3 Ethics questions

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Joined: Fri Sep 14, 2012 4:40 pm

3 Ethics questions

Postby vinita1703 » Sat Sep 29, 2012 4:14 am

Please clarify the below ethics questions which I marked incorrectly and still do not understand as to why my answer was incorrect .

1. Jefferson Piedmont, CFA, a portfolio manager for Park Investments, plans to manage the portfolios of several family members in exchange for a percentage of each portfolio’s profits. As his family members have extensive portfolios requiring substantial attention, they have requested that Piedmont provide the services outside his employment with Park. Piedmont notifies his employer in writing of his prospective outside employment. Two weeks later, Piedmont begins managing the family members’ portfolios. By managing these portfolios, did Piedmont violate any CFA Institute Standards of Professional Conduct?

A. Conflicts of Interest
B. Additional Compensation.
C. Both Additional Compensation and Conflicts of Interest.

Answer: C
C is correct because members should disclose all potential conflicts of interest,
the substantial time involved in managing family accounts, and when engaging in independent practice for compensation should not render services until receiving written consent from all parties. Standard IV (B), Standard VI (A).

How is this C .. since the person has already informed abut the compensation in writing ?
Also why conflict of interest also I don’t understand …. What should nbe the answer in such questions ? i marked it as A but i feel the question is wrong

2. Hui Chen, CFA, develops marketing materials for an investment fund he founded three years ago. The materials show the 3-, 2- and 1-year returns for the fund. He includes a footnote that states in small print “Past performance does not guarantee future returns.” He also includes a separate sheet showing the most recent semi- annual and quarterly returns, which notes they have been neither audited nor verified. Has Chen most likely violated any CFA Institute Standards of Professional Conduct?

A. No.
B. Yes, because he included un-audited and unverified results.
C. Yes, because he did not adhere to the global investment performance standards.

Answer: A

A is correct because the Standards require members to make reasonable efforts to make sure performance information is fair, accurate, and complete. The Standards do not require compliance with Global Investment Performance Standards (GIPS), auditing, or verification requirements. Standard III (D)

It should be B because even if it is not gips the ifnromation should be an audited and verified one ..??.

Question 3 :
8. Charlie Mancini, CFA, is the Managing Director for Business Development at SV Financial, (SVF), a large U.S. based mutual fund organization. Mancini has been under pressure recently to increase revenues. In order to secure business from a large hedge fund manager based in Asia, Mancini recently approved flexible
terms for the fund’s client agreement. To allow for time zone differences, the agreement permits the hedge fund to trade in all of SVF’s mutual funds six hours after the close of U.S. markets. Did Mancini violate any CFA Institute Standards of Professional Conduct?

A. No.
B. Yes, with regard to Fair Dealing.
C. Yes, with regard to Fair Dealing and Material Nonpublic Information.

Answer: C

C is correct because clients should be treated fairly and impartially. Standard III (B). In addition, the flexible trading terms allow the hedge fund manager to enrich themselves and is a violation of Standard II A, concerning trading on material nonpublic information. This is also a conflict of interest, Standard VI (A), Disclosure of Conflicts.

I answered b and I dont really understand why it should be c how is it material non public information

Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: 3 Ethics questions

Postby content.pristine » Wed Oct 03, 2012 4:48 pm

1. Additional Compensation: Written consent must be obtained from All parties involved. That means the families must write a letter confirming the additional compensation to the Piermont’s employer.
Conflict of Interest: Now due to the compensation arrangement, there will be a significant benefit for Piermont to neglect other portfolios and focus solely on the families’. Moreover, the other clients may suffer as this clearly done during market hours. (He is not working on something over the weekends, in his spare time to get additional compensation) Hence there is a clear conflict of interest. The other clients must be notified in writing about his additional compensation arrangements so they can judge whether his interests in handling their portfolios is compromised.

2. Not Auditing Results is not a violation of Standard III (D).

3. As you know, the NAV of a fund is calculated only once at the end of the trading day based on the MTM positions of all the assets. Now, any news that takes place after the market, would change the values of the positions. Let say, that after markets, there is some good news announced and all the stocks would go up in value. The Hedge fund then has the unfair advantage of buying units at an underpriced NAV and could sell immediately when the market goes up. Since stock prices change because of this good news, this is material information.

Hope this helps

Good Student
Posts: 17
Joined: Sat Jun 09, 2012 10:47 am

Re: 3 Ethics questions

Postby prateek.jain1284 » Fri Oct 19, 2012 3:43 pm

As for third question : Having a market news might be a "Material" information but certainly not "Nonpublic" information.
Then the answer should not be "C" in that case

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