6 RELATE TO ETHICAL AND PROFESSIONAL STANDARDS. ROWAN BROT...

Questions 1-6 relate to Ethical and Professional Standards. Rowan Brothers is a full-service investment firm offering portfolio management and investment banking services. For the last 10 years, Aaron King, CFA, has managed individual client portfolios for Rowan Brothers, most of which are trust accounts over which King has full discretion. One of King's clients for whom he has full discretion is Shelby Pavlica, a widow in her late 60s whose husband died and left assets of over $7 million in a trust. The assets are to be used solely for her benefit. Pavlica's three children are appalled at their mother's spending habits and have called a meeting with King to discuss their concerns. They inform King that their mother is living too lavishly to leave much for them or Pavlica's grandchildren upon her death. King acknowledges their concerns and informs them that, on top of her ever-increasing spending, Pavlica has recently been diagnosed with a chronic illness, a fact previously not known by her children. Since the diagnosis could indicate a considerable increase in medical spending, he will need to increase the risk of the portfolio to generate sufficient return to cover the medical bills and spending and still maintain the principal. King restructures the portfolio accordingly and then meets with Pavlica a week later to discuss how he has altered the investment strategy, which was previously revised only three months earlier in their annual meeting. During the meeting with Pavlica, King explains his reasoning for altering the portfolio allocation but does not mention the meeting with Pavlica's children. Pavlica agrees that it is probably the wisest decision and accepts the new portfolio allocation adding that she will need to tell her children about her illness so they will understand why her medical spending requirements will increase in the near future. She admits to King that her children have been concerned about her spending. King assures her that the new investments will definitely allow her to maintain her lifestyle and meet her higher medical spending needs. One of the investments selected by King for Pavlica's portfolio is a private placement offered to him by a brokerage firm that often makes trades for King's portfolios. The private placement is an equity investment in ShaleCo, a small oil exploration company. In order to make the investment, King sold shares of a publicly traded biotech firm, VNC Technologies. King also held shares of VNC, a fact that he has always disclosed to clients before purchasing VNC for their accounts. An hour before submitting the sell order for the VNC shares in Pavlica's trust account, King placed an order to sell a portion of his position in VNC stock. By the time Pavlica's order was sent to the trading floor, the price of VNC had risen, allowing Pavlica to sell her shares at a better price than received by King. Although King elected not to take any shares in the private placement, he purchased positions for several of his clients, for whom the investment was deemed appropriate in terms of the clients' objectives and constraints as well as the existing composition of the portfolios. In response to the investment support, ShaleCo appointed King to their board of directors. Seeing an opportunity to advance his career while also protecting the value of his clients' investments in the company, King gladly accepted the offer. King decided that since serving on the board of ShaleCo is in his clients' best interest, it is not necessary to disclose the directorship to his clients or his employer. For his portfolio management services, King charges a fixed-percentage fee based on the value of assets under management. All fees charged and other terms of service are disclosed to clients as well as prospects. In the past month, however, Rowan Brothers has instituted an incentive program for its portfolio managers. Under the program, the firm will award an all-expense-paid vacation to the Cayman Islands for any portfolio manager who generates two consecutive quarterly returns for his clients in excess of 10%. King updates his marketing literature to ensure that his prospective clients are fully aware of his compensation arrangements. ... In discussing Pavlica's spending and medical condition with Pavlica's children, did King violate any CFA Institute Standards of Professional Conduct?

A) No. Because the children are the remaindermen, King is obligated to manage the trust in the best

interest of both Pavlica and the children.

B) Yes, because he violated his client's confidentiality.

C) Yes, because he created a conflict of interest between himself and his employer.

Question #2 of 60

In reallocating the portfolio after the meeting with Pavlica's children, did King violate any CFA Institute Standards of Professional Conduct?

A) No, because King has discretion over the portfolio.

B) Yes, he violated Standard III(A) Loyalty, Prudence, and Care.

C) No, because he had a reasonable basis for making adjustments to the portfolio.

Question #3 of 60

In his statements to Pavlica after the reallocation, did King violate any CFA Institute Standards of Professional Conduct?

A) No.

B) Yes, because he misrepresented the expected performance of the strategy.

C) Yes, because he met with her before their annual meeting, which is unfair to clients who only

meet with King annually.

Question #4 of 60

Did King's actions with regard to allocating the private placement and the sale of VNC stock violate any CFA Institute Standards of Professional Conduct?

Private placement VNC sale

A) Yes Yes

B) No No

C) No Yes

Question #5 of 60

According to the CFA Institute Standards of Professional Conduct, which of the following statements is most correct concerning King's directorship with ShaleCo?

A) King may not accept the directorship because it creates a conflict of interest.

B) King may accept the directorship as long as it is disclosed to clients and prospects.

C) King may accept the directorship as long as it is disclosed to his employer, clients, and prospects.

Question #6 of 60

Does the fee structure at Rowan Brothers and King's disclosure of the compensation structure

Fee structure Disclosure

A) No Yes

B) Yes No

C) No No

Question #7 of 60