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:
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