Reading 2-IV: Standards of Professional Conduct & Guidan recognized, center, div, membership, class

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Session 1: Ethical and Professional Standards
Reading 2-IV: Standards of Professional Conduct & Guidance: Duties to Employers

LOS B.: Additional Compensation Arrangements.

 

 

 

An analyst belongs to a nationally recognized charitable organization, which requires dues for membership. The analyst has worked out a deal that he provides money management advice in lieu of paying dues. For this arrangement to comply with the standards, the analyst needs consent from:

A) his supervisor in the organization only.

B) both his supervisor in the organization and his regular place of work.

C) his supervisor in his regular place of work only.

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An employee/employer relationship does not necessarily mean monetary compensation for services. If the analyst is performing services for the organization, then the analyst must treat the position as if he were an employee and obtain consent from both his supervisor in the organization and in his regular place of work.

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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 it provides her with additional compensation.

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

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

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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.

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Jill Marsh, CFA, works for Advisors where she manages a portfolio for a wealthy family. Marsh earns 1% of the portfolio’s value each year in the form of a commission from Advisors. The family just told her that any year the portfolio she manages earns more than a 10% return, the family will give her the use of the family’s vacation home for one week. Hirsh will comply with Standard IV(B), Additional Compensation Arrangements, if she:

A) does nothing with respect to this.

B) sends an e-mail to her supervisor about the vacation home.

C) delivers a typed memo to her supervisor about the vacation home the first time she uses it.

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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. E-mail messages qualify. As long as the agreement is in effect, she must inform her employer even if she has yet to use the potential benefit.

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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 receives written consent from TrustCo and discloses the arrangement to his clients and prospects.

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

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

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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.

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An analyst working at an investment firm has a client that rents limousines. The client tells the analyst that as long as he is the client’s analyst, he can have free use of a limousine several times a year. The analyst needs to:

A) do nothing since the offer is not linked to the performance of the client's portfolio.

B) explicitly refuse such an offer.

C) inform his supervisor in writing of the offer if the analyst intends to accept the offer.

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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. They also need to get consent from their employer in writing. The written report to the employer should include the details of any written or oral agreement for extra compensation. The analyst does not have to refuse the offer.

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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.

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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.

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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 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.

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

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

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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.

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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.

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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.

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With regard to Lindquist’s seat on the board of Western Inns, he violated:

A) no standards.

B) Standard VI(A): Disclosure of Conflicts, and Standard IV(B): Additional Compensation Arrangements.

C) Standard VI(A): Disclosure of Conflicts, but not Standard IV(B): Additional Compensation Arrangements.

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Under Standard IV(B), Lindquist is required to disclose in writing to his employer any benefits (monetary or non-monetary) he receives for services that are in addition to compensation or benefits provided by his employer. An informal discussion with his supervisor does not conform to the requirement that the notice be in writing. Under Standard VI(A), he is also required to disclose the arrangement to his clients because a directorship is a conflict of interest that could reasonably be expected to impair his objectivity. He must do so even if he currently holds no shares of Western in his clients’ portfolios because it may impair his objectivity in recommending the stock for inclusion in clients’ portfolios in the future. Lindquist violated Standard I(B) because clients could reasonably assume his objectivity is in question. (Study Session 1, LOS 2.a)

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Which of the following standards is not violated in Lindquist’s version of the Midwestern model?

A) Standard V(A): Diligence and Reasonable Basis.

B) Standard IV(C): Responsibilities of Supervisors.

C) Standard I(C): Misrepresentation.

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The ad hoc model is not part of the formal research process and does not formulate an adequate basis for a recommendation. Lindquist’s recommendations are not supported by appropriate research because Lindquist’s version of the model obtains different results than the original model. These discrepancies have not been adequately researched. Lindquist’s supervisor is responsible for policing the analyst’s research. The fiduciary-duties standard covers a lot of ground, and it would not be hard to argue that by misrepresenting his research as that of a company standard, he is breaching a duty to the firm’s clients, who expect their investments to be chosen by the “Midwestern Model.” The plagiarism standard is not relevant here, because Lindquist has permission to use the model, and is not misrepresenting the work of others as his own work. In fact, Lindquist’s actions represent the opposite of plagiarism, pawning off his own work as the work of others. (Study Session 1, LOS 2.a)

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Lindquist’s actions in advertising his investment performance:

A) conform to all standards.

B) conform to standards concerning performance presentation as long as Lindquist does not claim compliance with CFA Institute Global Investment Performance Standards.

C) violate Standard III(D): Performance Presentation.

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Lindquist failed to conform to Standard III(D) by releasing misleading information concerning his historical performance at Midwestern. KMGR may use a different management style than Midwestern, rendering historical performance of little value to Midwestern clients. Claiming compliance with CFA Institute GIPS would only compound the problem. Misrepresenting performance results as occurring at one firm when they actually occurred at a previous employer is a violation of the presentation standards. (Study Session 1, LOS 2.a)

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Regarding the NCAA tickets, what action must Lindquist take to avoid a violation of Standard IV(B): Additional Compensation Arrangements?

A) Obtain written consent from all parties involved.

B) Disclose his receipt of the tickets to all other clients with the same investment objective as the Olson account.

C) None. Lindquist’s actions do not violate Standard IV(B).

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Lindquist may accept this gift from a client as long as he obtains written consent from all parties involved. (Study Session 1, LOS 2.a)