Ethical And Professional Standards MCQ - Ethical And Professional Standards Section 2

41 The Food Safety and Standards Authority of India (FSSAI) was investigating the presence of dangerous substances in a popular baby cereal, manufactured by Selet Limited. Selet is a publicly listed company with operations around the world. The tests results showed the presence of harmful chemicals above permissible limits that could mean product recalls and a temporary ban on production. The results of the test have not made public as yet. Tara, a lead scientist at one of Selet‟s labs, confides the results to Raul, a research analyst who covers Selet and manages Tara‟s portfolio. She asks him to sell her holdings in Selet. If Raul acts on Tara‟s information only for her portfolio, he would most likely violate which of the following Standards?

Raul must not act on the information passed by Tara and must encourage her and her firm to achieve public dissemination. Refer to Standard II(A) Material Nonpublic Information.

42 Alex Karachanis, CFA, is an independent financial advisor with a roster of over 100 clients. Along with advisory services, he also facilitates in executing the trades for his clients and manages their portfolio. Adonia Papadakis signed up Alex in November 2013 to advise and manage her portfolio. After detailed discussions on Adonia‟s circumstances and return requirements, it was agreed that only large cap equity investments will be made. In mid-2013 Alex felt that large cap stocks were excessively overvalued and shifted 50% of the portfolio to small-cap stocks. Over the next six months, small-cap stocks significantly outperformed large cap stocks. It is now January 2014 and Adonia has just received her account statement for 2013. She is very happy with the performance of her portfolio. Which Standard did Alex least likely violate?

Standard V(B) Communication with Clients and Prospective Clients is violated because Alex should have discussed the change with the client before moving to small cap stocks. Standard III(C) Suitability is violated because small cap stocks did not correspond to client’s risk profile (even though they ended up performing well). Standard III(D) Performance Presentation is least likely violated, because the question does not provide enough information to infer that the account statement was not fairly presented.

43 Riya, CFA, a portfolio manager has two high net worth clients: Rita and Anita. The two clients are sisters and except a few asset classes, their portfolio holdings are the same. The sisters have received $200,000 each in inheritance. Both, Rita and Anita, have expressed interest in taking exposure in risky international equities, especially China. Anita also plans to buy a new house in the next 3- 4 months and needs to make a down payment of $450,000. Riya is aware of Anita‟s plans and her needs for liquidity. After a thorough research, Riya identifies a fund that has the potential to earn good returns in the next three years, and recommends it to Rita for investment. Has Riya violated any Standard by not recommending the fund to Anita?

Anita’s circumstances have changed and the down payment takes precedence. She cannot invest any surplus in risky investments now. Since the stock was not suitable, Riya did not recommend the fund. So, she did not violate any standard.

44 Roland Andrade manages a small-cap, growth fund called Equity Opportunity Series – Growth. He purchases the stock of large-cap dividend paying company as it will bring stability to the fund. After the purchase, the stock has the highest holding in the fund. Which Standard did Andrade most likely violate?

A large-cap dividend paying company is usually not growth-focused. By choosing this stock for the fund, Andrade has violated Standard III (C) Suitability as it does not fit the fund's investment mandate.

45 Alba Parker, CFA, is working on a presentation for prospective clients. She showcases the return for the past seven years of a composite of the firm‟s discretionary accounts whose objective is to invest in European growth companies. Parker includes the returns of terminated accounts as the returns are impressive. She adds a note to the presentation indicating that the returns of terminated accounts have also been included. Is Parker in compliance with Standard III (D) Performance Presentation and GIPS Standards?

Including terminated accounts with a disclaimer is not in accordance with GIPS, but it complies with Standard III(D).