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

Questions 1 through 6 relate to Ethical and Professional Standards. Frank Litman Case Scenario Frank Litman, CFA, has recently been hired as a portfolio manager for Twain Investments, a small regional asset management firm. For the past ten years, Litman has managed a limited number of accounts belonging to family and friends. He started managing these accounts when he was enrolled in graduate school. All the accounts are too small to meet Twain’s minimum balance requirement of $5 million, and generate only modest fees for Litman. Litman disclosed the arrangement to the Human Resource (HR) manager when he interviewed for the position of portfolio manager. The HR manager agreed that the accounts were too small and would probably never be large enough to meet Twain’s minimum requirement. Upon accepting the position with Twain, Litman met with each of his non-Twain clients and recommended that they find another financial advisor. Each of them asked Litman to continue managing their money as a personal favor, arguing that a different advisor would undoubtedly charge higher fees. Following the meetings, Litman sent separate letters to both the Twain HR manager and his non-Twain clients explaining his employment relationship to each. The following month, Litman updated the promotional material he shares with all of his clients and prospects. The material summarizes Litman’s portfolio trading strategy, which he developed by analyzing twenty years of historical data. In his analysis, Litman determined that his strategy, which invests in large-capitalization U.S. stocks, would have outperformed the S&P 500 Index over the last 20 years—with an average annual return of 10.91 percent versus 10.42 percent for the S&P 500. The concluding paragraph of the brochure states, “We believe using this trading strategy over the long term will lead to superior performance compared with the S&P 500.” The brochure includes a footnote in small print stating, “Results are gross before tax so may be higher than what actual results would have been over the given period. Past performance cannot guarantee future results. ” At Twain, Litman has discretionary authority over the portfolios of individual stocks and bonds for about 30 clients. His ten largest clients vary widely in age, occupation, and wealth. For a variety of reasons, each of these accounts requires significant attention. The remaining two-thirds of Litman’s clients are stable, long-term investors, all of whom are saving for retirement. Litman performs comprehensive quarterly reviews with the owners of the ten largest accounts and similar annual reviews with the remaining clients. Recently, he made an exception to this rule when he learned that one of his smaller, less active clients had unexpectedly inherited $600,000 from an aunt’s estate. Litman met with the client and performed a comprehensive review of the client’s financial situation even though only three months had passed since their last meeting. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose. With a new CEO, Twain, which adheres to the Asset Manager Code of Professional Conduct, experiences significant change during the year when management hires a compliance officer. The compliance officer immediately begins to update the firm’s policies and procedures. After a thorough analysis, the firm decides to outsource its back-office operations and hires an independent consultant to review client portfolio information. At the same time, they add several research and investment staff and upgrade the information management system. They eliminate paper records in favor of electronic copies and develop a business-continuity plan based on current staffing. Eighteen months later, the compliance officer resigns. Rather than hire an external replacement, management designates one of Twain’s senior portfolio managers as the new compliance officer. The compliance officer reviews both firm and employee transactions and reports to the chief executive officer. 1. Which of the following is the most correct action for Litman to follow in order to comply with the Standards in regards to Twain and non-Twain clients? A. Do nothing. B. Inform his immediate supervisor. C. Obtain written consent from both Twain and non-Twain clients. 2. According to CFA Institute Standards and Recommended Procedures for Compliance, which of the following information in regards to Litman managing funds for his family and friends is least likely required for him to comply with the Duty to Employer? A. The names of his non-Twain clients. B. The amount and type of compensation received. C. The duration of the investment management agreements. 3. In the footnote of his promotional material about the performance of portfolio trading strategy, Litman is most likely not in compliance with the CFA Institute Standards of Professional Conduct with respect to: A. tax. B. fees. C. results. 4. Did Litman violate any CFA Institute Standards in regards to his performance reviews? A. No. B. Yes, with respect to the frequency of reviews for his ten largest clients. C. Yes, with respect to his recent review for the client with the inheritance. 5. Are Twain’s actions and procedures during the first year of the new CEO’s tenure in compliance with the Asset Manager Code of Professional Conduct? A. Yes. B. No, with respect to back-office operations. C. No, with respect to independent consultant. 6. With respect to its most recent compliance officer, are Twain’s actions and procedures in compliance with the recommendations and requirements of the Asset Manager Code of Professional Conduct? A. Yes. B. No, with regard to independence. C. No, with regard to reporting lines.