kim226

A money manager, who is a member of CFA Institute, suggests during phone calls to his clients that, “I hope you will relay to your friends the great returns I earned for you this past year.” The manager had generated above average returns in the past year. Is this a violation of Standard III(D), Performance Presentation?

A) Yes, because the Standard forbids members asking their clients to say anything about how well the member has done.

B) Not if it is true.

C) Yes, because the intended message fails the test of completeness as required under the standard.

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Standard III(D) requires that members communicate performance in a fair, accurate, and complete fashion, and covers both written and oral communication. Asking someone to advertise only one year’s performance is unlikely to be representative since this constitutes a timeframe that is too short.

prashantsahni

A money manager is meeting with a prospect. She gives the client a list of stocks and says, “These are the winners I picked this past year for my clients. Their double-digit returns indicate the type of returns I can earn for you.” The list includes stocks the manager had picked for her clients, and each stock has listed with it an accurately measured return that exceeds 10%. Is this a violation of Standard III(D), Performance Presentation?

A) No, because the manager had the historical information in writing.

B) Yes, unless the positions listed constitute a complete presentation (i.e., there were no stocks omitted that did not perform in the double digits).

C) Yes, because the manager cannot reveal historical returns of recent stock picks.

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Standard III(D) requires fair representations concerning past and potential future performance. Unless the list of the “winners” includes all the positions that the firm held, the manager is misrepresenting past performance. The following statement is questionable: “Their double-digit returns indicate the type of returns I can earn for you,” but the action of submitting a partial list is clearly a violation. The manager should have information on past performance in writing.

prashantsahni

A money management firm has created a new junk-bond fund. When the firm advertised the new fund at its issuance, they used care to accurately compute the returns from the past 10 years for all assets in the fund. The firm used the current portfolio weights to determine an average annual historical return equal to 18% and claim an 18% annual historical return in their advertising literature. With respect to Standard III(D), Performance Presentation, this is:

A) in compliance.

B) a violation because the advertisement implies the firm generated this return.

C) a violation because the Standard prohibits computing historical returns on risky assets like junk bonds.

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Reporting the historical returns of all assets now in the fund introduces a survivorship bias. Also, the advertisement is misleading because the fund just came into existence and has no historical record. Thus, the firm has misled the public as to their performance history.

prashantsahni

While it would be customary to report both five-year and ten-year performance data, Seminole Equity Partners has been in existence for only eight years. Because of this, Kurt Dambach does not report ten-year data but reports for both five years and since the inception of the fund. This he notes in a footnote at the bottom of the information sheet. This action is:

A) a violation of the Standard concerning prohibition against misrepresentation.

B) in accordance with the Code and Standards since he has indicated the basis in a footnote.

C) a violation of the Standard concerning performance presentation.

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Members who communicate performance information must ensure that the information is fair, accurate, and complete. Seminole Equity’s presentation meets this standard.

prashantsahni

Paul Salyer,a portfolio manager, is making a presentation to a prospective client. Paul says that as a new portfolio manager, he made an average annual rate of return of 50% in the last two years at his previous firm and that based on this, he can guarantee a 50% return to the client. Which of the following statements is in accordance with Standard III(D), Performance Presentation?

A) Implying that he can guarantee a return.

B) Imputing his past performance to future performance.

C) Stating his past performance as long as it is fact.

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There is no evidence that he’s lying about his past performance. He is in violation for implying that he can guarantee performance, for using short-term performance, and for imputing the manager’s past performance to future performance.

prashantsahni

Nancy Korthauer, CFA, has launched a new hedge fund called the Korthauer Tautology Fund and is actively soliciting clients from competitor’s firms. Client presentations are necessarily brief and often take place with the prospective client’s current investment advisor in the room. The Code and Standards require that:

A) a prospective client’s current investment advisor not participate in meetings.

B) all client presentations provide a thorough review of all elements of the investment management process. Abbreviated presentations are forbidden.

C) member or candidate provide (on request) additional detail information which supports the abbreviated presentation.

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See Standard III(D). When presentations are brief, additional detail which supports the abbreviated presentation information must be provided on request. Best practice dictates that the member or candidate should make reference to the abbreviated nature of the presentation.

prashantsahni

A broker was sanctioned for unsuitable recommendations and excessive trading involving three accounts under his care. These clients were unsophisticated, inexperienced individual investors with limited means. According to CFA Institute Standard III(C), Suitability, which of the following is least likely to be considered a relevant factor in determining the appropriateness and suitability of investment recommendations or actions for each portfolio or client?

A) Basic characteristics of the total portfolio.

B) Best interests of the investment professional.

C) Needs and circumstances of the portfolio or client.

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Determining appropriateness and suitability focuses on the portfolio or client, not on the investment professional. Investment professionals should take particular care to ensure that their goals in selling products or executing security transactions do not conflict with the best interests of the client.

prashantsahni

The best way to determine the suitability of an investment is:

A) based on portfolio performance results, presented as a weighted average, from the biggest financial companies.

B) to consider the financial situation, investment experience, and investment objectives of the client.

C) by administration of a specially designed survey of the client's opinions.

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Although broad in scope, the best way to determine suitability is to consider the financial situation, investment experience and investment objectives of the client. Both of the other choices deviate from these essential issues.

prashantsahni

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.

prashantsahni

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.