anshultongia

Jim Kent is an individual investment advisor in San Francisco with 300 clients. Kent uses open-ended mutual funds to implement his investment policy. For most of his clients, Kent has used the Baker fund, a small company growth fund based in Boston, for a portion of their portfolio. As a result he has become very friendly with Keith Dunston, the manager of the fund, whom Kent feels is mainly responsible for Baker's performance. One day Dunston calls Kent and tells him that he will be leaving the fund in four weeks and moving to San Francisco to work for a different money management company. Dunston is seeking suggestions on housing in the area. Baker has not yet announced Dunston's departure. Kent immediately finds a fund that is a suitable replacement for the Baker fund, and over the next two days he calls his 30 clients with the largest dollar investments in the funds and tells them he feels they should switch their holdings. Baker feels the remaining clients' positions are small enough to wait for their annual review to switch funds. Kent has:

A) violated the Standards regarding nonpublic information but has not violated the Standards in failing to deal fairly with clients.

B) violated the Standards by not dealing fairly with clients but has not violated the Standards regarding material nonpublic information.

C) violated the Standards by not dealing fairly with clients and regarding material nonpublic information.

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Kent must treat all clients fairly in acting on the information, regardless of the size of the investment. The information concerning the fund manager’s departure is not material nonpublic information because its release would have no effect on individual security prices.

anshultongia

Victor Logan is a portfolio manager for McCoy Advisors, and Jack Brisco is the Director of Research for McCoy. Brisco has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the McCoy model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. Brisco frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. Logan has conducted very thorough research on his own, using the same process that Brisco uses to validate his findings. Logan feels the model is missing some key elements that would further reduce the list of acceptable securities to purchase, however, Brisco has refused to look at Logan's research. Frustrated by this, Logan applies his own version of the model, with the justification that he is still only purchasing securities on the buy list. Because of the conflict with Brisco, he does not disclose the use of the model to anyone at McCoy or to clients. Which of the following statements regarding Logan and Brisco is CORRECT? Logan is:

A) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is violating the Standards by failing to consider Logan's research.

B) not violating the Standards by applying his version of the model, but is violating the Standards by not disclosing it to clients. Brisco is not violating the Standards.

C) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is not violating the Standards.

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Because the research is thoroughly conducted, and Logan has authority to make individual security selection decisions, Logan is not violating the Standards by applying his model. However, Logan is violating the Standard on communication with clients and prospective clients by excluding relevant factors of the investment process. The use of his model is an important aspect of the investment process and should be disclosed to clients. Brisco is not violating the Standards by not considering Logan’s research.

anshultongia

Ned Brenan manages two dozen pension accounts, one of which earned over 25% during the past two years. Brenan tells prospective clients that based on past experience they can expect a 25% return on their funds. Which of the following statements is CORRECT?

A) Brenan has violated both Standard of Professional Conduct III(D), Performance Presentation, and Standard I(C), Misrepresentation.

B) Brenan has violated Standard of Professional Conduct III(D), Performance Presentation, but Brenan has not violated Standard I(C), Misrepresentation.

C) Brenan has not violated Standard of Professional Conduct III(D), Performance Presentation, but Brenan has violated Standard I(C), Misrepresentation.

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Brenan violated Standard of Professional Conduct III(D) by using only one portfolio’s results to create a false impression of all the portfolios, and Brenan violated Standard of Professional Conduct I(C) by creating the impression that a certain return was assured (he should have used the words “might” or “could” instead of “can”).

anshultongia

Jennifer Gates is an individual portfolio manager who only uses mutual funds for her clients; she has therefore never created a portfolio of stocks. She enters an Internet chat room on investments and starts answering questions about investments. She states in the chat room that she has a CFA designation. One woman in particular is interested and questions her about the viability of creating her own stock portfolio. Gates feels that this would be a mistake because she only has $150,000 to invest, and states, "I have experience creating stock portfolios, and it does not make sense to do so with only $150,000." The woman she has chatted with sends her an e-mail and eventually becomes a client of hers. Gates has:

A) violated the Standards by soliciting business over the Internet.

B) violated the Standards by misrepresenting her experience.

C) not violated the Standards.

