bapswarrior

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. Calaveccio places a trade with Quantco Brokerage. While Calaveccio's part of the transaction was conveyed correctly to Quantco, there was a trading error made in Calaveccio's account due to a slip up within Quantco. Calaveccio realizes that the error has taken place, and informs his contact at Quantco. Calaveccio allows Quantco to cover the error, with no cost to TrustCo. This is:

A) a violation of Calaveccio's duty to his employer.

B) a violation of Calaveccio's fiduciary duties.

C) permissible under CFA Institute Standards since some trading errors are a fact of life in the securities industry.

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The issue is similar to an allocation of soft dollars. Clearly, if the broker absorbs the loss, they expect to make up the difference in some way. However, since the error was on the part of Quantco Brokerage, Calaveccio is under no obligation to cover the cost of the trading error. Moreover, no reasonable observer expects that there exists any implied future allocation of trades to Quantco in return for correcting their own mistake. There is no violation of Standard III(A), Loyalty, Prudence, and Care.

bapswarrior

In order to comply with Standard III(A), Loyalty, Prudence, and Care, an analyst needs to:

A) perform both of the actions listed here.

B) comply with applicable fiduciary duty.

C) liquidate his personal holdings of all stocks that his client owns.

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To comply with Standard III(A), the analyst must use reasonable care and exercise prudent judgment, always act for the benefit of clients, and determine and comply with applicable fiduciary duty.

bapswarrior

An analyst with his own money management firm trades on behalf of several large pension funds. The analyst now performs all trades through a particular brokerage firm because the brokerage provides his firm with a no-interest line of credit if paid within 60 days. The line of credit is available to all brokerage clients. The brokerage provides the analyst with personal account privileges that he would not otherwise be eligible for. The brokerage also provides the analyst with free research reports on many companies. Which of these benefits are violations of Standard III(A), Loyalty, Prudence, and Care?

A) Neither of these.

B) The personal account privileges.

C) The research reports.

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The personal account privileges are clearly a violation. The no-interest line of credit could be a violation if the analyst does not factor in the benefits when determining the fees of the clients, but it is not a per se violation. Research reports are least likely to be a violation.

bapswarrior

Which of the following would be a violation of Standard III(B), Fair Dealing?

A) Having well defined guidelines for pre-dissemination.

B) Trading for regular accounts before discretionary accounts.

C) Limiting the number of employees privy to recommendations and changes.

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Do not discriminate against a client when disseminating investment recommendations. If the firm offers different levels of service, this fact must be offered and disclosed to all clients. The other choices are necessary parts of the Standard. The Standard actually says to have published personal guidelines for pre-dissemination, which implies that the guidelines be well-defined.

bapswarrior

An analyst meets with a new client. During the meeting, the analyst sees that the new client’s portfolio is heavily invested in one over-the-counter stock. The analyst has been following the stock and thinks it will perform well in the long run. The analyst arranges through a brokerage firm to simultaneously sell a large number of shares of the stock via a series of cross trades from the new client’s portfolio to various existing clients. He arranges the trades to be executed at a price that approximates the current market price. This action is:

A) not in violation of the Standards.

B) a violation of Standard III(A), Loyalty, Prudence, and Care.

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

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There is no violation. It is in the best interest of the client to be diversified and selling via a series of cross trades will likely reduce price impact costs when compared to selling directly into the market. The analyst appears to have reasonable basis for putting the securities in the accounts of other clients.

bapswarrior

An investment advisor goes straight from a research seminar to a meeting with a prospective new client with whom she has never been in contact. The advisor is very excited about the information she just received in the seminar and begins showing the prospect the new ideas her firm is coming up with. This is most likely a violation of:

A) both of these.

B) Standard III(B), Fair Dealing.

C) Standard III(C), Suitability.

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It is a violation of Standard III(B) because the advisor should act first on behalf of existing clients whose needs and characteristics she already knows. It is a violation of Standard III(C) because she has never met the prospect and does not know if the new ideas are appropriate for the prospect. Thus, “both of these” is the best response.

bapswarrior

A money management firm has the following policy concerning new recommendations: When a new recommendation is made, each portfolio manager estimates the likely transaction size for each of their clients. Clients are notified of the new recommendation in the order of their estimated transaction size—largest first. All clients have signed a form where they acknowledge and consent to this allocation procedure. With respect to Standard III(B), Fair Dealing, this is:

A) not a violation because the clients have signed the consent form.

B) not a violation because the clients are aware of the policy.

C) a violation of the standard.

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Such a policy is a violation of the Standard and client acknowledgement and/or consent does not change that fact.

bapswarrior

In securing the shares for all accounts under her management, Linda Kammel of Northwest Futures purchased three blocks of shares at three different prices. She then allocated these shares by placing shares from the first block in accounts with surnames beginning with A-G. The second was allocated over accounts H-P, and the third over Q-Z. This action is:

A) consistent with her responsibilities under the Code and Standards.

