I’ll post the answers at 4:30 EST, without premature postulation. Wiggum Bob McKenzie, CFA, is chief executive officer (CEO) of McKenziefood, a European private equity firm specializing in food retailers. The retail food industry has been consolidating during the past two years as private equity funds have closed numerous deals and taken many companies private. McKenziefood recently hired Sarah Wiggum, a CFA Level II candidate, as a controller. On Wiggum’s first day of work, the head of personnel informs her that by signing the employment contract, Wiggum agrees to comply with the company’s code of ethics and compliance manual. She hands Wiggum copies of the code and compliance manual without further comment. Wiggum spends the next hour reading both documents. An excerpt from the compliance manual appears in Exhibit 1. EXHIBIT 1: McKenziefood Company Compliance Manual Excerpts 1. Employees must not accept gifts, benefits, compensation, or consideration that competes with, or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved. 2. Officers have responsibility for ensuring that their direct reports—that is, employees whom they directly supervise—adhere to applicable laws, rules, and regulations. 3. Employees in possession of material nonpublic information should make reasonable efforts to achieve public dissemination of the information if such actions would not breach a duty. 4. Employees shall not trade or cause others to trade in securities of food retailers that may be potential takeover targets of their employer. When she enters her new office that afternoon, Wiggum finds a large gift basket sent by her sister. The card reads “Congratulations on your new position.” The basket is filled with expensive high-quality food items from Crack-in-the-Box—a local small, publicly-traded food retailer, which produces many delicatessen products under its own brand name. During the next two weeks, Wiggum meets with all of McKenziefood’s upper management, including the CEO. In his office, McKenzie praises Wiggum’s efforts to complete the CFA program. “The program is demanding, but it is worthwhile.” McKenzie then explains his investment strategy for choosing McKenzieford’s acquisition targets. He points to a large map on the wall with multi-colored pins marking McKenziefood’s previous takeovers. The map shows acquisitions in all the major cities of Germany with one exception—the home of McKenziefood headquarters. McKenzie remarks, “We are currently in talks for another purchase. Confidentiality prohibits me from discussing it any further, but you will hear more about it soon.” Introduced to Crack-in-the-Box by her sister, Wiggum quickly becomes a loyal customer. She considers it the best food retailer in the vicinity and she frequently purchases its products. The following week, the local newspaper features an article about Crack-in-the-Box and its young founders. The article describes the company’s loyal and growing customer base as well as its poor quarterly financial results. Wiggum notes that the stock has steadily declined during the past twelve months. She concludes that the company has an inexperienced management team, but its popular product line and loyal customer base make the company a potential acquisition target. Wiggum calls her sister and recommends that she purchase Crack-in-the-Box shares because “it would be an attractive acquisition for a larger company.” Based on Wiggum’s recommendation, her sister buys €3,000 worth of shares. During the following two weeks the stock price of Crack-in-the-Box continues to decline. Wiggum’s sister is uncertain of what she should do with her position. She seeks Wiggum’s advice. Wiggum recommends that her sister wait another few days before making her decision and promises to analyze the situation in the meantime. While walking by McKenzie’s office the following day, Wiggum sees a document with Crack-in-the-Box’s distinctive logo and overhears the company’s name through an open office door. That evening, Wiggum tells her sister, “with the price decline, the stock is even more attractive.” She recommends that her sister increase her position. Based on her recommendation her sister buys an additional €3,000 worth of Crack-in-the-Box shares. One month later, McKenziefood publicly announces the acquisition of Crack-in-the-Box Company at a 20% premium to the previous day’s closing price. Following the announcement, Wiggum’s sister boasts about Wiggum’s excellent recommendation and timing to her broker. Regulatory authorities initiate an investigation into suspicious trading in Crack-in-the-Box shares and options preceding the formal announcement of the acquisition. McKenzie receives a letter from regulatory authorities stating that he is the subject of a formal investigation into his professional conduct surrounding the acquisition. He learns from the compliance officer that Wiggum is also under investigation. The compliance officer provides no details and out of respect for Wiggum’s privacy, McKenzie makes no inquiries. The situation remains unchanged and the matter is still pending with regulatory authorities several months later when McKenzie receives his annual Professional Conduct Statement (PCS) from CFA Institute. He reviews the text asking “In the last two years, have you been . . . the subject of . . . any investigation . . . in which your professional conduct, in either a direct or supervisory capacity, was at issue?” 44. Are Excerpts 2 and 3 of McKenziefood’s compliance procedures consistent with CFA Institute Standards of Professional Conduct? A. Yes. B. No, because Excerpt 2 applies only to officers and their direct reports. C. No, because Excerpt 3 does not require employees to achieve public dissemination. 45. According to CFA Institute Standards, must Wiggum obtain permission from her supervisor before accepting the Crack-in-the-Box gift basket? A. No. B. Yes, because the value of the basket is higher than €50. C. Yes, because consent is required by the company’s compliance procedures. 46. When making her initial recommendation to purchase Crack-in-the-Box company shares, Wiggum most likely violates the Standard relating to: A. loyalty to employer. B. integrity of capital markets. C. diligence and reasonable basis. 47. When recommending the purchase of additional Crack-in-the-Box company shares, Wiggum least likely violates the Standard relating to: A. loyalty to employer. B. integrity of capital markets. C. diligence and reasonable basis. 48. Does McKenzie violate any CFA Institute Standards? A. No. B. Yes, because he passes material nonpublic information to Wiggum. C. Yes, because he does not make reasonable efforts to prevent violations of applicable law. 49. According to CFA Standards, McKenzie must disclose to CFA Institute the investigation into: A. his conduct. B. Wiggum’s conduct. C. neither his conduct nor Wiggum’s conduct.
