“THE CONSULTANT,” JULES A. HUOT, STANDARDS OF PRACTICE CASEBOOK (AI...

2. “The Consultant,” Jules A. Huot, Standards of Practice Casebook (AIMR, 1996).

Purpose:

To test the candidate’s understanding of the AIMR Standards of Professional Conduct related to

suitability of investments, misrepresentation, fiduciary duty, and conflicts of interest.

LOS: The candidate should be able to

Standards of Practice Handbook (Session 2)

• appraise behavior that could lead to potential or actual violations of the Code and Standards.

Standards of Practice Casebook (Session 4)

• differentiate between ethical behavior that complies with the Code and Standards and conduct

that violates the Code and Standards.

Guideline Answer:

A. Template for Question 21A

U.S. Treasury Bill Investment

Suitability:

By investing 55 percent of the Fund’s assets in U.S. Treasury bills, Jennings is buying an

inappropriate and unsuitable investment for her clients (the Fund’s shareholders), despite the

positive outlook for these securities. The Fund’s investment strategy, as described in the prospectus,

is aggressive growth, to be achieved by remaining fully invested in small and micro cap stocks.

Investors in the Fund seek an aggressive, high growth investment. Thus Jennings’ conservative

investment in Treasury bills is clearly inconsistent with the Fund’s strategy and clients’ objectives.

Misrepresentation:

Jennings misrepresented the services that she was providing to her clients (the Fund’s shareholders)

when she stated in the prospectus that the Fund was an aggressive growth investment vehicle.

Specifically, her action of investing a majority of the Fund’s assets in U.S. Treasury bills suggests

that she misrepresented the Fund’s objective.

Client Interests/ Personal Interests:

Based on the facts presented, buying Treasury bills for the Fund does not benefit Jennings’ personal

interests in any way and would not skew her independence and objectivity with respect to client

interests. Thus no conflict exists between client interests and Jennings’ personal interests.

Disclosure of Conflicts:

Jennings’ purchase of Treasury bills for the Fund does not result in a conflict of interest. Therefore,

no disclosure is required to either her employer or her clients (the Fund’s shareholders).

B. Template for Question 21B

Biocure Investment

The Fund’s prospectus states that the Fund is seeking to achieve a high level of asset growth by

investing in small and micro cap stocks. Based on the facts presented, Biocure’s stock meets these

criteria and is a suitable investment. The stock appears to be an appropriate investment based on the

Biocure long-term earnings projections prepared by the research department of Jennings’ firm.

The prospectus states that the Fund would invest in small and micro cap stocks. Because Biocure is

such a stock, Jennings did not make any misrepresentation about Biocure stock or her purchase of

the stock.

Jennings’ purchase of Biocure stock for the Fund gives rise to the appearance that she placed her

own interests before her clients. That is, Jennings’ ownership of Biocure stock could affect her

judgment and place her personal interest in conflict with clients’ interests. Because of the recent

decline in Biocure’s stock price, Jennings’ large stock purchase on behalf of the Fund could be

interpreted as an attempt to boost the value of her personal holding of Biocure stock.

Jennings’ purchase of Biocure stock for the Fund represents a potential conflict of interest because

she personally owns $100,000 of this stock. Therefore, Jennings must disclose her interest in the

Biocure stock to both her employer and her clients (the Fund’s shareholders).

Level III: Question 22

Topic: PPS/Portfolio Management

Minutes: 18

Readings: