USING THE DATA IN EXHIBIT 3 AND CURRENT GIPS REQUIREMENTS FOR RETU...

6. Using the data in Exhibit 3 and current GIPS requirements for return calculations, the monthly

return is closest to:

A. –5.00%.

B. –4.85%.

C. –4.76%.

Ethics and Professional Standards

Question 2

Use the following information to answer the next six questions.

Jack Mann, CFA, has recently been awarded the CFA charter and has secured a new role as a junior

portfolio manager at Cavalier Investment Management Ltd (CIM), an institutional investment adviser

with a broad base of clients including investment funds, hedge funds, and private client managed

accounts.

Before Mann can start his new role, he must sign a contract and complete initial induction and training on

key regulatory and compliance issues. As part of the induction process, Mann is required to acknowledge

receipt of CIM’s compliance manual.

Mann’s initial role at CIM is to work alongside Ross Bassett, a senior fund manager who has been

employed by CIM for several years. Mann notes that Bassett openly discusses holding securities for his

personal account that are included in client portfolios. Mann questions Bassett as to the ethical nature of this

situation, suggesting that this arrangement might lead to accusations of a conflict of interest from clients.

Bassett refers Mann to the compliance manual of CIM, in particular to the extract shown in Exhibit 1.

Exhibit 1

Extract from CIM Compliance Manual Regarding Personal Account Dealing

“CIM has a strict policy on personal account dealing transaction reporting which

requires that employees must disclose holdings in which the employee has a beneficial

interest upon commencement of the employment relationship and afterwards on an

annual basis. All trades for personal accounts need to be precleared with compliance

and duplicate trade confirmations logged with the firm on a monthly basis. Client

concerns regarding personal account dealing conflicts of interest are addressed

through the following disclosure that must be made to all clients:

‘CIM investment managers are subject to strict policies and procedures regarding their

personal trading.’”

Mann notices that Bassett regularly receives offers of gifts from brokers and clients of CIM. In particular,

Mann notes the following arrangements that Bassett has recently agreed to in the first few weeks of

working with him:

•

Alberto Lyons, a sales trader with Roundhead Securities, a broker used by CIM, arranges and

pays for lunch with Bassett. Bassett does not disclose this to his employer.

•

Roundhead Securities organizes an investor conference in California and pays for the travel

expenses, accommodations, and several rounds of golf for the participants. This offer is not

unique to Bassett and he discloses it to his employer.

•

A client offers Bassett the use of their private ski chalet for a ski season if their portfolio

outperforms the benchmark index by more than 10% in any given year. Bassett discloses this

arrangement to his employer.

Mann attends a presentation to a prospective client where Bassett presents information about the

investment process at CIM along with a summary of past performance. Bassett is concerned that some of

the information presented in the performance might be a misrepresentation of the performance of CIM

funds. In particular, Mann notes the following issues:

•

While there was no benchmark provided in the presentation, the reason for this disclosed in the

report was the complexity and diversity of the strategies followed.

•

Several of the calculations and data inputs of the performance presentation were not compliant

with the CFA Institute Global Investment Performance Standards (GIPS

^®

).

•

A typographical error was noticed in the calculation of performance statistics, which Bassett

promises to correct prior to the next time the presentation material is used.

Mann is charged mainly with administrative tasks in his day‐to‐day role, including the processing of

proxy voting forms. Bassett informs Mann that there is no official policy on voting proxies at CIM, and

that he only considers in detail votes on nonroutine matters such as a takeover approaches and changes in

the structure of the company.

Mann notices that the marketing department of CIM has slightly altered the biography that he provided

them before it was published on the website of the firm. The letters “CFA” after his name have been given

a slightly larger font than his name, and the biography now explicitly states that Mann passed all three

levels of the CFA program at the first attempt (which is factually correct).

Mann becomes aware of a soft‐dollar arrangement that exists between CIM and Roundhead Securities.

Under the agreement, Roundhead offers execution‐only services under a direct market access (DMA)

computer‐driven system. Bassett has always been satisfied with the execution services of Roundhead

and considers the fees to be very competitive when compared to the fees charged by other brokers.

When asked what the soft‐dollar commissions are used to pay for, Bassett replies that they are always

used to benefit the client. Mann noticed that the soft‐dollar account has been used to purchase research

from Roundhead, and occasionally finance the commissions due on reversals of dealing errors on client