Ethical question

CFA Level I
#1

Ron Dunder, CFA, is the CIO for Bling Trust (BT), an investment advisor. Dunder recently assigned one of his portfolio managers, Doug Chetch, to manage several accounts that primarily invest in thinly traded micro-cap stocks. Dunder soon notices that Chetch places many stock trades for these accounts on the last day of the month, towards the market’s close. Dunder finds this trading activity unusual and speaks to Chetch who explains that the trading activity was completed at the client’s request. Dunder does not investigate further. Six months later regulatory authorities sanction BT for manipulating micro-cap stock prices at month end in order to boost account values. Did Dunder violate any CFA Institute Standards of Professional Conduct?

A. No. B. Yes, because he failed to reasonably supervise Chetch. C. Yes, because he did not report his findings to regulatory authorities I chose B, the answer is C. I think the solution is wrong. Any thoughts? Thanks.

#2

I would argue that he did supervise Chetch. Dunder noticed the unusual activity and confronted him, however he didn’t further take measures to look at it more closely.

#3

I would have chosen ‘B’ with a good amount of confidence.

Seems to me like a pretty clear violation of "IV- C. Responsibility of Supervisors"

“Must make reasonable effort to detect and prevent violations”.

It does not seem a reasonable effort was made here.

Not reporting findings is of course a violation as well, but Dunder can’t be sure Chetch is in violation until he investigates further.

#4

Agree.

#5

Thanks, guys.

#6

Hey Kelly,

I would double check that answer because I remember answering B and getting it correct.

#7

Thanks.