6.) The EnergyAlgae trades are least likely to have violated the CFA Institute Standards of
Professional Conduct with regard to:
A. share price distortion because of positive media presentations.
B. the order in which the shares were traded.
C. the adverse and skeptical opinions of EnergyAlgae products.
Vision
Vision 2020 Capital Partners (V2020) has operated for the last 10 years originating and brokering
corporate finance deals through private placements in emerging and frontier markets. Because
of slow economic growth globally, investment-banking deals have declined, and V2020 has
struggled to generate enough fees to sustain its business. The board of directors of V2020,
composed of corporate finance experts, has identified opportunities to generate a new revenue
stream.
One such opportunity is the creation of a division to manage an Emerging and Frontier Market
Balanced Fund (the Fund). The board has had several inquiries from clients asking for such a
product. The board believes the Fund is an ideal business line to meet client demand and create
monthly asset management fees. The board thinks the Fund should also be required to act as a
buyer of last resort for all its corporate finance client's private placements. The board believes
this arrangement would act as a major incentive for private businesses to use their corporate
finance services, thereby increasing revenues from their primary business activity.
Because none of the V2020 board members or senior managers are experienced in asset
management, the board hires Lauren Akinyi, CFA, an independent consultant who works with
various clients in the asset management industry. She is asked to undertake a study on an
appropriate structure for the Fund to meet both corporate finance and fund client needs. She is
also asked to help V2020 set up policies and procedures for the new fund to make certain all
capital market regulations have been followed.
The board informs Akinyi that the policies and procedures should also ensure compliance with
the CFA Institute Asset Manager Code of Professional Conduct (Asset Manager Code).
Subsequently, in a report to the board, Akinyi makes the following recommendations
concerning compliance with the Asset Manager Code:
Recommendation 1: V2020 should abide by the following principles of conduct:
Principle 1: Proceed with skill, competence, and diligence;
Principle 2: Act with independence and objectivity; and
Principle 3: Provide client performance within three days after month-end.
Recommendation 2: To take advantage of their vast business experience, the board of
directors should implement new policies. Specifically, the board should
Policy 1: take an active daily role in managing the Fund's assets,
Policy 2: designate an existing employee as a compliance officer, and
Policy 3: disclose any conflicts of interest arising from their business interests.
Recommendation 3: To avoid any conflicts of interest between the investment banking
business and the new fund management business, a separate wholly owned subsidiary should
be created to undertake the fund management business. The Fund would then provide a 100%
guarantee to buy the private placements of the corporate finance clients without having to
disclose to all clients the relationship between the two entities.
Recommendation 4: To ensure timely and efficient trades in each of the markets in which the
Fund invests, only one stockbroker in each market should be used. The board should also
consider buying an equity stake in each of the appointed brokers as an added profit opportunity.
After the Fund completes its first year of operations, V2020 receives a letter from its regulator.
The notification imposes heavy fines for poor disclosures to its fund clients and mandates the
replacement of the senior fund manager as a condition for the renewal of V2020's asset
management license. The board challenges the ruling in court, stating that the Fund made the
necessary full disclosures. After six months, not wanting to incur further expensive legal fees or
waste more precious time, the board, without admitting or denying fault, settles out of court,
paying a smaller fine. Subsequently, the senior fund manager is terminated but receives a
multimillion-dollar bonus upon leaving. After the replacement of the senior fund manager, the
license is renewed for a further year. The regulatory body, however, gives a warning that if the
Fund has any future violations, their license will be permanently revoked. Subsequently, the
Fund discloses to its clients that the regulator has renewed its license for one year after the
termination of the senior fund manager, a condition of the renewal. They also disclose the out-
of-court settlement and the fine paid.
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