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

Questions 7 to 12 relate to Ethical and Professional Standards

Gatekeepers Associates, Case Scenario

Gatekeepers Associates is a large-scale investment firm providing investment advisory

and brokerage services. Gatekeeper’s chief compliance officer, Emeral Irmak, is in the

process of modifying the firm’s policies and procedures so that they are in compliance

with the CFA Institute Asset Manager Code of Professional Conduct.

Wayne Fisher is a broker at Gatekeepers who specializes in domestic UK equities. His

performance is judged against a value-weighted average price (VWAP) benchmark. In

current trading quarter, Fisher received an order to buy 250,000 shares of a

pharmaceutical at a limit price of £52.00 (or better) from one of its institutional clients

which emphasizes on execution speed. The average daily trading volume and market

price was 3 million shares and £53.00, respectively, at the time the order was received.

Fisher purposely delays his trade till the end of the trading day in the hope of the seller

hitting his bid. One hour prior to the time of market close, the price of the security

declines to £52.00 and Fisher executes the order when the VWAP is £51.80. Upon

evaluating his performance, Wayne’s supervisor notes that the ask price did decline to

£52.00 two hours prior to the market close but, based on his performance relative to the

VWAP benchmark, Wayne’s trade timing strategy allowed him to successfully minimize

implicit costs which he otherwise could not have achieved.

The defined benefit pension fund of Thunder Limited is also Fisher’s client. The fund’s

plan sponsor has requested the broker to purchase 2.5 million shares of large-cap equity

securities for the investment portfolio. In addition, the sponsor has expressed the desire to

maintain trading anonymity. Fisher decides to display 10% of the order at any one time to

fulfill his client’s request.

In response to a systems virus which wiped out client information on the firm’s operating

system, Irmak has decided to design a business continuity plan which aims to address

systems failure and disaster recovery. The three policies devised are as follows:

Policy 1: Educate and train employees so that they can effectively execute the plan and

are specifically trained in their areas of responsibility.

Policy 3: Establish plans for notifying clients if primary systems become unavailable and

trading activities cannot be resumed.

A portion of Gatekeeper’s client holdings are in emerging market securities. The firm has

appointed brokers specializing in these securities to execute client orders. Securities are

valued using an internally developed valuation model to arrive at estimates of fair market

prices as actual prices are not directly observable in these volatile markets. On the other

hand, domestic equities are valued using current market prices. Portfolio managers

disclose the valuation methods used for domestic equities in monthly and emerging

market equities in semi-annual performance reports, which are dispatched to clients on

their respective dates.

The firm’s compliance officer is in the process of implementing a policy with respect to

the acceptance of gifts and entertainment. Under the proposed policy managers cannot

accept gifts, either cash or non-cash, which exceed a value of £2,500 in nominal terms. In

addition, employees are required to disclose to their manager, either orally or in writing,

the acceptance of any gift or entertainment item within 30 days of receipt.

7. By employing his trade timing strategy for the pharmaceutical stock, Fisher is in

violation of the Asset Manager Code with respect to:

A. client loyalty.

B. misrepresentation.

C. market manipulation.

8. With respect to Thunder Limited’s buy order, are Fisher’s actions consistent with

the requirements and recommendation of the Asset Manager Code?

A. Yes.

B. No, he is not seeking to maximize value.

C. No, he is attempting to manipulate the market.

9. Which of the following proposed business continuity plan policies is least likely

consistent with the Asset Manager Code?

A. Policy 1

10. Is the firm’s valuation method and associated disclosure for emerging market

securities consistent with the requirements and recommendations of the Asset

Manager Code?

B. No, disclosure must not made by asset class.

C. No, internal valuation models cannot generate fair values.

11. Is Gatekeeper’s performance reporting frequency consistent with the requirements

and recommendations of the Asset Manager Code?

A. No.

B. Only with respect to domestic equities.

C. Only with respect to emerging market equities.

12. The firm’s proposed gifts and entertainment policy is inconsistent with the

requirements and recommendations of the Asset Manager Code as:

A. oral disclosure is not permitted.

B. the nominal value limit is excessive.

C. acceptance of cash gifts is prohibited.