TO 12 RELATE TO ETHICAL AND PROFESSIONAL STANDARDS RIVERSI...

Questions 7 to 12 relate to Ethical and Professional Standards Riverside Asset Management Case Scenario Riverside Asset Management (RAM) is a privately owned, small-scaled investment advisory firm. The firm’s client base exclusively includes institutional clients. Roger Marquez, the firm’s compliance officer, has made necessary modifications to RAM’s policies and procedures to ensure they are consistent with the Asset Manager Code. Once he is reasonably satisfied with RAM’s level of compliance, Marquez sends an investment letter to clients and prospective clients which includes the compliance statement, “RAM claims compliance with the CFA Institute Asset Manager Code of Professional Conduct. This claim has not been verified by the CFA Institute.” Thomas Nash manages RAM’s global equity fund which in benchmarked to the MSCI global equity index. Nash employs a passive mandate for the global equity allocation of Aero Inc’s defined benefit pension plan’s portfolio, which is consistent with the client’s funding objectives. In the current year, the sponsor reports a surplus following a profitable financial year. Nash decides to modify his investment strategy and employ a semi-active approach which will allow him to increase the portfolio’s opportunity to earn higher returns. He intends to inform the sponsor of the change in their next quarterly meeting. Victoria Reed is a junior portfolio manager reporting to Nash. Reed is managing the investment portfolio of the Legend Foundation. As instructed by the foundation’s chief executive, Reed allocates 1,000 of Hower Inc’s shares to the portfolio which has undertaken an IPO. Reed simultaneously purchases 2,000 shares for her personal investment portfolio. She discloses the amount and quantity of her purchase in a quarterly trade confirmation and an annual statement of personal holdings which she will email to Marquez on the respective dates. Marquez is soon to retire and has been asked by RAM’s chief investment officer to nominate a successor. Marquez evaluates two candidates one of whom is his brother who is well-informed on the Code’s compliance policies and procedures. The second candidate is an investment manager who overlooks RAM’s emerging market equity fund. Several of the fund’s clients have requested an allocation to commodities. However, RAM lacks expertise and has selected Fairhole Associates, a commodity trading specialist to manage the allocation. Upon making the allocation, a letter is sent to clients which states, “RAM has appointed Fairhole Associates to manage commodity investments. Fairhole Associates retains liability for the performance of these investments.” At the end of the performance year, Nash prepares a performance presentation for the global equity fund. Although the fund has been in operation for the past eight years, he decides to present the annual performance for the recent most five years as they represent its most successful years. He presents gross- and net-of-fees returns and provides a breakdown of fees charged as management fees, incentive fees and commission. His disclosure purposely omits a contingent fee component which he deems as too complex for the understanding of clients. 7. Is RAM’s claim of compliance statement consistent with the Asset Manager Code? A. No. B. Yes, the CFA Institute cannot verify actual compliance with the Code. C. Yes, the CFA Institute can only verify the Manager’s claim of compliance. 8. By modifying his strategy, is Nash in violation of the Asset Manager Code? B. Yes, he has not undertaken a suitability analysis. C. Yes, he has not made disclose to clients prior to the change. 9. With respect to the purchase of Hower Inc.’s shares, is Reed in violation of the Asset Manager Code? B. Yes, she did not seek prior approval. C. Yes, she did not delay the purchase of shares 10. Which candidate best fits the role of compliance officer in accordance with the A. Marquez’s brother B. The emerging market fund manager. C. Neither of the two individuals. 11. Is the allocation of client trades to Fairhole Associates consistent with the requirements and recommendations of the Asset Manager Code? A. Yes. B. No, RAM cannot outsource work. C. No, RAM must retain liability for the outsourced work. 12. Which of the following statements least likely indicates why Nash’s performance presentation is inconsistent with the requirements and recommendations of the Asset Manager Code? Nash: A. has distorted the performance presented. B. has not explained the commission component. C. need only present gross- or net-of-fees returns but not both.