B) not permissible under the Code and Standards.

C) permissible only if the clients are informed of the allocation procedure.

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Standard III(B) requires a member to deal fairly with all clients when taking investment actions. Since she knew at the outset that she was going to place shares in all accounts, regardless of the first letter of the surname, all accounts must participate on a pro-rata basis in each block in order to conform to the Standard. Her actions constitute a violation of the Standard concerning fair dealing.

bapswarrior

Lance Tuipulotu, CFA, manages investments for 400 individuals and families and often finds his resources stretched. When his largest investors petition him to include a 5% to 7% allocation of non-investment-grade bonds in their portfolios, he decides he needs additional help to meet the request. He considers various independent advisors to use as submanagers, but determines that the most qualified advisors would be too expensive. Reasoning that a lower-cost provider would enable him to pass the savings along to his clients, he chooses that provider to invest the new bond allocation. Tuipulotu has violated:

A) Standard III(C) "Suitability" by failing to consider the appropriateness of the non-investment-grade bonds.

B) Both Standard III(C) "Suitability" and Standard V(A) "Diligence and Reasonable Basis."

C) Standard V(A) "Diligence and Reasonable Basis" by letting fee structure determine the selection of the submanager.

Both Standard III(C) "Suitability" and Standard V(A) "Diligence and Reasonable Basis" were violated. Tuipulotu must perform a full IPS review to determine the appropriateness of the new portfolio allocations. Submanagers should not be selected by cost structure alone, as the quality and appropriateness of the submanager is Tuipulotu’s responsibility.

bapswarrior

Chandra Patel, CFA, manages private client portfolios for QED Investment Advisers. Part of QED’s firm-wide policy is to adhere to CFA Institute Standards of Professional Conduct in the management of all client portfolios, and to this end, the firm requires that client objectives, investment experience, and financial limitations be clearly established at the outset of the relationship. This information is updated at regular intervals not to exceed eighteen months. The information is maintained in a written investment policy statement (IPS) for each client.
Anarudh Singh has been one of Patel’s clients ever since she began managing money ten years ago. Shortly after his regular situational update, Singh calls to inform Patel that his uncle is ill, and it is not known how long he will survive. Singh expects to inherit “a sizeable sum of money,” mainly in the form of municipal bonds. His existing portfolio allocation guidelines are for 75% to be invested in bonds. Singh believes that the expected inheritance will allow him to assume a more aggressive investment profile and asks Patel to begin moving toward a 75% allocation to equities. He is specifically interested in opening sizable positions in several technology firms, some of which have only recently become publicly traded companies. Patel agrees to begin making the changes to the portfolio and the next day begins selling bonds from the portfolio and purchasing stocks in the technology sector as well as in other sectors. After placing the trade orders, Patel sends Singh an email to request that he come to her office sometime during the next week to update his IPS. Singh replies to Patel, saying that he can meet with her next Friday.
A few days before the meeting, however, Singh’s uncle dies and the portfolio of municipal bonds is transferred to Singh’s account with QED. Patel sees this as an opportunity to purchase more technology stocks for the portfolio and suggests taking such action during her meeting with Singh, who agrees. Patel reviews her files on technology companies and locates a report on NetWin. The analyst’s recommendation is that this stock is a “core holding” in the technology sector. Patel decides to purchase the stock for Singh’s account in addition to several other wealthy client accounts with high risk tolerance levels, but due to time constraints she does not review the holdings in each account. Patel does examine the aggregate holdings of the accounts to determine the approximate weight that NetWin should represent in each portfolio.
Since Patel has very recently passed the Level III examination leading to the award of the CFA designation, QED sends a promotional email to all of the firm’s clients. The email states “QED is proud to announce that Chandra Patel is now a CFA (Chartered Financial Analyst). This distinction, which is the culmination of many years of work and study, is further evidence of the superior performance you’ve come to expect at QED.” Patel also places phone calls to several brokers that she uses to place trades for her accounts, stating that she “passed all three CFA examinations on the first attempt.” One of the people Patel contacts is Max Spellman, a long-time friend and broker with TradeRight Brokers Inc. Patel uses the opportunity to discuss her exclusive trading agreement with TradeRight for Singh’s account.
When ordering trades for Singh’s account, Patel’s agreement with TradeRight for brokerage services requires her to first offer the trade to TradeRight, and then to another broker if TradeRight declines to take the trade. TradeRight never refuses the trades from any manager’s clients. Patel established the relationship with TradeRight because Singh, knowing the firm’s fee schedule relative to other brokers, asked her to do so. However, because TradeRight is very expensive and offers only moderate quality of execution, Patel is considering directing trades on Singh’s account to BullBroker, which charges lower commissions and generally completes trades sooner than TradeRight.

