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

66 Raul Devgan, CFA, is a portfolio manager for Khadri Investments. He manages a high growth equity fund known as SmartMoney. Devgan reports the performance of SmartMoney in its quarterly newsletter and states, “SmartMoney was able to surpass its benchmark, S&P BSE by 0.20%. However, this type of performance should not be expected from the fund always.” Adrik Vanyusha is a client of Devgan and follows the performance of SmartMoney closely. Upon receiving the newsletter, he immediately contacts Devgan and informs him that the fund never exceeded its benchmark but in reality had underperformed. Devgan recalculates the results after the complaint, which confirm Vanyusha‟s claim. He sends Vanyusha the correct results and blames the discrepancy on typographical error. Devgan least likely violates the Standard relating to:

The Standard relating to Independence & Objectivity has not been violated because Devgan has not received any gifts, benefits or consideration to compromise his independence and objectivity.

67 Vladmir Seriozha, CFA, is fixed-income analyst at Rasputin Securities and describes the investment strategy of securities in a report to the firm‟s clients which is based on scenarios of certain declines in interest rates. The report explains the interest rate model which shows the increase in securities‟ valuations as rates decline. The model does not capture the risks of investment if the rates rise. Seriozha informs all the existing clients about the model's weakness in capturing the risks related to investments in case of an increase in interest rates, but all the promotional material for new clients does not carry this disclosure. Seriozha has most likely violated the Standard related to:

Standard V(B) Communications with Clients and Prospective Clients has been violated. Seriozha has not run the downside risks and has not explained the limitations of his model with respect to a change in rates contrary to the one he has reported. Members and Candidates must adequately disclose the marketrelated risks and limitations contained in their investment products and recommendations especially in their investment process.

68 Preet Khadri, CFA, works for Eminent Capital as an investment advisor. She meets with a college classmate at a dinner who offers to pay Khadri a compensation for selling the stock of her company Zoratri Inc., to her clients. Khadri does not mention this arrangement to her clients or employer, and sells the shares of Zoratri to her clients where appropriate. Khadri has least likely violated the Standard related to:

Khadri is in violation of Standard VI(A) Conflicts of Interest by failing to disclose to her clients that she is receiving additional compensation for promoting and selling Zoratri’s shares. Khadri has also not informed her employer of the additional benefits received for recommending Zoratri’s stock. Therefore her employer cannot evaluate her loyalty and objectivity. She also failed to disclose the additional compensation arrangement.

69 TriStar Money Management wants to invest in emerging market on behalf of its high-net-worth clients and hires Brent Emory, an independent consultant to solicit proposals from various advisers. Emory after considerable due diligence provides a list of managers based on their successful performance in the emerging market, but promotes Asian Tigers as the most competent. TriStar selects Asian Tigers as the new manager from Emory‟s list and further reviews the selected new manager to ensure that Asian Tigers is the appropriate investment manager for its clients. During the review, TriStar discovers that Emory was being paid by Asian Tigers to promote their services. Even though Emory was being paid by both parties, TriStar‟s investigation proves that the recommendation was objective and appropriate. Emory has least likely violated the Standard related to:

No violation of Standard VI(B) Priority of Transactions is committed by Emory.

70 Ankit Tivari, CFA, is an investment adviser who works for Best Securities. He has two clients: Raveena Ahisma, a 55 year-old widow with two college going children, and Agneya Adya, a 35-year old journalist who works for a local newspaper. Both her clients are employed and earn a substantial salary. Adya is very aggressive with his investments and wants to invest in high risk securities for a higher return, whereas Ahisma wants to invest in low risk, large cap securities to achieve a constant income for her children‟s education. Tivari recommends investing a quarter of their portfolios in derivatives that have a potential to earn high returns despite their volatility. Did Tivari violate any Standard while choosing investments for his clients?

Tivari has violated Standard III(C) Suitability by not identifying the risks and objectives of Ahisma and selecting an aggressive investment for both clients which is only suitable for Adya, since the two clients have different financial objectives and circumstances