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发表于 2012-3-23 16:03
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Sean O'Brien, CFA, works for Paradigm Portfolios as a portfolio manager. He manages a high-yield (junk bond) fund as well as 14 large private accounts. O'Brien's compensation for the high-yield fund is performance based, while the private-account compensation is based upon a percentage of assets. The company’s compensation packages are a closely guarded secret, and kept in-house.
When placing trades, O'Brien often uses the services of Junk Specialist Securities. The firm has the reputation for the best high-yield research on the Street, high trading commissions, and best execution. O'Brien sometimes "pays up" on trades to obtain research. He uses the research in managing all accounts under his purview. These trades are allocated equitably over all accounts.
O'Brien routinely takes personal positions in securities held in the high-yield fund, a practice allowed by Paradigm. On his way to work, he learns over the radio that a hurricane is heading toward the location of Villa Real Resorts in Mexico. Landfall is expected by Dec. 23, which could potentially ruin the lucrative Christmas vacation season. If the hurricane hits as expected, it will have a devastating affect on cash flows, and O’Brien believes Villa Real might default on its bonds. Both O'Brien and the high-yield fund hold Villa Real bonds. After arriving at the office, O’Brien sells off the fund’s Villa Real holdings, then immediately liquidates his own position.
Periodically O'Brien buys convertible bonds in the high-yield fund. When these are converted into common equity he typically does not vote the proxies, saying, "the fund is not an equity fund, and the equities are usually sold within the year."
Before accepting a new account, O'Brien conducts a thorough investigation into his client's financial situation, investment experience, and investment objectives. The information is updated annually through a survey mailed to the client and returned to Paradigm, and O’Brien follows up with a telephone call to the client. Judy Smith's portfolio was deemed suitable for the inclusion of high-yield bonds based upon the initial investigation, and reaffirmed at the last three annual updates. It is three months since Smith's last annual update, and the high-yield market has been weak. Smith files a lawsuit alleging malfeasance on the part of O'Brien.
O'Brien regularly attends analyst meetings. During the course of many of these meetings, he is observed consuming several highballs. On afternoons following the meetings he is easily angered and at times belligerent. However, his investment prowess does not seem to diminish.
In the course of effecting money-market transactions for the accounts, O'Brien routinely places numerous trades, allocating the paper with marginally higher yields to the high-yield fund and the remainder to the private accounts.With regard to the Smith account, O’Brien’s actions are in: A)
| violation of the fiduciary-duties Standard. |
| B)
| compliance with all applicable CFA Institute Standards. |
| C)
| violation of the portfolio investment recommendations Standard. |
|
O'Brien's actions are in full compliance with the Standards. He did appropriate research to determine the suitability of high-yield investments in Smith’s account, and followed up regularly, as is required. O'Brien cannot read Smith's mind, nor is he expected to do so. It is incumbent upon Smith to notify O'Brien of a change in her risk tolerance and objectives if these change between annual updates. (Study Session 2, LOS 6.b)
O’Brien’s drinking at analyst meetings and subsequent conduct is: A)
| in violation of Standard I(D): Misconduct because it reflects adversely on his professional competence. |
| B)
| in violation of Standard IV(A): Loyalty to Employer, because his drinking deprives the company of quality work. |
| C)
| in violation of Standard I(B): Independence and Objectivity. |
|
O’Brien’s conduct is not illegal, but it does violate the professional-misconduct Standard, which states, “Members shall not … commit any act that reflects adversely on their honesty, trustworthiness, or professional competence.” The fact that O’Brien’s investment work has not suffered is irrelevant, because the lunchtime drinking “reflects adversely” on O’Brien and Paradigm Portfolios. The conduct does not violate Standard I(B) or Standard IV(A), though it could violate the latter if the quality of O’Brien’s work begins to tail off. (Study Session 1, LOS 2.a)
Which of the following statements about O’Brien’s use of convertible bonds is CORRECT? A)
| O’Brien’s lack of expertise in equity analysis, despite usage of the CFA mark, represents a violation of Standard VII(A): Conduct as Members and Candidates in the CFA Program. |
| B)
| Unless O’Brien makes arrangements for someone else to vote the proxies, he is in violation of Standard III(A): Loyalty, Prudence, and Care. |
| C)
| The use of convertible bonds in O’Brien’s high-yield fund violates Standard V(A): Diligence and Reasonable Basis. |
|
O’Brien has a fiduciary duty to ensure that the proxies are voted according to the best interests of his clients. He need not do the voting himself, but he must set up a system by which somebody takes responsibility. There is nothing about convertible bonds that makes them necessarily unfit for a high-yield fund. If O’Brien earned the CFA designation and kept his dues up to date, he can use the designation even if he specializes. Standard I(C), Misrepresentation, relates to marketing services, not voting proxies. (Study Session 2, LOS 7.b)
With regard to the Villa Real investment, O’Brien’s actions: A)
| violate neither the reasonable-basis Standard nor the priority-of-transactions Standard. |
| B)
| violate the reasonable-basis Standard and the fiduciary-duties Standard. |
| C)
| do not violate the fiduciary-duties Standard but do violate the priority-of-transactions Standard. |
|
O’Brien is allowed to invest in securities he covers according to company policy. Since he traded for the firm’s accounts first and his personal account second, O’Brien did not violate a fiduciary duty or the priority-of-transactions Standard. Since O’Brien acted on information he obtained through a weather forecast, he did not use any material nonpublic information. His sell decision was based on his knowledge of the company and its circumstances, and, as such, is not a violation of the reasonable basis standard. (Study Session 1, LOS 1.b)
O’Brien’s money-market allocations represent: A)
| a violation of Standard III(B): Fair Dealing. |
| B)
| reasonable actions, as they simply reflect the nature of his compensation. |
| C)
| a breach of his fiduciary duty to mutual-fund account owners. |
|
O’Brien breached his fiduciary duty to private-account holders, but not to owners of the fund. He did violate the fair-dealing Standard by attempting to boost his compensation, but not Standard V(B), which relates to outside compensation, not that from his firm. (Study Session 2, LOS 8.a)
The practice of "paying up" for the research is: A)
| not OK for the fund and not OK for the private accounts. |
| B)
| OK for the fund but not OK for the private accounts. |
| C)
| OK for the fund and OK for the private accounts. |
|
CFA Institute Soft Dollar Standards allow for the purchase of research with client brokerage as long as the broker delivers best execution. Since the research benefits all of O’Brien’s clients, he can use brokerage to purchase it in the belief that the benefit of the research outweighs the effect of higher transaction costs. (Study Session 1, LOS 3.a) |
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