Do QED’s policies comply with CFA Institute Standards of Professional Conduct with respect to the information contained within the client IPS' and the frequency with which the information is updated?

Information

Frequency

A) No No

B) No Yes

C) Yes No

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According to Standard III(C)—Suitability, members and candidates must consider investment experience, objectives (risk and return), and constraints before investing funds on the client’s behalf or recommending investments to the client. The firm has complied with the information content. The investment policy statement must be updated at least annually, or after significant changes in client circumstances, however, according to the guidance statement accompanying Standard III(C). Thus, the firm has not complied with Standard III(C) in this regard. (Study Session 1, LOS 2.a,b)

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In light of Singh’s comments during his telephone call to Patel prior to his uncle’s death, which of the following actions that Patel can take comply with CFA Institute Standards of Professional Conduct?

A) Patel must not place any trades in the account until she meets with Singh to develop a new portfolio strategy based on the updated information.

B) Patel may change the current portfolio strategy and begin trading based upon Singh’s expectations because he advised her to do so.

C) Patel must adhere to the existing portfolio strategy until she meets with Singh to develop a new portfolio strategy based upon updated financial information, but may place trades which are consistent with the existing strategy.

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According to Standard III(C)—Suitability, Patel must observe the written investment objectives now in effect as determined in cooperation with the client and may trade only on that basis. Because the anticipated change in Singh’s financial condition was subject to an event of indeterminable timing, she should continue to honor the existing written investment objectives until a change is warranted by an actual increase in the client’s total financial assets and has been agreed upon with her client. (Study Session 1, LOS 2.a,b)

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According to CFA Institute Standards of Professional Conduct, may Patel reallocate Singh’s portfolio toward technology stocks after his Uncle dies, but before the meeting with Singh?

A) No—Patel and Singh must meet and revise the IPS and portfolio strategy before reallocating.

B) Yes—the total value of the municipal bonds received into the account will be too large relative to the other assets in the portfolio.

C) No—Patel must wait until the next annual meeting to reallocate.

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According to Standard III(C)—Suitability, investment recommendations and actions must be consistent with a client’s written objectives and constraints (typically in the form of an IPS). Because Singh’s written IPS would not allow the large allocation to technology stocks prior to receiving the inheritance, the IPS must be updated by Singh and Patel prior to taking any actions that deviate from the original IPS. Patel will violate Standard III(C) by reallocating the portfolio before meeting with Singh. (Study Session 1, LOS 2.a,b)

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Did Patel violate any CFA Institute Standards of Professional Conduct when she purchased the NetWin stock for Singh’s portfolio or for the other clients’ portfolios?

Singh's portfolio

Other portfolios

A) No No

B) Yes Yes

C) No Yes

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According to Standard III(C)—Suitability, Patel must analyze the appropriateness and suitability of NetWin.com stock on a case-by-case basis before buying it. This will necessarily consider the basic characteristics of the security and how these will affect overall portfolio characteristics relative to the existing investment strategy for each portfolio. Patel has not analyzed the effect that the stock will have on any of the individual portfolios in question and has thus violated the Standard. Patel cannot look at aggregate measures to determine the appropriate weight that the security should represent in the individual portfolios because the portfolios are being managed individually, not in aggregate. (Study Session 1, LOS 2.a,b)

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Which of the following is least accurate regarding the promotional announcement of Patel passing the Level III exam?

A) The promotional announcement uses the letters “CFA” as a noun and hence is an improper use of the designation.

B) The announcement violates the Code of Ethics because it implies that obtaining a CFA charter leads to superior performance.

C) The promotional announcement violates the restrictions on misrepresenting the meaning of the CFA designation.

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An announcement that a member of a firm has received the right to use the CFA® designation is not a violation of the Code or Standards. However, Standard VII(B) requires that any reference to the charter must not misrepresent or exaggerate the meaning or implications of the CFA designation. A charterholder cannot claim that holding a charter leads to superior performance results. The letters “CFA” can only be used as an adjective (never a noun, as in “he is a CFA”). Finally, passing all three exams does not give one the right to use the designation. All criteria must be met (e.g., experience requirements) before Patel can use the designation. (Study Session 1, LOS 2.a,b)

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With respect to the choice of broker, did Patel violate any CFA Institute Standards of Professional Conduct?

A) No.

B) Yes, since Patel is obligated to seek the best possible price and execution for all clients.

C) Yes, since Patel failed to properly notify Singh that using TradeRight would lead to higher commissions and opportunity costs.

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Since Singh directed Patel to use TradeRight, this should be considered client-directed brokerage. While Patel should inform Singh of the implications of that choice, Patel has no option but to follow the client’s direction according to Standard III(A)—Loyalty, Prudence, and Care. Singh was fully aware of the fees charged by TradeRight relative to other brokerage firms, but elected to use them anyway. Investment managers are obligated to seek the best price and execution in the absence of client direction. (Study Session 1, LOS 2.a,b)