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

Questions 7 through 12 relate to Ethical and Professional Standards Alliance Limited Case Scenario Alliance Limited (AL) is an asset advisory firm situated in Chicago, providing investment advisory services to private wealth clients. To improve its standing in the national market, senior officer Ali Reza has recommended AL adopt the CFA Institute Asset Manager Code. He has drafted compliance policies in three different areas which will assist the firm in gaining compliance. Personal Trading: Any employee intending to trade a security on AL’s watch list must seek prior approval from the compliance officer if the trade exceeds the $1,000 limit. Backup records: To ensure the safety of account information, all pertinent information will be stored on a backup computer system in electronic form only. The system will be located in AL’s headquarters; an offsite system is currently not within the firm’s budget. Fee Disclosures: All managers are encouraged to disclose all actual gross- and net-of-fees performance results as well as an itemization of charges. The procedure used to determine contingent fees must be disclosed upon request. After drafting the policies, Reza engages in a discussion with AL’s senior portfolio manager, Rob Martin. Martin manages the account of Martha Flower, a wealthy real estate developer who is operating in Florida. Martin has long suspected Flower of embezzling her clients’ funds. After thorough investigation, Martin is now certain and fears a substantial portion of her portfolio may be funded with these funds. He is uncertain of what action to take. Sylvia Bath, CFA, a portfolio manager serving AL, manages the investment account of Peter Blake. Blake is one year away from retirement and will depend entirely on his retirement income to provide for his modest lifestyle. His investment portfolio has a current equity allocation of 10%, comprising entirely of domestic large-cap value stocks, with the remainder in fixed income securities. Due to the current cyclicality of the U.S. economy and to protect her client’s portfolio, Bath has decided to sell the value stocks and purchase large-cap growth stocks in the same proportion. Since this action was taken to protect Blake’s portfolio, she does not believe informing Blake was necessary. Later that evening, Bath receives an invitation to attend a charitable event from Blake. Among the invitees include professionals from the investment industry. Believing that the event will provide the opportunity to bring more business to AL, she accepts the invitation after informing her supervisor in writing. At the event, the attendees engage in various activities for cash prizes. Blake wins two cash prizes worth $50 each, which she intends to disclose to her supervisor. The following day Bath has been asked to review the performance record and resume of Ramos Davis, a candidate applying for the position of computer systems technician. Davis was fired from Cappa Inc., a large investment bank, after being wrongly accused of negligent supervision of the bank’s backup computer system, which subsequently led to its destruction in a site fire. 7. Which of the following policies is most likely consistent with both the required and recommended standards of the CFA Institute Asset Manager Code? The policy concerning: A. Personal trading only. B. Backup records only. C. neither personal trading nor backup records. 8. Which of the following statements is most likely correct with respect to the Fee Disclosures policy? A. The procedure used to determine contingent fees must be disclosed regardless of client request. B. Managers should be encouraged to disclose either gross- or net-of-fees results but not both. C. The policy is in compliance with the required and recommended standards of the Asset Manager Code. 9. In order to adhere with the requirements and recommendations of the Asset Manager Code, Martin’s best course of action with respect to his knowledge on Flower’s activities is to: A. inform his supervisor. B. inform local authorities. C. keep any information gained during the investigation confidential. 10. By diverting Blake’s funds to large-cap growth stocks, has Bath violated the Asset Manager Code? A. No. B. Yes, she should have informed Blake after implementing the change. C. Yes, she should have informed Blake of the proposed change before taking investment action. 11. With respect to informing her supervisor of the invitation and accepting the cash prizes, are Bath’s actions consistent with the Asset Manager Code? B. Yes. C. Only with respect to the cash prizes. 12. When hiring Davis as systems technician, which of the following actions will be required by AL to comply with the Asset Manager Code? A. Ensure Davis is qualified. B. Consider another candidate for the position. C. Provide disclosure of the details of his employment termination to clients.