Hunter Harrison, CFA, is president and chief investment officer (CIO) of Ironclad Investments, an investment adviser and pension consultant for medium and large corporate pension clients. Ironclad recently hired a compliance officer to update its compliance manual, which follows the CFA Institute Code and Standards. Harrison serves as a director on several non-profit and corporate boards of directors, some of which have their pension assets managed by Ironclad. Harrison oversees Ironclad’s research analysts and portfolio managers, including Michelle Myers, who completed Level II of the CFA examination last year. Myers is a portfolio manager who regularly meets with clients and prospects. Myers is also a partner in a software company that sells retirement and benefit administration services to institutional clients, some of which are also clients of Ironclad. During her correspondence with prospects and clients, Myers commonly refers to her status as a candidate in the CFA program. She has included reference to her status as a “Level III CFA candidate” in her biographical background to increase her prominence in the industry.
Regarding Myers' references of her status as a candidate in the CFA program, what Standard governs these actions and is she in compliance?
|
A) |
Standard VII: Responsibilities as a CFA Member or CFA Candidate. Compliance: Yes. | |
|
B) |
Standard I: Professionalism. Compliance: No. | |
|
C) |
Standard III: Duties to Clients. Compliance: No. | |
The actions of Myers are covered under Standard (VII)—Responsibilities as a CFA Member or CFA Candidate, and Myers appears to be in compliance with this Standard. Standard VII(B)—Reference to CFA Institute, the CFA designation, and the CFA Program requires that CFA candidates appropriately reference their participation in the CFA program, clearly stating their candidate status and not implying the achievement of any type of partial designation. Additionally, to be considered a candidate an individual must be registered to take the next scheduled exam. Since Myers completed Level II last year, and no information is provided to indicate that she is not registered for the next examination, she appears to be a candidate. (Study Session 1, LOS 2.a)
All of the following most likely apply to Myers’ participation as a partner in the software company EXCEPT:
|
A) |
Standard IV (B.5)—Preservation of Confidentiality. | |
|
B) |
Standard IV (B.4)—Priority of Transactions. | |
|
C) |
Standard III (C)—Disclosure of Conflicts to Employer. | |
Standard VI(B)—Priority of Transactions most likely does not apply to Myers’ participation in the software company. Standard VI(B) covers priority over transactions in securities or other investments for clients and employers to prevent any instances of “front-running” for the benefit of the member. Myers’ software business is not transaction-oriented, and there is no information that describes any instances of the software company having priority in securities transactions over Ironclad or its clients. (Study Session 1, LOS 2.a)
As part of Ironclad’s portfolio management activities on behalf of clients, Harrison and Myers maintain relationships with third party soft dollar providers and commission recapture brokers.
- Better Trading Brokerage (“Better Trading”), one of Ironclad’s top ten brokers and soft dollar providers, has offered Harrison two round-trip airline tickets anywhere in the U.S. in appreciation for their two-year relationship with Ironclad.
- One of Harrison’s clients, Worldwind Travel (“Worldwind”), who participates in commission recapture, has offered Harrison two round-trip airline tickets anywhere in the U.S. or Europe in appreciation for their two-year relationship with Ironclad.
Which of the following best describes Harrison’s actions under the Code and Standards? Harrison:
|
A) |
can accept the offer from both Better Trading and Worldwind. | |
|
B) |
can accept the offer from Worldwind, but cannot accept the offer from Better Trading. | |
|
C) |
cannot accept the offer from either Better Trading or Worldwind. | |
Subject to additional disclosure, Harrison can accept the offer from Worldwind, but cannot accept the offer from Better Trading. Harrison’s actions are covered by Standard I(B)—Independence and Objectivity. Under Standard I(B), members shall use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. As such, Harrison’s acceptance of the offer from Better Trading could be perceived to compromise his independence and objectivity on behalf of his clients, as the broker may be trying to influence Harrison to increase the amount of trading that Ironclad executes on behalf of clients. Since Better Trading is not a client of Ironclad, and its offer could negatively influence Harrison’s actions on behalf of Ironclad’s clients in violation of the Standard, the offer should be refused. The offer from Worldwind, who is one of Ironclad’s clients, if accepted, does not cause Harrison to violate Standard I(B). Gifts from clients are distinguishable from gifts from third parties seeking to influence the activities of an investment manager. Worldwind’s offer to Harrison may be accepted, provided it is disclosed to Ironclad in writing as additional compensation or benefits. Standard IV(B)—Additional Compensation Arrangements requires members to disclose in writing any additional compensation or other benefits received for their services in addition those provided by their employer. Harrison is obligated to disclose the offer and abide by any further requirements set forth by Ironclad prior to accepting the tickets. (Study Session 1, LOS 2.a)
Myers has disclosed her partnership interest in the software company to Harrison, including the potential for additional compensation and the possible conflicts of interest.
