Xavier Newsome, CFA, serves as trustee for the Block Corporation’s trust. Newsome is 31 years old. The trust requires a certain amount of current income to support Mr. Block’s widow. After her death, the trust proceeds will go to the Block grandchildren. Newsome is a member of a running club as are several of the Block grandchildren. As part of his duties as trustee, Newsome makes portfolio decisions that favor growth of the principal and puts the current income at risk. Has he violated any fiduciary standards? A) Yes, because he did not act impartially. B) Yes, because he did not use caution. C) No, because he acted impartially. D) No, because he acted with loyalty.
A. Pretty self-explanatory, actually.
Sorry, you’re probably looking for more than that. Since this dude runs with the children, we’re to assume that he’s favoring them in his investment approach, which is to maximize the principal growth as opposed to making sure that the old hag has enough money (current income) to buy her 46 cats food and whatever the hell else cats need.
I am going with A. If the trust REQUIRES a certain amount of income, you can not put that at risk in favor of growth.
I see it as kind of vague…we’re not told for certain that there is any kind of influence by the grandchildren or that he hasn’t maintained impartiality. I would actually think he violated it for caution, as he has deviated from the initial investment approach that is required by the trust. Then again, I can’t remember the definition of caution from CFAI as I haven’t reveiewed ethics since failing last year.
C’mon guys, work with me here… “The trust requires a certain amount of current income to support Mr. Block’s widow.” (that’s REQUIRED, as in NEEDS TO HAVE) “After her death, the trust proceeds will go to the Block grandchildren. Newsome is a member of a running club as are several of the Block grandchildren.” (we can infer that they’re friendly at least; hell, maybe he’s sleeping with one or more of them) “As part of his duties as trustee, Newsome makes portfolio decisions that favor growth of the principal and puts the current income at risk.” (so he clearly is foregoing the old lady’s interest(s) in favor of the grandkids)
skillionaire Wrote: ------------------------------------------------------- > Sorry, you’re probably looking for more than > that. > > Since this dude runs with the children, we’re to > assume that he’s favoring them in his investment > approach, which is to maximize the principal > growth as opposed to making sure that the old hag > has enough money (current income) to buy her 46 > cats food and whatever the hell else cats need. Yeah, if she was a dog person it would change the complexity of the whole issue. 
I’m going with A too.
skillionaire Wrote: ------------------------------------------------------- > Sorry, you’re probably looking for more than > that. > > Since this dude runs with the children, we’re to > assume that he’s favoring them in his investment > approach, which is to maximize the principal > growth as opposed to making sure that the old hag > has enough money (current income) to buy her 46 > cats food and whatever the hell else cats need. I agree with A, but it is vague, based on the word children I’m guessing they’re underage and all I’m saying is I do not trust Xavier Newsome, CFA “running” with my children, not with a name like that. I’m calling violation. On a serious note, A, as granny is the primary beneficiary with the children being secondaries.
skillionaire Wrote: ------------------------------------------------------- > “After her death, the trust proceeds will go to > the Block grandchildren. Newsome is a member of a > running club as are several of the Block > grandchildren.” (we can infer that they’re > friendly at least; hell, maybe he’s sleeping with > one or more of them) How do you know he is not sleeping with the grandma?
I think sleeping with the grandma is an unstated assumption.
But are we to assume that he has violated impartiality if he is involved in an extracurricular activity? This is still too vague in my mind…like you said, the fact that they refer to “children” is throwing me off. I mean, are we to assume that this dude has no morals and just because he “happens” to be in the same running/book/sex-club, that he’s gonna bend like a straw and completely change the investment style? I see your point Skill, but are we just to assume that this dude has no backbone?
Agree with skillionare, this was not a vague question. The trust has two competeting beneficiaries…income beneficiary who would naturally want an income based portfolio and a principal “remainderman” beneficiary who would want a growth oriented portfolio. It is a trustee’s fiduciary duty to balance these interests. The whole question can be answered from one sentence: “Newsome makes portfolio decisions that favor growth of the principal and puts the current income at risk.” Answer is A.
skillionaire Wrote: ------------------------------------------------------- > C’mon guys, work with me here… > > “The trust requires a certain amount of current > income to support Mr. Block’s widow.” (that’s > REQUIRED, as in NEEDS TO HAVE) > > “After her death, the trust proceeds will go to > the Block grandchildren. Newsome is a member of a > running club as are several of the Block > grandchildren.” (we can infer that they’re > friendly at least; hell, maybe he’s sleeping with > one or more of them) > > “As part of his duties as trustee, Newsome makes > portfolio decisions that favor growth of the > principal and puts the current income at risk.” > (so he clearly is foregoing the old lady’s > interest(s) in favor of the grandkids) I completely agree. The fact that he is sleeping (or not) with the beneficiaries (would he need to disclose it to his employer?) is irrelvant. He can be friendly with the beneficiaries, or even sleep. But he should always act in a way that is impartial. Doing something that would jeopardize the required incoem a retiree is living on is a violation of the CFA code of ethics. If the grandchildren were not in the picture, we could go with B. But here it is so obvious that he is managing the portfolio in order to benefit some (ONLY SOME) beneficiaries that I have to go with A
Black Swan Wrote: ------------------------------------------------------- > I think sleeping with the grandma is an unstated > assumption. I completely agree. Whether it is April 1st or not, we should not make up our own assumptions when answering the questions.
I would have picked ‘B’ - Xavier has not acted with caution in protecting the principal of the trust funds and ensuring income generation for the widow. The question just says that he belongs to a running club and that some of the grandchildren belong to a running club as well. So what?? It doesn’t even say that they belong to the same running club. You’re not allowed to go running if you’re a fund manager? God forbid they go to the movies, the supermarket, the mall, the golf club, etc or Xavier will have to stay locked up in his apartment all day.
I don’t think that the fact that they belong to a club is determinant. What is determinant is that he managed the whole portfolio in a way that was appropriate for only SOME beneficiaries.
On a more serious note, if he is using soft dollars to pay for sex with the grandma, is this considered abuse of the soft dollars as it is at the direction of the beneficiary, or is it a violation because she is not the sole beneficiary. Or is it only a violation if he fails to disclose his agreement with the grandkids?
Doesn’t Xavier have only one objective at the moment - income generation? The grandchildren get the principal upon her death, but for now income generation would seem to be the sole objective and he need only act to preserve capital. That requires caution. Unfortunately I did this study session a while back and can’t remember the exact requirements (brain fuzz) but I’m sure preservation of capital is the chief requirement here and to me that equals caution.
Black Swan Wrote: ------------------------------------------------------- > On a more serious note, if he is using soft > dollars to pay for sex with the grandma, is this > considered abuse of the soft dollars as it is at > the direction of the beneficiary, or is it a > violation because she is not the sole beneficiary. > Or is it only a violation if he fails to disclose > his agreement with the grandkids? Soft dollars shoudl be used to pay for Research. What you describe is not Research. What you describe is more lika withdraw of funds from the portfolio.
I am now wondering if the kids are beneficiaries. Wouldn’t the grandma be the only beneficiary. And the kids are only inheritents. “The trust requires a certain amount of current income to support Mr. Block’s widow. After her death, the trust proceeds will go to the Block grandchildren.” As such the kids are not entitled to anything until grandma dies. Since there is no issue of being impartial between several beneficiaries, I would like to change my answer to B