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One cannot misrepresent their experience, even over the Internet.

anshultongia

Chuck Thomas is the trustee of a trust of which Jill Wyatt is the main beneficiary. Wyatt's husband is the president of a company. In emptying the recycling bin at home, Wyatt finds some papers that lead her to believe that her husband’s company will make a tender offer to acquire another firm. Wyatt takes the information to Thomas, who uses it to purchase shares of the company for the trust, but does not further disclose the information. Thomas has:

A) not violated any Standards.

B) violated the Standards concerning material nonpublic information.

C) violated the Standards concerning loyalty, prudence, and care.

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Thomas cannot act or cause others to act on material nonpublic information.

anshultongia

Steve Jones is a portfolio manager for Gregg Advisors. Gregg has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Gregg model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. The director of research frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. Jones thoroughly understands the model and uses it with all of his clients. Jones is:

A) not violating the Standards either in purchasing stocks without a thorough research basis or in not disclosing all alterations of the model to clients.

B) violating the Standards in purchasing stocks without a thorough research basis and in not disclosing all alterations of the model to clients.

C) violating the Standards in not disclosing all alterations of the model to clients, but not in purchasing stocks without a thorough research basis.

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Jones and Gregg are using reasonable judgment in not continually disclosing all of the alterations of the model. It is acceptable to use a pure quantitative model as a sole basis for purchasing stocks, as long as it is thoroughly researched.

anshultongia

Janine Walker is an individual investment advisor with 200 individual clients. When she first obtains a client, Walker solicits personal data that helps her formulate an investment recommendation, including tax status, income, expenditure needs, and risk tolerance. The Standards:

A) require updating a client's data only when a material change occurs to the personal data.

B) only require to update a client's data when a material change is being made to the clients' portfolio.

C) require Walker to update the data regularly.

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According to Standard III(C), Suitability, Members and Candidates must reassess client information and update regularly.

anshultongia

Sheila Stevens has accepted a one-year gift membership (valued at approximately $225) to the Women’s World Health Club from a firm to which she directs trades. She has done so without notifying her employer. Which of the following statements is least accurate?

A) This is a violation of the Code and Standards but is less serious than an identical case in which the gift was given by a client of Stevens.

B) This is a violation of the Code and Standards, because the gift is not a token amount.

C) This is a violation of the Code and Standards, because it has not been disclosed to her employer.

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This action is clearly a violation of Standard I(B), Independence and Objectivity. Accepting a gift from a non-client is a more serious violation than accepting a gift from a client (for which a compensation arrangement would already exist), since the intent is almost certainly to gain influence over future actions of the member (e.g., increased allocation of trades).

anshultongia

Patricia Hoolihan is an individual investment advisor who uses mutual funds for her clients. She typically chooses funds from a list of 40 funds that she has thoroughly researched. The Burns, a married couple that are a client, asked her to consider the Hawkeye fund for their portfolio. Hoolihan had not previously considered the fund because when she first conducted her research three years ago, Hawkeye was too small to be considered. However, the fund has now grown in value, and cursory research uncovers no fundamental flaws with the fund. She puts the fund in the Burns' portfolio but not in any of her other clients' portfolios. The fund ends up being the best performing fund on her list. Hoolihan has:

A) violated the Standards by not dealing fairly with clients.

B) not violated the Standards.

C) violated the Standards by not having a reasonable and adequate basis for making the recommendation.

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Despite the fact the addition of the fund was successful, Hoolihan acted improperly in not conducting the same degree of research as she did for the other funds on her list.

Walex

Betsy Fox is an investment advisor who has a client, Don Gordon, who is an employment lawyer. At lunch, Fox noticed Gordon and the Chief Financial Officer of Blue Star Company at the next table. She overhears them talking and ascertains that Blue Star is about to announce higher than expected earnings. Before the earnings release, Gordon contacts Fox and asks her to purchase 3,000 shares for his portfolio. Fox:

A) can purchase shares for Gordon, but cannot ever purchase shares for her personal account.

B) can only purchase shares for her personal account after informing all of her clients about the potential of the increase in earnings.

C) must refuse to purchase shares for Gordon.

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According to Standard II(A), Material Nonpublic Information, Fox cannot act or cause others to act on material nonpublic information until the information is made public. The information overheard at lunch was material and nonpublic; therefore, Fox must wait until the information is made public before accepting Gordon’s order.