Ethical And Professional Standards MCQ - Ethical And Professional Standards Section 1

51 Anna Becker is employed by Jergen Investment Management Company (JIMC). Becker is a Level II candidate and is the only CFA candidate employed by JIMC. Becker is given supervisory responsibilities of the compliance department and asked to review the firm‟s compliance policies and procedures, which she finds inadequate. She voices her concerns during a meeting with the CEO, who tells her to submit her recommendations in a report but these will not be implemented since the firm is undergoing a change in structure and no compliance changes will be entertained till then. According to the Code and Standards, Becker should:

According to Standard IV(C) Responsibilities of Supervisors, a member or candidate should decline in writing to accept supervisory responsibilities until reasonable compliance procedures are laid down by a firm for her to assume and exercise responsibility.

52 Cory Crawford works as a fixed-income portfolio manager focusing on investment-grade bonds at Doonesbury Capital. His clients are primarily risk-averse, retired pensioners. Crawford‟s firm has introduced a bonus system to reward those portfolio managers who achieve a return higher than their respective benchmarks. Crawford, who is also a Level I candidate, purchases certain high-yield bonds in order to increase the return of his portfolio. No change in the objective or strategy has been suggested by Crawford. Crawford has least likely violated the Standard related to:

Crawford doesn’t own the same securities as his clients therefore he least likely violates Standard VI(B) Priority of Transactions. He violates Standard VI(A) Disclosure of Conflicts by failing to inform his clients of the change in his compensation arrangement with his employer which causes a conflict between his compensation and the clients’ IPS. He violated III(C) Suitability because high-yield bonds are not suitable for his risk-averse clients.

53 Rhonda Gates, CFA, works as a senior analyst covering basic materials and mining industry at Marcel Investments. After thorough and independent research, Gates concludes that the stock of Riley Mining is overpriced and recommends selling it to take profits. She informs all the department heads of Marcel of her findings. Thomas Toffler, head of trading, after being informed about Riley‟s stock immediately places a sell order on behalf of the firm and is able to trade aggressively. The next day Gates‟ report is sent to all clients and the sales force. Toffler least likely violated which of the following Standards?

Standard III(A) Loyalty, Prudence and Care has been violated because Toffler did not place his clients’ interests before his employer’s interests. Standard VI(B) Priority of Transactions has been violated. Toffler would have avoided the conflict by waiting until his clients had the opportunity to receive and assimilate Gates’ report. The report was sent out to all clients at the same time; hence Standard III(B) Fair Dealing is not violated.

54 Ratti Sonali, a Level III candidate, works as a trader at Rupali Investments. While working on trades for high net-worth clients, she notices a decline in the portfolio value due to certain investments made by the portfolio manager. She informs her supervisor Ashok Rajan who tells her not to concern herself with the portfolio manager‟s performance. Sonali then speaks to the compliance officer who tells her that the high net worth client portfolio is successful and the portfolio manager is very competent. The Standard least likely violated is:

Standards IV(A) Loyalty and IV(C) Responsibility of Supervisors have been violated since both the supervisor and compliance officer did not investigate Sonali’s concerns. There is no evidence of misrepresentation.

55 Shehroze Parvan, CFA, manages a balanced fund at McCoy Securities. He recently joined the company after working for ten years at Russell Securities. McCoy hired Parvan because of his proven track record at Russell. The new advertising material that Parvan develops for the clients of McCoy carries his past performance which he achieved at Russell as an endorsement of his knowledge and skills in investing. However, the performance results at the end include a qualifier stating, “These results were achieved by Parvan at Russell Securities.” Has Parvan violated any Standard?

No violation has occurred. It is acceptable to share past performance as long as a clear disclaimer is provided that this performance was achieved at another firm.