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Reading 6: Asset Manager Code of Professional Conduct -LOS

CFA Institute Area 1-2: Ethical and Professional Standards
Session 2: Ethical and Professional Standards in Practice
Reading 6: Asset Manager Code of Professional Conduct
LOS c: Recommend practices and procedures designed to prevent violations of the Asset Manager Code.

Establishing information barriers between departments would fall under which section of the Code?

A)Investment Process and Actions.
B)Loyalty to Clients.
C)Compliance and Support.
D)
Trading.


Answer and Explanation

Establishing information barriers falls under the Trading section of the Code and is meant to restrict the flow of material nonpublic information so as to limit the potential misuse of this information for insider trading.

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Which of the following procedures relates specifically to maintaining the confidentiality of information under the Loyalty part of the Code?

A)Using reasonable care and prudent judgment when managing client accounts.
B)Maintaining records for an appropriate amount of time.
C)
Creating and implementing an anti-money laundering policy.
D)Developing a business continuity plan.


Answer and Explanation

Where appropriate, firms should implement an anti-money laundering policy which falls under the Loyalty to Clients section specifically related to preserving the confidentiality of client information. Developing a business continuity plan and maintaining records falls under the Compliance and Support section of the Code. Using reasonable care and prudence falls under the section of the Code dealing with Investment Process and Actions.

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Which of the following procedures is NOT part of the Performance and Valuation section of the Code?

A)Using readily accepted valuation techniques to value client assets.
B)Implementing the Global Investment Performance Standards (GIPS®).
C)Having an independent third party value client accounts.
D)
Performing stress testing on complex derivative products.


Answer and Explanation

The Performance and Valuation section of the Code deals with reporting the clients and managers results in an accurate manner without misrepresentation. Stress testing falls under the section of the Code dealing with Investment Process and Actions.

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Georgette Litman, CFA, is an employee of Cooper and Grey Financial Consultants. She has had the responsibility for several client portfolios over several years. Litman was recently promoted to a senior management position with the idea of establishing guidelines to help ensure compliance with the Chartered Financial Analyst Institute Code and Standards and also the CFAI Asset Manager Code of Professional Conduct in the firms portfolio management business. To help in this task of compliance, Cooper and Grey Financial Consultants has hired Jack Book to help institute a set of procedures that will help Cooper and Grey Financial Consultants achieve their goal. Book has a legal background and is a new employee at Cooper and Grey Financial Consultants. Litman hopes that Book can help by providing a new and outside perspective to the process. Although Book is not a member of CFAI and has no immediate plans for joining CFAI and taking the Level I exam, Book brings a wealth of knowledge and experience. Understandably, Book must take some time to understand many details, e.g., the reasons for a separate conduct code for asset managers that is in addition to the CFAI Code of Professional Conduct.

Litman wants to know what the clients of Cooper and Grey Financial Consultants are thinking and get their perspective on how the firm is doing. She knows that many of the employees of Cooper and Grey Financial Consultants have close relationships with the clients and that gifts have been exchanged on occasion. She asks Book to look into this activity. She tells Book that it is acceptable for token gifts of any kind (except illegal substances) to be exchanged as long as the employees inform her of the gift. She sits down with Book to compose a list of all the recent gifts that Cooper and Grey Financial Consultants employees have told her they have received. She says that it is a good step to finally get them written down. After they compose this list, Book is to find out if there have been gifts that Litman was not informed as being given or received.

Litman is also concerned that money-laundering may be occurring through the accounts at Cooper and Grey Financial Consultants. Book has a background in detecting money-laundering activities, and this was one of the reasons Litman suggested that Cooper and Grey Financial Consultants hire Book. Litman asks Book to create an anti-money-laundering policy to detect and help prevent Cooper and Grey from being used for that purpose and other illegal activities. Litman cautions Book that the CFAI Asset Manager Code of Professional Conduct prevents Cooper and Grey Financial Consultants from providing client information to legal authorities, so Book will have to be careful in the design of the policies. Litman tells Book that, if all goes well in this area, she will see to it that Book becomes the compliance office of Cooper and Grey. In this position, Litman says that Book will report directly to her, and she will then use this information to report directly to the CEO and board of directors.

Litman asks Book to help her draft procedures for monitoring performance and evaluating managers. She and Book compile a list of procedures that they plan to employ. Litman recommends abiding by the Global Investment Performance Standards, or GIPS, and using fair-market values when determining portfolio asset values. Book insists that Cooper and Grey Financial Consultants should use a third party for valuing asset accounts.

In addition to suggesting that an independent third party evaluate the performance of managers, Book recommends that the information disseminated to clients be reviewed by an independent third party for accuracy and completeness. Furthermore, in addition to maintaining adequate records, Book insists that Cooper and Grey Financial Consultants develop a plan for dealing with a natural disaster or some other event that could potentially destroy the records.

