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周教授CFA金融课程:2019/2020年CFA一二三级系列课程

Ethical and Professional Standards 【Reading 6】Sample

Preston Partners Case Study (Refer to CFA Institute Standards of Practice Casebook for details).
Preston Partners is a medium-sized investment management firm which adopted the Code and Standards as part of its policy manual. Gerald Smithson, CFA, a portfolio manager, had recently added the stock of Utah Biochemical Company and Norgood PLC to all his clients' investment portfolios. Smithson had a personal relationship with the president of Utah Biochemical. Shortly afterwards Utah Biochemicals and Norgood announced a merger which increased the share prices of both companies.
Smithson contends that he saw the president of Utah Biochemical dining with the chairman of Norgood but did not overhear their conversation. Smithson researched both companies extensively and determined that each company was a good investment. He also pondered whether there would be a merger as they seemed to complement each other. He put in block trades for shares of each company which were executed over a period of two weeks at various prices. Preston's policies were not clear in this area so he allocated the shares by starting with his largest client and working down to small accounts. Some of Smithson's clients were very conservative personal trust accounts; others were pension funds which had aggressive investment objectives.Regarding their supervisory duties, which of the following violations was NOT committed by Preston?
A)
Standard IV(C) by putting in place a procedure that only uncovers violations of Standards by employees but does not prevent violations.
B)
Standard III(B) for allowing portfolio managers to place block trades at different prices and to allocate the different prices to clients' accounts.
C)
Standard IV(C) by failing to have complete and proper supervisory procedures in place.



Block trades, if allocated fairly among client accounts, are not a violation of the Standards. Preston violated Standard IV(C) by not laying down clear policy guidelines and procedures to prevent violations from occurring. Procedures should not only uncover violations but they should also prevent them from taking place. Standard III(B) was violated, but not by the act of placing block trades at different prices and allocating the different prices to clients' accounts.

Which of the following statements concerning the actions of Smithson or Preston Partners is least accurate?
A)
Smithson did not violate any Standards since he consulted with the Preston company manual for allocating trades.
B)
Preston violated Standard IV(C) for not putting into place adequate supervisory procedures.
C)
Smithson did not violate Standard II(A) prohibition against the use of material nonpublic information.



Smithson did not adhere to the Fair Dealing standard because the large accounts were treated first. Standard III(B) states no client shall be put at a disadvantage as a result of the portfolio manager's fiduciary duty to the client. Despite the fact that the company manual was incomplete and did not provide a clear policy or guideline in this matter, Smithson is held accountable for adhering to the Code and Standards, of which he should be aware as a member. Preston violated Standard IV(C) as the firm did not put into place adequate supervisory procedures and clear compliance policies for the employees of the firm. It is not enough that violations are detected after they have been made. The policies, procedures and monitoring efforts should prevent violations from occurring. Smithson did not violate Standard II(A) relating to material non-public information since he performed his own due diligence and did not base his investment decision on the meeting of the two executives alone. He relied on the "mosaic" produced by his research and observance of the meeting. The case implies that he did not overhear the conversation, trading on which would have put him in violation of the Standards and the laws.

Preston Partners Case Study (Refer to CFA Institute Standards of Practice Casebook for details).
Preston partners is a medium-sized investment management firm which adopted the Code and Standards as part of its policy manual. Gerald Smithson, CFA, a portfolio manager, had recently added the stock of Utah Biochemical Company and Norgood PLC to all his clients' investment portfolios. Smithson had a personal relationship with the president of Utah Biochemical. Shortly afterwards Utah Biochemicals and Norgood announced a merger which increased the share prices of both companies.
Smithson contends that he saw the president of Utah Biochemical dining with the chairman of Norgood but did not overhear their conversation. Smithson researched both companies extensively and determined that each company was a good investment. He also pondered whether there would be a merger as they seemed to complement each other. He put in block trades for shares of each company which were executed over a period of two weeks at various prices. Preston's policies were not clear in this area so he allocated the shares by starting with his largest client and working down to small accounts. Some of Smithson's clients were very conservative personal trust accounts; others were pension funds which had aggressive investment objectives.Select the most appropriate policy statement for Preston regarding Standard IV(C) concerning Responsibilities of Supervisors.
A)
"Preston employees who are in supervisory roles will be held accountable for the actions of those who report to them in matters of compliance with the policies and procedures of Preston. Supervisors will also be held responsible for compliance with securities laws and regulations by which employees' actions are governed."
B)
"Preston employees who are in supervisory roles will not be accountable for the actions of those who report to them in matters of compliance with the policies and procedures of Preston. However, supervisors will be held responsible for compliance with securities laws and regulations by which employees' activities are governed."
C)
"Preston employees who are in supervisory roles will be held accountable for the actions of those who report to them in matters of compliance with the policies and procedures of Preston. Supervisors will not be held responsible for compliance with securities laws and regulations by which employees' activities are governed."