- One of Myers’ software clients, Breakthrough Pharmaceuticals (“Breakthrough”), is a publicly-traded corporation that is also held in portfolios of Ironclad’s clients. In the course of their business relationship, Breakthrough’s chief executive officer (CEO) informs Myers that the company has been experiencing problems making retirement benefit payments, and its pension plan has recently gone from “overfunded” to “significantly underfunded” as a result of market conditions.
- Breakthrough’s CEO indicates to Myers that he is attempting to source additional short-term financing to make retiree benefit payments and will disclose the significant “underfunded status” of the pension plan in the upcoming financial statements.
- Myers, concerned about Ironclad clients holding stock of Breakthrough given the impact on earnings from the current pension troubles and short-term liquidity issues, informs Harrison of the impending disclosure.
- Ironclad sells 1,800,000 shares of Breakthrough for clients, causing the price to drop $4 per share.
- Upon disclosure of the pension troubles, Breakthrough’s stock dropped 18%.
According to Standard II—Integrity of Capital Markets, Myers has:
|
A) |
violated the Standard by sharing material nonpublic information with Harrison. | |
|
B) |
not violated the Standard since the information shared with Harrison was used to fulfill Ironclad’s fiduciary duty to avoid significant losses. | |
|
C) |
not violated the Standard by sharing material nonpublic information with Harrison because the information did not involve a tender offer. | |
Although the information shared by Myers may have helped Ironclad’s clients avoid losses in shares of Breakthrough, the information was material nonpublic information. In this example, Myers’ software company owes a duty of loyal and confidentiality to Breakthrough. Information is “material” if its disclosure would have an impact on the stock or if a reasonable investor would want to know the information prior to making an investment decision. Material is “nonpublic” until it has been generally disseminated to the marketplace and investors have had an opportunity to react to the information. The information about Breakthrough’s pension difficulties was both material and nonpublic, as the stock dropped significantly upon disclosure of the information in the market. Therefore, Myers had a duty to keep the information confidential and not to trade, or cause others to trade, on the information. (Study Session 1, LOS 2.a)
Ironclad owns shares in several research and technology companies, including approximately 4% of the outstanding shares of Advanced DSL (“Advanced”), Internet Connections (“Internet”), and approximately 6% of the outstanding shares of Speedy Chip Technology (“Speedy Chip”) and Wavelength Digital (“Wavelength”).
Which of the following least likely applies to Harrison and Myers?
|
A) |
Standard II(A)—Material Nonpublic Information. | |
|
B) |
Standard IV(B)—Additional Compensation Arrangements. | |
|
C) |
Standard III(A)—Loyalty, Prudence, and Care. | |
Standard II(A)—Material Nonpublic Information is least likely to apply to both Harrison and Myers in this situation. Given Harrison’s role on the boards of directors for Internet and Wavelength, he is in the position to potentially receive material nonpublic information; however, there are no facts presented that would infer that he either received or used material nonpublic information about Internet or Wavelength. Myers, as a benefits consultant for Speedy Chip, also may be in a position receive to material nonpublic information, but there are no facts presented that would infer Myers’ receipt or use of material nonpublic information. (Study Session 1, LOS 2.a)
|
发表于 2010-3-31 14:08
|