prashantsahni

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. One of the clients gets married and the assets of the new spouse and the client are combined. With the larger portfolio of the now married client, Hatfield determines that they can assume a higher level of risk and begins a change in the policy concerning that portfolio. Which of the following would violate Standard III(C), Suitability?

A) Implement a similar policy for the other client who did not just get married.

B) Assess the return objectives of the newly married client and his spouse.

C) Assess the time horizon of the newly married client and his spouse.

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According to Standard III(C), Suitability, the analyst must assess the time horizon, return objectives, tax considerations, and liquidity needs of a client before changing an investment policy. The analyst must notify the client of the new policy. Implementing the policy for the other client may be a violation of the Standard unless that client’s needs are totally reassessed and determined to be identical to the needs of the newly married client.

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Janet Reilly has just approached Betty Miller, CFA, about purchasing 10,000 shares of Brookshire Co., a newly incorporated real estate development firm. Reilly is a retired schoolteacher living off the income from her late husband's life insurance policy. This investment will represent a significant shift in her investment portfolio. Brookshire Co. is a local firm that has recently received a lot of press concerning some exciting, but speculative projects that they have undertaken in the region. Consistent with the Standards, Miller should:

A) not accept the order, because it is not a suitable investment for Reilly.

B) accept Reilly's order, but have her sign a disclaimer absolving Miller of any potential losses.

C) accept Reilly's order after she acquaints Reilly with the downside risks associated with a risky investment of this type.

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Members are required to consider the appropriateness and suitability of investment actions for their clients. The needs and circumstances of the client, and the characteristics of the investment and the portfolio must be taken into account. If Reilly understands the risks of this investment and the rest of her portfolio is adequate for her income needs, Miller can proceed to make the investment.

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What is the required frequency for updating information on each client’s financial situation, investment experiences, and investment objectives?

A) Only during the first meeting with the client.

B) Every year.

C) Regularly.

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Standard III(C) Suitability. Members shall make a reasonable inquiry into a client’s financial situation, investment experience, and investment objectives prior to making any investment recommendations and shall reassess and update this information regularly.

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If an analyst has a policy of making an inquiry into a client’s financial situation, investment experience, and investment objectives regularly, this is:

A) neither of these.

B) a violation of Standard III(E), concerning client confidentiality.

C) congruent with Standard III(C), Suitability.

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Standard III(C) explicitly says that an analyst should make such inquiries and update information regularly. Client confidentiality is addressed in Standard III(E) but that is with respect to how the analyst treats the information once it is obtained.

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An analyst thinks that a major change in the tax law will benefit holders of utility company stocks. She immediately begins calling all her clients and telling them of the upside potential of investing in such assets now. Based upon this information, this is most likely:

A) a violation of Standard V(A), Diligence and Reasonable Basis.

B) a violation of Standard III(C), Suitability.

C) congruent with Standard V(A), Diligence and Reasonable Basis.

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According to Standard III(C), the analyst needs to determine the suitability of an investment for each client. It is doubtful that all her clients are identical in their needs. According to the information, the analyst mentions the upside potential but does not mention the downside risk. Although the information says that she thinks that the change in the tax law will benefit holders of utility company stocks and says nothing of how she arrived at this conclusion, we do not know if she has or has not made her decision on a reasonable basis.

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Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. Hatfield has been trading on the clients’ behalf with a single brokerage firm for several years. Because of his many years of business, the brokerage firm occasionally gives Hatfield shares in an initial public offering (IPO) to sell to his clients. Hatfield has a policy of allocating the IPO shares equally between the portfolios of the two clients. This policy is:

A) a violation of Standard III(C), Suitability.

B) congruent with Standard III(C), Suitability.

C) a violation of Standard III(B), Fair Dealing.

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According to Standard III(C), the analyst must consider the appropriateness and suitability of an investment recommendation for each portfolio or client. Having a fixed policy of adding investments to portfolios without evaluating their suitability is a violation of Standard III(C). The action does not violate Standard III(B)

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Kim Lee manages a variety of accounts at Superior Investments. Some are permitted to invest in tax-exempt issues only; others may not invest in a stock unless it pays dividends. Lee is researching a biotech firm specializing in the analysis of "mad cow" disease. While touring company facilities and meeting with management, she learns that they believe they may have found a way to reverse the disease. Moreover, one manager conjectured, "Suppose that we reversed the disease in someone who didn't even have it? We might then be able to boost that individual's IQ into the stratosphere!" Lee returns to her office and buys shares for all accounts under her supervision. This action is:

A) appropriate given the obvious potential of the therapy.