To comply with Standard IV(C), supervisors must be held accountable for their employees' actions governed by laws and regulations and held responsible for ensuring that employees who report to them, directly or indirectly, comply with company policies and procedures.

Select the most appropriate policy statement for Preston regarding Standard III(B) concerning Fair Dealing for allocation of block trades.
A)
"Preston shall not discriminate against any client account, and all clients will receive the same price for order execution and will be charged the same commission, if applicable. However, larger clients, who are more profitable, can be allocated trades on a preferential basis consistent with general business practice in many industries."
B)
"Preston shall not discriminate against any client account, and all clients will receive the same price for order execution and will be charged the same commission, if applicable. Block trades will be allocated pro rata before or immediately after the execution of the block trade."
C)
"Preston shall not discriminate against any client account, and all clients will receive the same price, adjusted for quantity discounts, for order execution and will be charged commissions based on number of shares allocated. Block trades will be allocated pro rata before or immediately after the execution of the block trade."



Standard III(B) addresses fair dealing when it comes to clients. Block trades, if executed at different prices, must be allocated in such a way that all client accounts are charged the same average price and commission. One way to achieve this fair allocation is to allocate them pro rata across all accounts, with no preferential treatment. The suitability of investments for a particular client is covered by Standard III(C).

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Sean O'Brien, CFA, works for Paradigm Portfolios as a portfolio manager. He manages a high-yield (junk bond) fund as well as 14 large private accounts. O'Brien's compensation for the high-yield fund is performance based, while the private-account compensation is based upon a percentage of assets. The company’s compensation packages are a closely guarded secret, and kept in-house.
When placing trades, O'Brien often uses the services of Junk Specialist Securities. The firm has the reputation for the best high-yield research on the Street, high trading commissions, and best execution. O'Brien sometimes "pays up" on trades to obtain research. He uses the research in managing all accounts under his purview. These trades are allocated equitably over all accounts.
O'Brien routinely takes personal positions in securities held in the high-yield fund, a practice allowed by Paradigm. On his way to work, he learns over the radio that a hurricane is heading toward the location of Villa Real Resorts in Mexico. Landfall is expected by Dec. 23, which could potentially ruin the lucrative Christmas vacation season. If the hurricane hits as expected, it will have a devastating affect on cash flows, and O’Brien believes Villa Real might default on its bonds. Both O'Brien and the high-yield fund hold Villa Real bonds. After arriving at the office, O’Brien sells off the fund’s Villa Real holdings, then immediately liquidates his own position.
Periodically O'Brien buys convertible bonds in the high-yield fund. When these are converted into common equity he typically does not vote the proxies, saying, "the fund is not an equity fund, and the equities are usually sold within the year."
Before accepting a new account, O'Brien conducts a thorough investigation into his client's financial situation, investment experience, and investment objectives. The information is updated annually through a survey mailed to the client and returned to Paradigm, and O’Brien follows up with a telephone call to the client. Judy Smith's portfolio was deemed suitable for the inclusion of high-yield bonds based upon the initial investigation, and reaffirmed at the last three annual updates. It is three months since Smith's last annual update, and the high-yield market has been weak. Smith files a lawsuit alleging malfeasance on the part of O'Brien.
O'Brien regularly attends analyst meetings. During the course of many of these meetings, he is observed consuming several highballs. On afternoons following the meetings he is easily angered and at times belligerent. However, his investment prowess does not seem to diminish.
In the course of effecting money-market transactions for the accounts, O'Brien routinely places numerous trades, allocating the paper with marginally higher yields to the high-yield fund and the remainder to the private accounts.With regard to the Smith account, O’Brien’s actions are in:
A)
violation of the fiduciary-duties Standard.
B)
compliance with all applicable CFA Institute Standards.
C)
violation of the portfolio investment recommendations Standard.



O'Brien's actions are in full compliance with the Standards. He did appropriate research to determine the suitability of high-yield investments in Smith’s account, and followed up regularly, as is required. O'Brien cannot read Smith's mind, nor is he expected to do so. It is incumbent upon Smith to notify O'Brien of a change in her risk tolerance and objectives if these change between annual updates. (Study Session 2, LOS 6.b)

O’Brien’s drinking at analyst meetings and subsequent conduct is:
A)
in violation of Standard I(D): Misconduct because it reflects adversely on his professional competence.
B)
in violation of Standard IV(A): Loyalty to Employer, because his drinking deprives the company of quality work.
C)
in violation of Standard I(B): Independence and Objectivity.