With respect to establishing compliance with the CFAI Asset Manager Code of Professional Conduct, the fact that Book is not a member of CFAI is:

A)important and must be immediately remedied by his enrolling for the Level I exam.
B)important and must be immediately remedied by his joining CFAI, but he does not have to enroll for the Level I exam.
C)a reason for Litman to be sanctioned by CFAI, and Book should be reassigned to another department in Cooper and Grey.
D)
not directly important.


Answer and Explanation

It is not required that a CFAI member establish compliance.

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Litmans past and future policy concerning the monitoring and control of the exchange of gifts has:

A)only one problem: she apparently was not informed in writing.
B)no problems; it is in accordance with the CFAI Asset Manager Code of Professional Conduct.
C)only one problem: she apparently has not prohibited cash gifts.
D)
at least two problems: she apparently was not informed in writing and she has not prohibited cash gifts.


Answer and Explanation

Litmans instructions to Book concerning creating an anti-money-laundering policy to detect and help prevent Cooper and Grey from being used for that purpose and other illegal activities is:

A)not appropriate, nor is the issue a part of the CFAI Asset Manager Code of Professional Conduct.
B)
not entirely correct in that Cooper and Grey may give necessary information to legal authorities in the event of an investigation.
C)not appropriate since Book is not a member of CFAI.
D)appropriate and correct.


Answer and Explanation

Recommend practices and procedures designed to prevent violations of the Asset Manager Code addresses loyalty to clients. Loyalty to clients deal with always putting the clients interests before your own, maintaining the confidentiality of client information, and not engaging in any business relationship or accepting gifts from others that could affect your judgment and objectivity. Appropriate procedures include creating an anti-money-laundering policy to detect and help prevent firms from being used for money laundering or other illegal activities and creating a procedure that delineates how confidential client information should be collected, utilized, and stored. The confidential information policy does not preclude disseminating necessary information to legal authorities in the event of an investigation.


Litmans plan for making Book the compliance officer at Cooper and Grey is:

A)
not appropriate because in that position, Book should be the one reporting to the CEO and the board of directors.
B)not appropriate because Book is not a member of CFAI.
C)appropriate because Book is not a member of CFAI.
D)not appropriate because Book is new to the firm.


Answer and Explanation

Recommend practices and procedures designed to prevent violations of the Asset Manager Code addresses compliance and support. Under compliance and support, the procedures specify that a compliance officer should be designated who reports directly to the CEO or board of directors and who is responsible for making sure compliance procedures are in place and followed. There are not strict and specific qualifications such being a member of CFAI (or not), nor how long the officer has been with the firm.


In drafting procedures for monitoring performance and evaluating managers, the:

A)suggestion by Litman is generally accepted but that of Book is a violation of the CFAI Asset Manager Code of Professional Conduct.
B)suggestions by both Litman and Book are not generally accepted nor recommended by the CFAI Asset Manager Code of Professional Conduct.
C)
suggestions by both Litman and Book are generally accepted and recommended to comply with the CFAI Asset Manager Code of Professional Conduct.
D)suggestion by Book is generally accepted but that of Litman is a violation of the CFAI Asset Manager Code of Professional Conduct.


Answer and Explanation

Recommend practices and procedures designed to prevent violations of the Asset Manager Code address performance and valuation. Performance and valuation deal with reporting investment results in an accurate manner without misrepresentation and using fair-market values when determining portfolio asset values. A good guideline to follow would be the Global Investment Performance Standards (GIPS®), which incorporates a high level of quality in reporting requirements. Because manager compensation is sometimes based on performance results, managers may be tempted to manipulate performance results in an attempt to increase their compensation. To avoid this conflict of interest, procedures for valuing asset accounts should include transferring the responsibility of valuing asset accounts to an independent third party.


In response to Books suggestions concerning the hiring of a third party to review information disseminated to clients and for the plan for dealing with a natural disaster, according to the CFAI Asset Manager Code of Professional Conduct, Litman should:

A)
adopt them both.
B)ignore them both.
C)adopt the plan for hiring the third party to review information only.
D)adopt the plan for dealing with a natural disaster only.


Answer and Explanation

Recommend practices and procedures designed to prevent violations of the Asset Manager Code addresses compliance and support. Compliance and support deal with: ensuring compliance with the Code and legal and regulatory requirements and appointing a compliance officer, ensuring that portfolio information disseminated to clients is accurate and complete and reviewed by an independent third party, appropriately maintaining records, employing qualified staff along with adequate resources, and instituting a contingency plan in the event of a natural disaster.

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