Reading 2-IV: Standards of Professional Conduct & Guidan 2010, only, commission, developed, business

bmaggie

Jan Hirsh, CFA, is employed as manager of a college endowment fund. The college’s endowment is held by the brokerage firm Advisors, Inc. Over the years, Hirsh has developed a solid relationship with Advisors. Because of this relationship, Advisors has given her their Platinum level service for her personal account. Advisors ordinarily gives the Platinum level only to clients who do a minimum of $2,500 of commission business in a year. Hirsh has never reached the $2,500 commission level and probably will never do so. According to Standard IV(B), Additional Compensation Arrangements, Hirsh needs to:

A) inform her supervisor verbally about the Platinum account.

B) inform her supervisor in writing about the Platinum account.

C) do none of the actions listed here.

---

Having the Platinum account is a benefit from her managing the endowment, which led to the relationship with Advisors. Members should report to their employers any additional compensation or benefits they receive for their services. This must be in writing. Doing $2,500 in business alone will not negate her obligation unless she explicitly tells Advisors that she is willing to accept whatever penalties accompany a Platinum account when a client does less business.

zaestau

c

bmaggie

Jill Marsh, CFA, works for Advisors where she manages various portfolios. Marsh’s godfather is an accountant and has done Marsh’s tax returns every year as a birthday gift. Marsh’s godfather has recently become a client of Advisors and asked specifically for Marsh to manage his account. In order to comply Standard IV(B), Disclosure of Additional Compensation Arrangements, she needs to:

A) have her godfather cease doing her taxes.

B) liquidate from her personal portfolio any stocks her godfather owns and verbally tell her supervisor about the tax services.

C) do neither of the actions listed here.

---

Standard IV(B) requires that members disclose to their employer in writing all benefits that they receive in addition to their regular compensation for services they perform on behalf of their employer. It is not unreasonable for an individual’s godfather to give them a birthday gift. Moreover, since the tax services were a regular birthday present before her godfather became a client, this implies that they are unrelated to any investment management services.

bmaggie

Sharon West is a CFA charterholder and trust officer for REO Trust Company. Soon after beginning work for REO, West finds that REO has been conducting all its securities transactions through her brother who is a registered representative. West's brother charges REO commissions that are equal to the lowest available from another broker. West's brother tells her that if she continues doing business with him, he will give her a substantial discount on all personal transactions she conducts through him. West:

A) must inform her employer of the arrangement because she is doing business with a member of her immediate family.

B) does not need to inform her employer of the arrangement because the commissions her brother charges the firm are the lowest possible.

C) must inform her employer of the arrangement because it provides her with additional compensation.

---

Members are required to disclose to their employer in writing all monetary compensation or other benefit they receive in addition to the employer’s compensation. The discounting of West’s commissions is a benefit that must be disclosed.

bmaggie

Selma Brown, CFA, is a portfolio manager for Mainland Securities. Rick Wood, one of her clients and owner of Wood Fitness Centers, offers to permit Brown and her immediate family to use the facilities at his fitness centers at no cost during 2003. To get this benefit, Brown must achieve on Wood’s portfolio at least a 2-percentage point return above the total return on the S&’s 500 index during 2002. Brown orally informs her immediate supervisor of the nature and duration of the proposed arrangement.

Arnold Turley, a CFA Institute member, is a portfolio analyst at Mainland Securities. He was just elected to the Board of Directors for Omega Services, which pays him $1,000 plus expenses for attending each of its quarterly board meetings. Turley e-mails Mainland’s compliance officer informing her of this arrangement with Omega and receives a reply informing him that the agreement is acceptable.

Did Brown or Turley violate CFA Institute Standards of Professional Conduct?

A) Brown: No, Turley: No.

B) Brown: Yes, Turley: Yes.

C) Brown: Yes, Turley: No.

