Reading 2-III: Standards of Professional Conduct & Guid

black, returns, manager, class, stocks

Q1. 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) No, because the manager had the historical information in writing.

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

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

Q2. 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.

Q3. 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) a violation because the advertisement implies the firm generated this return.

B) in compliance.

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