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

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.