THROUGH 6 RELATE TO ETHICAL AND PROFESSIONAL STANDARDS WIL...

Questions 1 through 6 relate to Ethical and Professional Standards Wilshire Investment Case Scenario Wilshire Investment (WI) is a U.S. based investment management firm providing wealth management services to institutional clients. The firm primarily invests in traditional asset classes such as equity and fixed income. Holme’s Trust Foundation (HTF) is WI’s institutional client. Its portfolio is being managed by Tony Monroe. Monroe is evaluating commodity futures in Rigea, an Eastern European country, for HTF’s investment portfolio. WI does not have expertise with commodity futures. Therefore, Monroe has made arrangements with an external portfolio manager, Raul Davis. Under the arrangement Davis and WI will share any commissions generated. In addition to their agreement, Davis has invited Monroe to Rigea. As a signal of good gesture, Davis’s firm has offered Monroe to pay for commercial transport and hotel accommodation. Monroe has declined the hotel accommodation offered but has not responded to the transport offer. Jean Lowe is a research analyst serving WI’s research wing. Lowe is currently analyzing hedge funds in Rigea. Monroe has asked Lowe to avoid hedge funds in Rigea because he believes they will not generate attractive returns. Lowe remains convinced that the hedge funds are attractive investment opportunities. After thorough research and analysis, Lowe recommends the assets class and compels Monroe to invest his clients’ funds. Six months later, the investment generates a strong alpha. Prior to serving WI, Monroe served another portfolio management firm at which he was extremely popular. In order to generate the same level of popularity at WI, Monroe decides to contact a fellow portfolio manager at his previous workplace to provide contact details of clients who are no longer invested with the firm. The firm continues to store client details on its database. After his successful yet uncertain venture into hedge funds, Monroe contemplates increasing client portfolio allocations to modern alternative investment classes, particularly buyout funds and venture capital funds. In describing the new investment opportunity to his clients, he states: Statement: “Buyout fund investments are virtually risk-free as the associated funds are established companies; the latter category is highly risky but will generate substantial returns if the associated venture survives.” Octavia Richards, CFA, is a broker serving East End Brokers (EEB). On behalf of EEB, she is forming an arrangement whereby any requested research will be directed to EEB in exchange for providing new clients to Monroe. The commission charged by Richards is higher than average; however, he believes doing business through Richards will allow WI to gain access to investment funds with very high investment requirements and improve client accounts’ results as well as meet their investment needs. He intends to disclose the arrangement to clients if successful. Curious about the success of the hedge fund, Monroe decides to investigate the source of the outperformance. During his analysis and discussions with local analysts, Monroe comes to the conclusion that the fund may be victim to survivorship bias. He presses fund management who refuse to provide any information on the matter. 1. In response to the commercial transport offer made by Davis’s firm, Monroe’s best course of action would be to: A. accept the offer without any disclosure to his supervisor. B. accept the offer with disclosure to his supervisor. C. decline the offer. 2. By issuing the research report, has Lowe violated any Standards of Professional Conduct? A. No. B. Yes, she has violated IV (A) Loyalty by not respecting Monroe’s instructions. C. Yes, she has violated VI (A) Disclosure of conflicts by failing to disclose the difference in opinion. 3. By requesting access to client records, has Monroe violated any Standards of Professional Conduct? 4. In describing the proposed investment classes to his clients, Monroe has most likely violated: A. I (C) Misrepresentation. B. III (D) Performance Presentation. C. V (B) Communication with Clients and Prospective Clients. 5. By undertaking the brokerage arrangement with EEB and Richards, Monroe has: A. violated standard III (A) Loyalty, Prudence and Care. B. violated standard III (C) Suitability. C. not violated any Standards of Professional Conduct. 6. Based on Monroe’s suspicions regarding the hedge fund, his best course of action would be to: A. consult his supervisor. B. consult WI’s whistleblowing policy. C. discontinue his investment arrangement with the hedge fund.