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A broker was sanctioned for unsuitable recommendations and excessive trading involving three accounts under his care. These clients were unsophisticated, inexperienced individual investors with limited means. According to CFA Institute Standard III(C), Suitability, which of the following is least likely to be considered a relevant factor in determining the appropriateness and suitability of investment recommendations or actions for each portfolio or client?

A) Best interests of the investment professional.

B) Basic characteristics of the total portfolio.

C) Basic characteristics of the investment involved.

D) Needs and circumstances of the portfolio or client.

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Answer and Explanation

Determining appropriateness and suitability focuses on the portfolio or client, not on the investment professional. Investment professionals should take particular care to ensure that their goals in selling products or executing security transactions do not conflict with the best interests of the client.

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The Securities and Exchange Commission (SEC) sanctioned Stephen Rangen, a former broker, for unsuitable recommendations and excessive trading in several accounts. His clients were unsophisticated, inexperienced individual investors with limited means. As such, they relied heavily on Rangens advice and expected him to initiate any transactions in their respective accounts. The SEC found that Rangens trading methods were contrary to his clients goals. For example, he used margin accounts and concentrated their equity holdings in particular securities. Rangen claimed that his actions were justified because his clients were aware of the risks.

Which of the following statements best describes why Rangens argument, that his clients were aware of the risks, did NOT meet the requirements of the Code and Standards? Rangen failed to:

A) make recommendations that were consistent with his clients' financial needs.

B) deal fairly and objectively with his clients when taking investment action.

C) consider the effect of excessive trading on the returns of his clients' portfolios.

D) disclose to his clients all matters that reasonably could be expected to impair his ability to make unbiased and objective recommendations.

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Answer and Explanation

Rangen did not fulfill the obligation he assumed when he agreed to counsel these clients. That is, he did not make recommendations that were consistent with their financial needs. According to Standard III(C), Suitability, Rangen must consider the appropriateness and suitability of investment recommendations or actions for each portfolio or client. This is true even if his clients wanted to speculate and were aware of the risks.

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Rangen bought U.S. Treasury strips and over-the-counter stocks that did not produce income as sought by his clients. Rangen claimed that his actions were justified because his firms research department recommended the purchase of the Treasury strips. Also, he claimed the stocks that he bought were all in the top-rated categories of his firms research division. Which of the following statements best describes why Rangens arguments, in which he attempted to shift the blame to his employer, did NOT meet the requirements of the Code and Standards?

A) Rangen misrepresented the basic characteristics of the investments that he bought for his clients' accounts.

B) Rangen did not use reasonable care and judgment to achieve and maintain independence and objectivity in taking investment actions.

C) Rangen used material nonpublic information from his firm's research department as the basis for selecting the securities that he bought for his clients' accounts.

D) Rangen's duty was to make only recommendations that were in the best interests of his clients.

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Answer and Explanation

Rangen cannot shift the blame to his employer. He had an obligation to consider not only his firm's recommendations, but also his clients' investment objectives and financial situations. He failed to consider relevant factors relating to his clients. Rangen violated Standard III(C) because he initiated investment actions without properly considering whether these actions were suitable to his clients' financial situations and investment objectives.

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Stephen Rangen, a broker, has three accounts consisting of unsophisticated, inexperienced individual investors with limited means. One of these accounts is an elderly couple. The clients want to invest in safe, income-producing investments. They rely heavily on Rangens advice and expect him to initiate most transactions in their respective accounts. In managing their accounts, Rangen pursues the following strategies: (1) buys U.S. treasury strips and non-dividend paying over-the-counter (OTC) stocks, (2) uses margin accounts, and (3) concentrates the equity portion of their portfolio in one or two stocks. Rangens approach leads to extremely high turnover rates in all three accounts.

Which of the following statements about Rangen is FALSE?

A) Rangen has a fiduciary duty to each client.

B) Rangen's conduct violates Standard III(C), Suitability.

C) Rangen places his own interests above those of his clients by excessively trading in the accounts.

D) Rangen's conduct violates Standard IV(B), Additional Compensation Arrangements.

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Answer and Explanation

No information in the case suggests that Rangens conduct violates Standard IV(B), Disclosure of Additional Compensation Arrangements.

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Which of the following statements about Rangen's conduct is TRUE? Rangen's conduct:

A) meets the requirements of the Code and Standards because his clients are aware of the risks that he is taking in managing their accounts.

B) meets the requirements of the Code and Standards because he does not have complete control over his clients' accounts.

C) meets the requirements of the Code and Standards because his firm's research department recommended the U.S. Treasury strips and non-dividend paying stocks.

D) does not meet the requirements of the Code and Standards because his investment strategy is inconsistent with his clients' objectives.

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Answer and Explanation

Rangen's actions are inconsistent with Standard III(C), Suitability, because his investment actions are neither appropriate nor suitable for each client. Even if his clients were aware of the risks, the portfolios that he constructed are inconsistent with their financial needs. Because he is in a position to control the volume and frequency of transactions in their accounts, he has control over the accounts. Although Rangen relies upon recommendations from his firms research department, he cannot shift blame to his employer because he must follow recommendations that are in the best interests of his clients.

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The best way to determine the suitability of an investment is:

A) based on portfolio performance results, presented as a weighted average, from the biggest financial companies.

B) with the help of the special performance presentation standards.

C) by administration of a specially designed survey of the client's opinions.

D) to consider the financial situation, investment experience, and investment objectives of the client.

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Answer and Explanation

Although broad in scope, the best way to determine suitability is to consider the financial situation, investment experience and investment objectives of the client. All the other choices deviate from these essential issues.