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

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.