investment and Standard III(C)—Suitability for recommending an investment before determining if the investment was appropriate for the client. |
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Fleming violated Standard V(A)—Diligence and Reasonable Basis because he was not familiar with the specifics of the investment, but made an investment recommendation based upon his confidence in Waverly’s investment expertise. Fleming is also in violation of Standard III(C)—Suitability because his agreement with Waverly’s investment decision was not based upon the suitability of the offering within the context of Waverly’s total portfolio. Standard I(C)—Misrepresentation was also violated when Fleming confirmed that Waverly should purchase shares in DCH’s secondary offering, but failed to inform the client that he had not analyzed the investment in any way. Waverly would reasonably expect Fleming to analyze an investment prior to its recommendation and was therefore misled. (Study Session 1, LOS 2.a,b)
According to CFA Institute Standards of Professional Conduct, which of the following of Fleming’s actions is most likely a violation of Standard I(C)—Misrepresentation? Fleming: A)
| executes the trades on DCH Corp. per Waverly’s instructions without first referring to Waverly’s IPS. |
| B)
| tells the CIO of the Crockett Foundation that DCH’s secondary offering will earn at least the lowest return earned on its IPO shares over the last three years. |
| C)
| tells the CIO of Crocket Foundation that shares of DCH’s IPO outperformed the S&P 500 by at least 15% in each of the last three years since the offering. |
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Standard I(C)—Misrepresentation prohibits members and candidates from making any untrue statements or omissions of facts that may be false or misleading. Guaranteeing a particular rate of return on an investment is in direct violation of the standard. Fleming has essentially guaranteed a minimum rate of return on the secondary offering equal to the lowest rate of return earned on the IPO shares over the last three years. Even though a specific number isn’t mentioned in the question, it would be observable by the Crockett Foundation. The other statements might also be considered violations of the standards but are not specifically violations of I(C)—Misrepresentation as noted in the question. (Study Session 1, LOS 2.a,b)
Which of the following statements most accurately assesses Fleming’s comment about Waverly during his conversation with the CIO of the Crockett Foundation? According to the Code and Standards, Fleming’s statement is: A)
| not in violation of any standard because he only disclosed factual information, and he did not disclose the details of Waverly’s purchase. |
| B)
| in violation of Standard I(C)—Misrepresentation because his statement may be misleading with regard to future performance of the offering. |
| C)
| in violation of Standard III(E)—Preservation of Confidentiality because his failure to keep information about a client’s investment action confidential. |
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According to Standard III(E)—Preservation of Confidentiality, members and candidates must keep information about current, former, and prospective clients confidential unless the information concerns illegal activities, disclosure is required by law, or the client permits disclosure. By telling other clients of Waverly’s investment actions, whether offering specific information on the trade or not, Fleming could adversely affect Waverly’s investment in the offering. (Study Session 1, LOS 2.a,b)
According to CFA Institute Standards of Professional Conduct, did Fleming’s conversation with the CIO of the Crockett Foundation or his decision to sell GlobalBank’s position in DCH stock most likely violate Standard II(B)—Market Manipulation? | Conversation with CIO [td=1,1,100]Sell decision |
Standard II(B)—Market Manipulation prohibits practices that distort prices or artificially inflate trading volume with the intent to mislead market participants, including the dissemination of false or misleading information. Although Fleming’s conversation included two prohibited comments (a guarantee of performance and an inappropriate disclosure of client information), he did not give the CIO of Crockett information in an attempt to manipulate prices or trading volume and thus did not violate Standard II(B). His decision to sell GlobalBank’s shares of DCH, however, was intended to manipulate the price of DCH stock in order to intimidate smaller investors into withdrawing their purchase order in the secondary offering, thereby freeing up shares for his client, the Crockett Foundation. This action is clearly a violation of Standard II(B). (Study Session 1, LOS 2.a,b)
Is it most likely that Fleming violated any CFA Institute Standards of Professional Conduct related to his meeting with the CIO of the Crockett Foundation? A)
| No—he does not have a duty to maintain client records, only his employer does. |
| B)
| Yes—he failed to maintain appropriate records to support his investment recommendation. |
| C)
| No—he maintained an IPS and followed established procedures in maintaining client records and data. |
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Standard V(C)—Record Retention states that members and candidate must maintain appropriate records to support their investment recommendations and actions. Fleming maintained an IPS and records of conversations, but he is also required by the standard to keep research and other documentation supporting investment recommendations and actions, which Fleming did not do. When there are no regulatory requirements related to record retention, the Standard recommends that members and candidates keep client records for a minimum of seven years. (Study Session 1, LOS 2.a,b) |
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发表于 2012-3-21 10:36
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