TO 6 RELATE TO ETHICAL AND PROFESSIONAL STANDARDS DAVID SE...

Questions 1 to 6 relate to Ethical and Professional Standards

David Seaman, CFA, Case Scenario

David Seaman, CFA, is a portfolio manager at Himalayan Wealth Management, an asset

advisory firm, where he is responsible for managing the accounts of high net-worth

clients. He has categorized the accounts being managed as high risk tolerance/low

liquidity needs (Class A); high risk tolerance/high liquidity needs (Class B); low risk

tolerance/low liquidity needs (Class C); and low risk tolerance/high liquidity needs (Class

D). HWM portfolio managers are under strict orders to comply with the CFA Institute

Code of Ethics and Standards of Professional Conduct.

Seaman has hired Martin Freeman as a junior portfolio manager. Freeman has passed the

CFA Level II exam this year but will not be sitting for the Level III exam because he has

missed the fee payment deadline. After joining HWM, Fraser distributes business cards to

his colleagues at his previous employer as well as his current business contacts. His

business card reads as follows:

Himalayan Wealth Management

Martin Fraser

Junior Portfolio Manager

CFA Program Level III Candidate

Seaman has also recently changed the broker used to execute client trades. Eastern

Associates (EA), a brokerage-dealer firm, will now be executing HWM client trades. EA

has appointed Sylvia Marshall to broker the trades. On behalf of EA, Marshall will be

charging a fee higher than the previous broker but promises to deliver exemplary

performance results. EA is relatively new to the market and does not have a performance

history.

Unbeknownst to clients, Marshall is Seaman’s close friend and upon mutual consent has

offered to reduce broker fees below the standard rate. In exchange she would like Seaman

to provide investment advice for her personal portfolio and her wealthiest brokerage

clients. Marshall discloses this arrangement to her supervisor while Seaman accepts the

Marshall notifies Seaman that Blue-Cap Enterprises, a robotic chip manufacturer and her

brokerage client, will soon undertake an IPO of its stock. The news has not yet been

made public and, in a meeting, Marshall informally tells Seaman that she came to know

of this impending event while overhearing a conversation between two senior brokers at

EA. Upon the conclusion of their meeting, Seaman returns to his desk and instructs

Fraser to keep the news to himself and allocate the stock to client portfolios. Fraser

allocates the stock to Class A and B while he deems the event as highly risky for the

other two classes and makes no further allocations.

At the end of first year of engaging EA, Seaman prepares a performance presentation

which summarizes the results achieved and projections for the future. The respective

statements to be included in the presentation are as follows:

Results achieved: ‘HWM has generated an annual return of 18.2% on Class A accounts;

15.2% on Class B accounts; 8.6% on Class C accounts; and 6.1% on Class D accounts.’

Projections: ‘We expect to maintain or enhance the results achieved in the current year

for the foreseeable future subject to tax rates and fees remaining constant. We do not seek

to guarantee performance results.’

1.

By distributing his business card, Fraser is in violation of the CFA Institute

Standards of Professional Conduct because he most likely:

A.

shared them with his former colleagues.

B.

specified his candidacy in the CFA Program.

C.

has not identified himself as a Level II candidate.

2.

By selecting EA as a brokerage firm, Seaman is in violation of the CFA Institute

Standards of Professional Conduct relating to:

A.

suitability.

B.

fair dealing.

C.

loyalty, prudence and care.

3.

In context of the details of the brokerage arrangement with Marshall, which of the

following Standards of Professional Conduct is least likely being violated?

A.

Referral fees

B.

Conflict of interests

C.

Additional compensation arrangements

4.

Are the three individuals in violation of the CFA Institute Standards of

Professional Conduct with respect to the IPO trade?

Marshall?

Seaman?

Fraser?

A.

Yes

No

No

B.

Yes

Yes

No

C.

Yes

Yes

Yes

5.

Is the ‘Results Achieved’ statement consistent with the CFA Institute Standards of

Professional Conduct?

A.

Yes.

B.

No, returns have not been identified as being either gross- or net-of fees.

C.

No, the statement highlights discrimination of client classes in terms of

differing portfolio results.

6.

Is the ‘Projection’ statement consistent with the CFA Institute Standards of

B.

No, past results are being simulated.

C.

No, there is an implicit performance guarantee.