THROUGH 12 RELATE TO ETHICAL AND PROFESSIONAL STANDARDS MA...

Questions 7 through 12 relate to Ethical and Professional Standards Martinez Advisory Case Scenario Martinez Advisory is a U.S. based multinational investment management firm founded by the Martinez brothers, Jose and Juan. Its U.K. division, Holton Advisory (HA), currently manages a £45 million investment fund and is being headed by Jeremy Walsh, CFA. Portfolio investments include U.K. Treasuries, corporates, gilts, municipals, hedge funds, private equity, and emerging and developed market equities. A strong believer of maintaining good relationships with clients, Walsh instructs HA’s portfolio managers to report hedge fund performance on a semi-annual basis and the performance of the other asset classes on a quarterly basis. To justify the difference in the reporting policies, HA’s performance report includes a disclosure to clients. Disclosure: All our hedge fund investments are structured with lock-up periods; therefore their performance cannot be ascertained with 100% accuracy before the scheduled reporting date. Therefore, it is HA’s utmost responsibility to ensure reported performance is fair, accurate and complete. HA’s private wealth clients are of various financial backgrounds. To ensure equitable dealings with clients, portfolio managers allocate trades based on needs assessment. Trades are first allocated to those accounts which management believe require immediate allocation. Any remaining portion of the trade is allocated to the accounts of those clients expressing an interest. HA’s risk management head, Harold White, has retired after serving a 30 year period. Upon his retirement he recommends Jack Lee, senior risk manager, for his position. After lengthy discussions and decision making by the board, Lee is appointed as the risk management head. Upon his appointment, Lee formulates a plan to automate HA’s centralized risk management system. The system will have the added function of generating automated performance reviews of the firm’s portfolio managers. To ensure performance being reported to clients complies with HA’s policies, the most experienced portfolio managers undertake a review of individual client account information. Due to the complexity of institutional accounts, a joint audit is undertaken by HA’s internal audit department head and a renowned external audit firm. Valuing private equity holdings has been a challenge for HA’s portfolio managers. To aid fund investments are valued using statistical methodologies. With the exception of hedge funds investments and emerging market equities, which are valued using a ad hoc error approach, all other asset classes are valued using the most recent asset prices. 7. Are HA’s performance reporting policies consistent with both the required and recommended standards of the CFA Institute Asset Manager Code of Professional Conduct? A. Yes. B. No, the procedures regarding hedge funds are not. C. No, the procedures regarding all asset classes are not. 8. Is HA’s trade allocation policy consistent with both the required and recommended standards of the Asset Manager Code? B. No, trades should be allocated based on suitability. C. No, trades should not be allocated to the accounts of clients expressing an interest. 9. In order to adhere to the requirements and recommendations of the Asset Manager Code with respect to the changes at the risk management department, HA’s best course of action is to: A. do nothing. B. disclose to clients details regarding the risk management head replacement only. C. disclose to clients details regarding the risk management head replacement and the automation of the risk management system. 10. Are HA’s performance review policies consistent with requirements and recommendations of the Asset Manager Code? A. No. B. Only with respect to private wealth client accounts. C. Only with respect to institutional client accounts.

CFA Level III Mock Exam 3 – Questions (PM)

11. Which of the following asset classes are valued using a methodology, which is inconsistent with the Asset Manager Code? A. Private equity. B. All other asset classes. C. Hedge funds investments and emerging market equities. 12. Which of the following statements is most likely correct with respect to the CFA Institute Code of Ethics? Members and candidates: A. are encouraged to adhere to the Code. B. are required to respect client confidentiality. C. are required to respect their fellow investment professionals.