Questions 7 through 12 relate to Ethical and Professional Standards.
Anne Zawadi Case Scenario
A group of fund management professionals recently formed a self-regulating professional
association, the Fund Managers’ Association (FMA), whose main objective is to increase
the level of integrity of fund management in the country. Membership in the FMA is
restricted to fund management firms.
The FMA wants to create a Code of Conduct to be used by all the firm members of the
FMA. To help in the creation of the Code, the FMA has hired Anne Zawadi, a CFA
charterholder.
In the first meeting between the Board of the FMA and Zawadi, the Chairman of the
FMA Board states, “Our initial thoughts are to require all of our members to adopt the
CFA Code of Ethics and Standards of Professional Conduct rather than create our own
code. If they fail to abide by the CFA Code, their membership will be revoked.”
Zawadi responds, “Perhaps it would be better to adopt the CFA Institute Asset Manager
Code of Professional Conduct, as it is specific to asset management firms, not
individuals. The Code lays out principles of conduct, including acting in a professional
and ethical manner, acting for the benefit of clients at all times and with independence
and objectivity, in addition to acting with skill, competence and diligence. It also covers
communication with clients. It is so comprehensive there is no need to allow any
flexibility amongst your members. However, it only covers some aspects of our capital
markets regulations but it should be adopted without any further provisions.”
After Zawadi’s comments, the FMA Board agreed to adopt the CFA Asset Manager Code
without any changes or additions, requiring all its members to strictly abide by it. It also
required its members to state in their marketing material that their clients could submit
complaints regarding any member to the FMA’s Compliance Committee.
One year later, the Compliance Committee of the FMA asks to meet with Zawadi to
discuss a complaint against one of its members, Amani Asset Management. The
complaint comes from a client who gave Amani full discretion and believes Amani
violated the Asset Managers Code. His opinion is based on the fact that he lost one third
of his portfolio value over the last year. The client claims he was told by one of Amani’s
managers that recently all of their clients’ asset allocations were heavily weighted to
more speculative equity investments in order to enhance returns. The manager is also
alleged to have told the client his performance is really quite good as the market lost 50
percent.
Along with his complaint, the client submitted his investment policy statement, prepared
by Amani. Zawadi noted that the client’s risk tolerance in the statement was described as
“moderate” due to his conservative nature and poor investment experiences in the past.
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Amani’s client also indicates he heard that Amani had been fined a substantial amount of
money by regulators for not complying with regulations regarding the handling of client
funds. The client also indicates that as a result of the disciplinary action, several top
management personnel left the company. The client enclosed Amani’s last bi-weekly
newsletter in which Amani disclosed recent staff additions, new management fee
structures, and changes in handling client account procedures.
As part of the FMA’s objective of improving standards in their industry, the FMA Board
asks Zawadi to review the procedures they require of their members in regards to
Compliance and Support, Trading and Disclosure. Zawadi finds the following existing
procedures in place:
Compliance Members are required to ensure all their employees sign a statement
and Support: acknowledging the firm’s mandatory compliance with the CFA Asset
Managers Code; appoint a Compliance Officer reporting to the CEO and
Board of Directors; maintain records regarding investment decisions for a
minimum of six years; and portfolio information must be checked by
another department within the Member firm.
Trading: Members are required to enforce procedures to ensure: clients’ interests
are first and foremost; trade allocations are distributed equally amongst all
clients and best trade execution.
Disclosure: Members are required to ensure all Members disclose: basis for valuation
methodology; potential conflicts of interest; and use of derivatives.
After the review of the procedures she makes two recommendations as to how the FMA
can further enhance integrity amongst its members:
Recommendation: Each member firm should require all of its employees to
declare on a quarterly basis, any investment actions taken
by themselves or anyone else living in their household to
ensure the firms’ clients’ interests are being put before the
employees of the firm.
Recommendation: Member firms should restrict the use of performance fees
but solely charge clients on the basis of a percentage of
assets under management so to ensure managers do not
take excessive risk.
7. Are Zawadi’s comments regarding the implementation and the ethical
responsibilities of the CFA Asset Manager Code of Professional Conduct
most likely accurate?
A. No.
B. Yes, because she covers all aspects of the ethical responsibilities.
C. Yes, because she covers all aspects of the ethical responsibilities and mentions
that the Code must be adopted without any changes.
8. Did Amani’s client have a basis for making a complaint with regard to the Asset
Manager Code against Amani?
A. Yes.
B. No, Amani treated all the clients equally and did not favor one client over
another.
C. No, the client gave Amani full discretion and his portfolio outperformed the
market.
9. Which of the FMA’s existing procedures regarding Compliance and Support least
likely meets the minimum Standards of the Asset Managers Code?
A. Maintaining records.
B. Department confirmation.
C. Independent Compliance Officer.
10. Which of the following disclosures would the FMA least likely require of their
members to meet the minimum Standards of the Asset Managers Code?
A. Use of leverage.
B. Fund audit results.
C. Remuneration of Professional Staff.
11. Could Zawadi’s first recommendation be improved further to better meet the
Standards of the Asset Manager Code and the CFA Standards of Professional
Conduct?
A. No, it already meets the requirements of both Codes.
B. Yes, disallow all employees to trade in investment securities.
C. Yes, require all employees to obtain permission prior to making a trade.
12. Does Zawadi’s recommendation conform to the Asset Manager Code of
Standards?
B. No, Code does not forbid performance fees as long as the fee calculation is
clearly disclosed.
C. No, Code does not forbid performance fees as long as each client’s
performance fee is calculated identically.
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