Reading 2-III: Standards of Professional Conduct & Guida

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Q1.Alan Cramer, CFA, practices in a country that does not regulate the investment of company retirement plans. He was retained by Bingham Companies to manage their corporate pension plan. Bingham’s management has approached Cramer and requested that Cramer invest the entire plan in Bingham stock.

Cramer may:

A) not invest any of Bingham Company's retirement plan in its own stock regardless of the stock's prospects and in spite of management's request.

B) invest a portion of the retirement plan in Bingham Company stock if the investment is prudent and if he keeps the overall portfolio properly diversified.

C) invest all of the retirement plan assets in Bingham Company stock according to management's request only if Cramer can document that the investment is more prudent than any other investment opportunity he finds.

Q2.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.

Q3.Which of the following statements about the limitations that the Fair Dealing standard imposes is TRUE?

A) Referral fees may be disclosed after proceeding with an agreement for service.

B) Clients should not be discriminated against when disseminating investment recommendations.

C) Before trading on her own portfolio, a CFA charterholder must wait for employer and client deals to be executed.

Q4.Rey Sanchez, CFA, covers the specialty chemical industry for Rock Advisory Associates. Until today he has had a buy recommendation on ChemStar, and many of the firm’s customers have purchased shares based upon his recommendation. The firm’s client accounts are divided into two fundamental categories: trading and buy-and-hold accounts. The firm holds discretionary trading authority over the trading accounts, but not the buy-and-hold accounts. Sanchez has recently come to believe that the fundamentals are changing for the worse at ChemStar, and is preparing a sell recommendation. He calls a meeting of the firm’s portfolio managers with accounts holding ChemStar and tells them of the pending release of the sell recommendation. On this basis, the portfolio managers sell all positions in the discretionary accounts but not in the buy-and-hold accounts. Sanchez completes and mails the report to all clients two days later, and, shortly thereafter, many of the buy-and-hold accounts sell their ChemStar positions. With regard to these actions, Sanchez is:

A) not in violation of the Standard on Fair Dealing; the portfolio managers are in violation of the Standard on Fair Dealing.

B) in violation of the Standard on Fair Dealing; the portfolio managers are not in violation of the Standard on Fair Dealing.

C) in violation of the Standard on Fair Dealing; the portfolio managers are in violation of the Standard on Fair Dealing.