Reading 2-V: Standards of Professional Conduct & Guidance center, 2011, investment, Investment, class

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Session 1: Ethical and Professional Standards
Reading 2-V: Standards of Professional Conduct & Guidance: Investment Analysis, Recommendations, and Actions

LOS C.: Record Retention.

 

 

An analyst has constructed an investment policy statement (IPS) and a portfolio for a new client, Stephanie Sasser. He has also provided written guidelines on the processes used to make investment management decisions. Six month later, Sasser questions the analyst about several portfolio holdings. Due to a large allocation in financial services stocks during a severe market downturn, her portfolio has underperformed the benchmark by a large margin. Although the analyst remembers discussing the over-allocation with Sasser, and receiving her approval, he is unable to find supporting documents. Which of the following Standards has the analyst most likely violated?

A) Standard V(B) Communications with Clients and Prospective Clients.

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

C) Standard V(C) Record Retention.

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Standard V(C) Record Retention requires analysts to develop and maintain “…records to support their investment analysis, recommendations…with clients and prospective clients.” The analyst is unable to document the over-allocation with respect to the benchmark; this is most likely a violation of Standard V(C).

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Lee Hurst, CFA, is an equity research analyst who has recently left a large firm to start independent practice. He is able to re-create several of his previous recommendation reports from memory, based on sources obtained at his previous employer. He publishes the reports and obtains several new clients. Hurst is most likely:

A) in violation of Standard V(C) “Record Retention.”

B) not in violation of any Standard.

C) in violation of Standard V(A) "Diligent and Reasonable Basis."

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Hurst is most likely in violation of Standard V(C) "Record Retention" because the supporting documentation is unavailable. He needs to recreate the supporting records based on information gathered through public sources or the covered company.

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An analyst has constructed an investment policy statement (IPS) and a portfolio for a new client, Susan Stevens. He has also provided written guidelines on the processes used to make investment management decisions. Six month later, Stevens questions the analyst about several portfolio holdings. Although the analyst cannot remember his reasoning for recommending specific securities, and cannot find supporting documents, he assures her that the recommendations were made within the limits of her IPS and the firm’s stated processes for making investment management decisions. Stevens is not satisfied by this response, but leaves the portfolio unchanged. The analyst has most likely violated:

A) Standard V(B) Communications with Clients and Prospective Clients.

B) Standard V(C) Record Retention.

C) Standard III(C) Suitability.

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Standard V(C) Record Retention requires analysts to develop and maintain “…records to support their investment analysis, recommendations…with clients and prospective clients.” The analyst is unable to explain why securities were added to the portfolio; this is a violation of Standard V(C).

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According to CFA Institute Standards of Professional Conduct, members should do all of the following to meet the compliance procedures for having a reasonable basis for recommendations, EXCEPT:

A) distribute a detailed, written research report to clients with each recommendation.

B) analyze the client's investment needs.

C) analyze the investment's basic characteristics before recommending a specific investment to a broad client group.

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Standard V(C), Record Retention, requires that members maintain appropriate records to support the reasonableness of such recommendations or actions, but they are not required to distribute a research report with each recommendation.

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Ten years ago Lance Tuipuloto, CFA, met with Horace and Nichole Scadden to discuss potential investments, but these prospects never became clients. Tuipuloto now wants to destroy the records from the meeting with the prospective clients. Is this action in compliance with Standard V(C)?

A) Yes; A sufficient number of years have passed since the meeting.

B) Yes; the prospects never became clients.

C) No.

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According to Standard V(C), Record Retention, the files may be destroyed. The CFA Institute recommends keeping all records for at least 7 years. Given that more than 7 years have passed since Tuipuloto‘s meeting with the Scaddens, it is not against Standard V(C) to get rid of the records from that meeting.