12 RELATE TO ETHICAL AND PROFESSIONAL STANDARDS. GARRETT K...

Questions 7-12 relate to Ethical and Professional Standards. Garrett Keenan, CFA, is employed by Gold Standard Bank (GSB), in the Capital Markets Division. The GSB Board of Directors has recently made two decisions: a leveraged co-invest fund is to be created for the benefit of senior-level employees of GSB, and a hedge fund is to be constructed which will be marketed to high net worth Trust Department clients and prospects. Both of the new entities will be fund-of-funds (FOF) managed on behalf of GSB by "third party" managers that Keenan will select. Keenan first researched the available pool of hedge fund managers, and compiled a report on a subset that was based primarily on historical performance record. The 60 managers selected for further review were tiered into three groups according to their three-year track record. Of the 20 managers in the highest performing tier, Keenan selected 15 managers for the employee leveraged co-invest FOF. The other five managers in the top tier were selected along with the 20 hedge fund managers in the second tier for the FOF to be marketed to high net worth trust clients. While screening hedge fund managers, Keenan came across his college friend, John Carmichael, one of the principals at the hedge fund management firm Bryson Carmichael (BC). Because BC's track record met Keenan's criteria for inclusion in one of the FOFs, BC was selected. Upon being informed of this development, Carmichael called Keenan to express his appreciation, and during that conversation, offered Keenan the use of Carmichael's mountain house resort. Over the next year, Keenan and his family spent two long weekends at Carmichael's mountain house. In appreciation for his stay, Keenan promised to take Carmichael's two children to Walt Disney World (free of charge) during their planned upcoming summer vacation (assuming Keenan's wife can take time off from her independent medical practice). Carmichael accepted this invitation, but was told by Keenan to keep the invitation confidential. Another hedge fund manager being considered for inclusion was Barry Grant. Grant had been actively soliciting investors for his hedge fund and offered to pay Keenan a personal fee of $200 if Keenan accepted Grant's fund into one of GSB's FOFs. Because Grant's fund performance was within Keenan's acceptable guidelines, Keenan refused to accept the fee. However, Keenan told Grant that if his fund were able to beat the benchmark return by at least 1% during the first annual measurement period, he would be happy to accept his one-time fee. Keenan later mentioned this arrangement to his direct supervisor during their weekly meeting. Once Keenan had finished the manager selection process, he was asked to offer a training seminar to the Trust Department's sales force. In that training, Keenan reviewed the agreed upon forms of compensation that the hedge funds would receive: a) a 2% fee on assets under management, and b) 20% of the returns over a high water mark. While the sales force was instructed to inform prospective FOF clients that "past performance is no guarantee of future results," Keenan recommended that the sales force emphasize positive rather than negative aspects of the fee earned on returns over the high water mark. Keenan said, "Your clients should not worry about the managers failing to outperform each year, because the profits on returns over the high water mark are how they make their real money." Keenan also instructed the sales force to emphasize the combined number of CFA charterholders on the management teams of the hedge funds in the FOF and provide a factual description of the requirements to become CFA charterholders. As a matter of good business, GSB's compliance procedures require a quarterly review of all managers for performance assessment, style drift, and strategy changes. One year after the funds' formation, such a review showed that Carmichael's fund had by far the worst one-year return. After the review, Keenan removed the second worst performing hedge fund from the employees' leveraged co-invest FOF, but decided to give Carmichael's firm one more quarter to improve performance. As a replacement for the fund Keenan removed from its FOF, he selected a new hedge fund which invested in companies that fund managers believed were likely takeover candidates. ... During his initial selection of the managers for the two FOFs, which of the following Standards did Keenan least likely violate?

A) Independence and Objectivity.

B) Performance Presentation.

C) Fair Dealing.

Question #8 of 60

By accepting the use of John Carmichael's mountain house, Keenan:

A) violated the Diligence and Reasonable Basis Standard.

B) violated the Independence and Objectivity Standard.

C) did not violate a Standard.

Question #9 of 60

Assuming that Grant's fund beats the benchmark return by 1.5% the first year and Keenan receives the $200 fee, the Additional Compensation Arrangement Standard was:

A) not violated because the amount of the one-time fee was not material.

B) not violated because Keenan disclosed the fee arrangement to his supervisor.

C) violated as Keenan failed to get the written consent from Grant and his supervisor.

Question #10 of 60

In his presentation to the bank Trust Department sales force, Keenan:

A) violated the Misrepresentation Standard by describing the hedge funds' fee structure as a

mechanism for delivering better returns.

B) violated the Misrepresentation Standard by mentioning the number of CFA charterholders on the

FOF management teams.

C) was in compliance with the Standards.

Question #11 of 60

As a result of the first year review and resulting change in fund managers, did Keenan violate the following Standard(s)?

Misconduct Loyalty to Employer

A) Yes Yes

B) Yes No

C) No Yes

Question #12 of 60

By including the new fund with the takeover strategy in the FOF, Keenan:

A) violated the Market Manipulation Standard.

B) violated the Suitability Standard.

C) did not violate any Standards.

Question #13 of 60