Reading 5: Pearl Investment Management (A), (B), and (C)－

equipment, Investment, management, office, class

Q9. Xenica Jones, CFA, is a portfolio manager and also follows the office equipment industry for Hynes-Gold and Co. In her June 30 discussions with the management of Zprint, she learns that an internal audit has detected irregularities in the firm's Italian operations. This fact is disclosed on July 1 in both The Wall Street Journal and The Financial Times. On July 10 Zprint's management announces that an investigation of the matter would not be completed until an external audit of all European operations was complete. This stock dropped 6 percent on the news release on the 10th. Jones places a series of sell transactions in Zprint stock on the 3rd. When she places the trades, she trades first for her clients and finishes with a trade selling short for her own account. These actions are:

A) in violation of the Standard concerning fair dealing.

B) in violation of the Standard concerning fiduciary duties since she is not allowed to sell short under the Standard.

C) not in violation of the Code and Standards.

Q10. While working on her report, Jean Paul, CFA, learns from her friend in the investment banking department that the company she is analyzing can expect a tender offer very soon. Concerning this conclusion, Paul can:

A) not trade on it because it is material nonpublic information.

B) trade on it, because it is public information.

C) trade on it, because she figured it out by herself.

Q11. Calvin Moore, CFA, has been transferred from the brokerage house of the Browning Company to the portfolio management department. In portfolio management, Moore learns that clients are grouped into three divisions according to portfolio value, divided as follows:

§ Group 1 up to $10,000

§ Group 2 from $10,001 to $100,000

§ Group 3 more than $100,000

When recommendations are announced or trades are initiated, a particular sequence is followed in communicating to these groups. At the next monthly meeting, Moore suggests that the sequencing practice is a breach of CFA Institute Standards. One of Moore’s co-workers replies that the grouping approach helps the company in applying the Standard regarding portfolio recommendations. He further suggests that because Browning’s overall performance is more strongly affected by actions taken on the high value portfolios, that these portfolios should take priority over the small value portfolios. What should Moore do? Moore should:

A) disassociate himself from the problem and seek legal advice.

B) do nothing since there is no breach with the Standards.

C) prepare a written report to the CEO describing the problem.