---

Brown violated Standard IV(B), Additional Compensation Arrangements, because she must disclose in writing other benefits to be received for services that are in addition to compensation conferred by her employer. Turley did not violate Standard IV(B) because he received consent from his employer in writing, which includes e-mail.

bmaggie

Jane Talbot, CFA, is a portfolio manager at Cavalier Investments. Talbot manages the account of Wendall Wilcox. The performance of Wilcox's portfolio has been below that of the benchmark portfolio, the S& 500, for the past several years. In an effort to enhance his portfolio's performance, Wilcox offers to pay Talbot $2,000 each year that his portfolio's return exceeds that of the S& 500. Wilcox suggests this arrangement last for the next three years. The amount that Wilcox agrees to pay Talbot is in addition to the compensation that Talbot will receive from his employer and the standard fee that Wilcox will pay Cavalier for managing his portfolio over the three-year period. Talbot agrees to the arrangement proposed by Wilcox and informs Cavalier in writing of the terms of the agreement under which she will receive additional compensation. According to CFA Institute Standards of Professional Conduct Talbot must disclose:

A) both the nature and amount of compensation only.

B) the nature of the compensation only.

C) the nature and amount of compensation plus the duration of the agreement.

---

Procedures for compliance for Standard IV(B) indicate that the written report should state the terms of any oral or written agreement under which Talbot will receive additional compensation including the nature of the compensation, the amount of compensation and the duration of the agreement.

bmaggie

Chris Babcock, CFA, a portfolio manager for a large Texas investment firm, has been offered compensation in addition to what her firm pays her. The offer is from one of her clients and the additional compensation will be based on her yearly performance in excess of the market index. Babcock should:

A) make written disclosure to all parties involved before she accepts this offer.

B) turn down the offer because it represents a clear conflict between this client and Babcock's other clients.

C) make written disclosure to her other clients before she accepts this offer.

---

Standard IV(B), Additional Compensation Arrangements, applies in this situation. Standard IV(B) states, “No gifts, benefits, compensation, or consideration are to be accepted with may create a conflict of interest with the employer’s interest unless written consent is received from all parties.”

The key words here are "written consent" - members must obtain written consent because such arrangements may affect loyalties and objectivity and create potential conflicts of interest.

bmaggie

An analyst needs to inform his supervisor in writing of which of the following?

A) An annual bonus, sent to the analyst by a client, which varies with the performance of the client's portfolio that the analyst manages as an employee even though no verbal or written agreement exists about the bonus.

B) A client and the analyst alternate paying for lunch at a local sandwich shop.

C) Both the lunch and the bonus mentioned in the other answers.

---

Standard IV(B) requires that members disclose to their employer in writing all benefits that they receive in addition to their regular compensation for services they perform on behalf of their employer. Since the bonus varies with the performance of the client’s portfolio, there is a clear link to the services of the analyst. The analyst is not required to report the lunch since it is not linked to performance.

bmaggie

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with Worldwide Brokerage. Worldwide suggests to Calaveccio that they are willing to provide him with additional compensation for order flow. Is this permissible under the Code and Standards?

A) Yes, if he discloses the arrangement in writing to TrustCo.

B) Yes, if he receives written consent from TrustCo and discloses the arrangement to his clients and prospects.

C) No, such an arrangement is in violation of the Code and Standards.

---

In conformance with Standard IV(B) Additional Compensation Arrangements, Calaveccio is required to obtain written consent from TrustCo, his employer. In conformance with Standard VI(C) Referral Fees, he is also required to disclose the additional compensation to clients and prospects. Written permission from his clients and prospects is unnecessary.

bmaggie

David Saul, CFA, heads the trust department at Savage National Bank. Fairway Enterprises invites Saul to sit on its Board of Directors. In return for his services on the Board, Fairway offers to provide Saul and his family with access to the facilities at Wilmont Country Club at no cost. Saul will not receive any monetary compensation for his services on the Board. According to CFA Institute Standards of Professional Conduct, which of the following actions must Saul take?

A) Saul must obtain written consent from all parties to only if he decides to accept the offer to serve on the Board of Directors.

B) Saul must disclose in writing to Savage Bank the terms of the offer whether or not he accepts the offer to serve on the Board of Directors.

C) Saul must reject the offer to serve on the Board of Directors.

---

Standard IV(B) requires that members obtain written consent from all parties involved before accepting monetary compensation or other benefits that they receive for their services that are in addition to compensation or benefits conferred by a member's employer. In this situation, Saul may also be obligated to disclose his participation on Fairway's Board to clients, prospective clients, and employer under Standard VI(A), Disclosure of Conflicts.