O’Brien’s conduct is not illegal, but it does violate the professional-misconduct Standard, which states, “Members shall not … commit any act that reflects adversely on their honesty, trustworthiness, or professional competence.” The fact that O’Brien’s investment work has not suffered is irrelevant, because the lunchtime drinking “reflects adversely” on O’Brien and Paradigm Portfolios. The conduct does not violate Standard I(B) or Standard IV(A), though it could violate the latter if the quality of O’Brien’s work begins to tail off. (Study Session 1, LOS 2.a)

Which of the following statements about O’Brien’s use of convertible bonds is CORRECT?
A)
O’Brien’s lack of expertise in equity analysis, despite usage of the CFA mark, represents a violation of Standard VII(A): Conduct as Members and Candidates in the CFA Program.
B)
Unless O’Brien makes arrangements for someone else to vote the proxies, he is in violation of Standard III(A): Loyalty, Prudence, and Care.
C)
The use of convertible bonds in O’Brien’s high-yield fund violates Standard V(A): Diligence and Reasonable Basis.



O’Brien has a fiduciary duty to ensure that the proxies are voted according to the best interests of his clients. He need not do the voting himself, but he must set up a system by which somebody takes responsibility. There is nothing about convertible bonds that makes them necessarily unfit for a high-yield fund. If O’Brien earned the CFA designation and kept his dues up to date, he can use the designation even if he specializes. Standard I(C), Misrepresentation, relates to marketing services, not voting proxies. (Study Session 2, LOS 7.b)

With regard to the Villa Real investment, O’Brien’s actions:
A)
violate neither the reasonable-basis Standard nor the priority-of-transactions Standard.
B)
violate the reasonable-basis Standard and the fiduciary-duties Standard.
C)
do not violate the fiduciary-duties Standard but do violate the priority-of-transactions Standard.



O’Brien is allowed to invest in securities he covers according to company policy. Since he traded for the firm’s accounts first and his personal account second, O’Brien did not violate a fiduciary duty or the priority-of-transactions Standard. Since O’Brien acted on information he obtained through a weather forecast, he did not use any material nonpublic information. His sell decision was based on his knowledge of the company and its circumstances, and, as such, is not a violation of the reasonable basis standard. (Study Session 1, LOS 1.b)

O’Brien’s money-market allocations represent:
A)
a violation of Standard III(B): Fair Dealing.
B)
reasonable actions, as they simply reflect the nature of his compensation.
C)
a breach of his fiduciary duty to mutual-fund account owners.



O’Brien breached his fiduciary duty to private-account holders, but not to owners of the fund. He did violate the fair-dealing Standard by attempting to boost his compensation, but not Standard V(B), which relates to outside compensation, not that from his firm. (Study Session 2, LOS 8.a)

The practice of "paying up" for the research is:
A)
not OK for the fund and not OK for the private accounts.
B)
OK for the fund but not OK for the private accounts.
C)
OK for the fund and OK for the private accounts.



CFA Institute Soft Dollar Standards allow for the purchase of research with client brokerage as long as the broker delivers best execution. Since the research benefits all of O’Brien’s clients, he can use brokerage to purchase it in the belief that the benefit of the research outweighs the effect of higher transaction costs. (Study Session 1, LOS 3.a)

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Preston Partners Case Study (Refer to CFA Institute Standards of Practice Casebook for details).
Preston partners is a medium-sized investment management firm which adopted the Code and Standards as part of its policy manual. Gerald Smithson, CFA, a portfolio manager, had recently added the stock of Utah Biochemical Company and Norgood PLC to all his clients' investment portfolios. Smithson had a personal relationship with the president of Utah Biochemical. Shortly afterwards Utah Biochemicals and Norgood announced a merger which increased the share prices of both companies.
Smithson contends that he saw the president of Utah Biochemical dining with the chairman of Norgood but did not overhear their conversation. Smithson researched both companies extensively and determined that each company was a good investment. He also pondered whether there would be a merger as they seemed to complement each other. He put in block trades for shares of each company which were executed over a period of two weeks at various prices. Preston's policies were not clear in this area so he allocated the shares by starting with his largest client and working down to small accounts. Some of Smithson's clients were very conservative personal trust accounts; others were pension funds which had aggressive investment objectives.
Which of the following statements is CORRECT?
A)
Utah Biochemical was an appropriate investment for Preston's personal trust accounts.
B)
Smithson failed to comply with Standard III(C) regarding suitability of investments for clients portfolios.
C)
Smithson acted on inside information because he had observed senior executives of Norgood and Utah Biochemical having lunch together, in violation of Standard II(A).


Smithson did not assess the suitability of the two stocks for the different risk tolerances of Preston's clients, which can be classified into two categories: conservative and aggressive. Utah Biochemical was not appropriate for conservative personal trust accounts but he allocated it to them anyway. Smithson did not violate Standard II(A) relating to material non-public information since he performed his own due diligence and did not base his investment decision on the meeting of the two executives alone. He relied on the "mosaic" produced by his research and observance of the meeting. The case implies that he did not overhear the conversation, trading on which would have put him in violation of the Standards and the laws. Preston was remiss in discharging its duties as they did not lay down clear policies and guidelines for allocation of block trades, in violation of Standard III(B). As mentioned, Utah Biochemical was probably not an appropriate investment for trust accounts and the statement is, therefore, false.

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