Questions 1 through 6 relate to Ethical and Professional Standards.
Weiying Shao Scenario
Weiying Shao, CFA, is an investment officer employed by Zhang Financial Services.
Zhang provides wealth management services solely to high net worth individuals and has
adopted the CFA Institute Standards and Asset Manager Code of Conduct.
Shao receives a request from a client asking for an itemized accounting of the actual fees
and other costs charged to them for the year. Shao sends the client a document itemizing
management fees paid by the client along with an explanation as to how the fees were
derived.
Zhang has expanded its services recently to include proprietary mutual funds. Two
experienced and respected research analysts were promoted to manage the new mutual
funds.
Shao meets with Guohua Xu, a client who holds a diversified portfolio of funds.
Traditionally, Shao has invested client assets in long-established funds with strong
performance and management continuity. Because he has great respect for Zhang’s new
products and their portfolio managers, Shao suggests investing a portion of Xu’s portfolio
in one of the new Zhang funds. He recommends a fund with investment objectives
similar to those of Xu. Shao provides performance data based on a simulated application
of the fund’s approach over the past 18 months. He adds, “The new fund’s simulated
performance is comparable to the performance of your current holdings over that period.”
Several clients ask Shao about hedge funds. After carefully screening for risk and return
characteristics, Shao recommends selected hedge funds he finds appropriate for even
conservative clients. The funds have had excellent performance so Shao believes they
are appropriate despite their three year lock out prevision. He discusses his research and
recommendations with a colleague who responds “I don’t believe hedge funds are
appropriate for any of our conservative clients, especially those with short-term liquidity
needs.”
Periodically Shao reviews Zhang’s confidential proxy voting policy that is disclosed to
clients only upon request. The policy directs investment officers to be selective when
reviewing proxies, and to avoid spending time reviewing and voting routine proxies. In
such cases, Zhang considers the cost involved for the client to be greater than the benefit
that the client would receive.
Zhang has strict trade allocation procedures developed in accordance with the CFA
Institute Standards and Asset Manager Code of Conduct. The firm distributes copies of
the procedures to clients annually. Occasionally, Shao receives notice from the trading
desk at the close of the day informing him that his block trades were only partially filled.
Recently, when the trading desk could not execute the full $750,000 in stock that he had
requested for two accounts, he allocated $100,000 of the stock to the $5 million dollar
private account and the remaining $500,000 of stock to a $25 million dollar institutional
account.
During the next month, Zhang’s founder is accused by regulatory authorities of a number
of violations including misappropriation of client funds. The same day, a team of senior
portfolio managers leave Zhang to start their own firm. Zhang instructs its personnel not
to discuss either of these developments with current or prospective clients.
1. Are the fee disclosures made by Shao to his client consistent with the CFA
Institute Asset Manager Code of Professional Conduct?
A. No.
B. Yes, because Shao disclosed how fees are derived.
C. Yes, because Shao itemized the management fees paid on the client’s behalf.
2. By recommending that Xu switch a portion of his portfolio to a new Zhang fund,
does Shao violate any CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, because he has a conflict of interest as the new funds are proprietary.
C. Yes, because the fund data used in the performance comparison was
simulated.
3. By recommending hedge funds, does Shao violate any CFA Institute Standards?
B. Yes, because hedge funds have risk characteristics that are not suitable for
conservative investors.
C. Yes, because the hedge funds recommended are not suitable for conservative
investors with short-term liquidity requirements.
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4. Is Zhang’s proxy voting policy consistent with the requirements and
recommendations of CFA Institute Standards and the Asset Manager Code of
Conduct?
A. Yes.
B. No, because the proxy voting policy should be disclosed to all clients.
C. No, because voting of all proxies is a part of the management of client
investments.
5. When allocating the shares on the partially filled block order does Shao violate
any CFA Institute Standards?
B. Yes, because he fails to disclose the firm’s trade allocation policies.
C. Yes, because he should allocate shares to client accounts only after the order
is completely filled.
6. According to the CFA Institute Asset Manager Code of Conduct, Zhang must
disclose the information regarding its:
A. founder only.
B. team of senior portfolio managers only.
C. both the founder and the team of senior portfolio managers.
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