B) a violation of the Standard concerning appropriateness and suitability of investment actions.

C) a violation of the Standard concerning fiduciary duties.

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Given the variety of accounts under her supervision, it is not likely the shares of a speculative biotech firm would be suitable for all accounts. Placing such shares in all accounts indicates that she has failed to consider the appropriateness and suitability of the investment for each account, and this places her in violation of Standard III(C).

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Procedures for compliance with Standard III(C), Suitability, include determining all of the following with respect to a client EXCEPT:

A) social habits and interests.

B) liquidity needs.

C) return objectives.

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The procedures for compliance with Standard III(C) include determining all of the aspects of a client’s investment objectives and constraints mentioned above, but do not include gathering information about the client’s social habits and interests.

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A portfolio manager must determine the client’s constraints, which may include all of the following EXCEPT the client’s:

A) tax considerations.

B) liquidity needs.

C) mortgage payment.

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The mortgage payment per se is of interest to the portfolio manager only insofar as it affects the bigger picture issues such as liquidity needs, cash flow, etc.

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Stephen Rangen, a former broker, had three accounts consisting of unsophisticated, inexperienced individual investors with limited means. One of these accounts was an elderly couple. The clients wanted to invest in safe, income-producing investments. They relied heavily on Rangen’s advice and expected him to initiate most transactions in their respective accounts. In managing their accounts, Rangen pursued the following strategies: (1) bought U.S. treasury strips and non-dividend paying over-the-counter stocks, (2) used margin accounts, and (3) concentrated the equity portion of their portfolios in one or two stocks. Rangen’s approach led to extremely high turnover rates in all three accounts. The Securities and Exchange Commission sanctioned Rangen for unsuitable recommendations and excessive trading in several accounts.For this specific situation, which of the following is least likely to be an appropriate compliance procedure involving Standard III(C), Suitability? The broker should:

A) develop an investment policy statement for each client.

B) avoid using material nonpublic information received in confidence to benefit clients.

C) assess and document each client's risk tolerance.

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The prohibition against use of material nonpublic information refers to Standard II(A), not Standard III(C), Suitability.

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For this specific situation, all of the following are appropriate compliance procedures involving Standard III(C), Suitability, EXCEPT:

A) reviewing investment policy statements regularly.

B) educating clients about selecting appropriate asset allocations and strategies.

C) complying with any prohibitions on activities imposed by their employer if a conflict of interest exists.

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Standard VI(A), Disclosure of Conflicts, refers to complying with any prohibitions on activities imposed by their employer if a conflict of interest exists and, therefore, is unrelated to Standard III(C).

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For this specific situation, which of the following policy statements should be adopted to ensure that future violations of this kind do not occur?

A) Before advising individual clients, managers should review the recommendations provided by the firm's research department. From this set of recommendations, they should select those securities that provide the expected highest return on investment. Managers should review the investor's portfolio at least monthly to see if existing securities should be replaced with those more recently recommended. Managers should turnover portfolios frequently and concentrate holdings within portfolios in order to achieve the highest possible returns for clients.

B) Before making any recommendations or taking any investment actions, managers should formulate an investment policy for a client. They should consider the type and nature of the client and should obtain and analyze necessary information on the client's objectives (risk and return) and constraints. Managers should maintain and review regularly the investor's objectives and constraints to reflect any changes in the client's circumstances. Where appropriate, managers should properly diversify portfolios.

C) When making recommendations or taking investment actions, managers should seek to minimize the client's portfolio risk. Managers should review the recommendations of the firm's research department to identify securities with low volatility. In making asset allocation recommendations or decisions for discretionary accounts, managers should weight the portfolios towards dividend-paying stocks and other income-producing assets such as bonds and mortgage REITS. Managers should review portfolios at least semi-annually.

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Standard III(C) requires that members shall “make a reasonable inquiry into a client’s financial situation, investment experience, and investment objectives prior to making any investment recommendations and shall update this information regularly to allow the members to adjust their investment recommendations to reflect changed circumstances.” The other policy statements focus on maximizing returns or minimizing risk. These statements may be inconsistent with the needs and circumstances of each individual client.