Seriously?
Yes
^Yup … join the fun … you know you want to …
- B 45. A 46. A 47. C 48. C 49. A
B A C B B A
B A A C B B
Jeez i feel rusty B A C A A C
Davis: 6/6 Damil: 3/6 Serious: 4/6 Canuck: 2/4 44. B is correct. Excerpt 2 is inconsistent with CFA Standards because it addresses only officers and only their direct reports, that is, employees whom they directly supervise. Standard IV © states that “any investment professionals who have employees subject to their control or influence” exercise supervisory responsibility. According to The Standards of Practice Handbook, “members and candidates who supervise large numbers of employees cannot personally evaluate the conduct of their employees on a continuing basis. Although these members . . . may delegate supervisory duties, such delegation does not relieve them of their supervisory responsibility.” Excerpt 3 is consistent with CFA Standards. It is based on a quote from the Standards of Practice Handbook stating that “if a member or candidate determines that information is material, the member . . . should make reasonable efforts to achieve public dissemination.” Members are not required to achieve public dissemination and those bound by a duty of loyalty or a duty to preserve confidentiality would refrain from doing so because it would breach their duty. 45. A is correct. According to Standard I(B) Independence and Objectivity, members must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Although it was sent to Wiggum’s office, the gift basket is a private gift from Wiggum’s sister and not likely to affect Wiggum’s professional activities. According to Excerpt 4 of the McKenziefood compliance manual and Standard IV(B) Additional Compensation Arrangements, employees must obtain permission from their employer before accepting gifts, compensation, or other benefits that compete with, or might create a conflict of interest with, the employer’s interests. The gift basket does not create a conflict or compete with the employer’s interests. 46. A is correct. Wiggum most likely violated the Standard relating to loyalty to employer, Standard IV(A). While Wiggum used public information to develop the recommendation to purchase Crack-in-the-Box shares, the company compliance guide states that she should not trade or cause others to trade in securities of companies that may be potential takeover targets. Wiggum’s recommendation caused her sister to trade in Crack-in-the-Box, violating the company’s compliance policies, and possibly harming her employer in its attempt to acquire Crack-in-the-Box. By advising others to invest in a food retailer that she considered an attractive acquisition target, Wiggum deprived her employer of the advantage of her skills and abilities and may have caused harm to her employer. Wiggum could have recommended Crack-in-the-Box to McKenzie rather than her sister as an acquisition target. Although the sister’s trade in Crack-in-the-Box was small, a large trade might have moved the stock price and caused harm to McKenziefood in terms of additional cost. 47. C is correct. Wiggum least likely violated the Standard relating to diligence and reasonable basis. Wiggum initially applied the mosaic theory and had a reasonable basis for the trade as required by Standard V(A). Eventually, she came into possession of material nonpublic information (corporate logo on a document, overheard conversation). According to Standard II(A), once in possession of material nonpublic information, she is prohibited from acting or causing others to act. Wiggum also violated her duty of loyalty to her employer, Standard IV(A), by encouraging others to trade in Crack-in-the-Box and possibly harming McKenziefood’s attempts to acquire the smaller company at an attractive price. 48. C is correct. McKenzie did not adequately fulfill his responsibilities as a supervisor. While he may have delegated supervisory duties to Wiggum’s immediate supervisor, such delegation does not relieve him of his supervisory responsibility. As stated in the Standards of Practice Handbook, members and candidates with supervisory responsibility also must understand what constitutes an adequate compliance system for their firms and make reasonable efforts to see that appropriate compliance procedures are established, documented, communicated to covered personnel, and followed. “Adequate” procedures are those designed to meet industry standards, regulatory requirements, the requirements of the Code and Standards, and the circumstances of the firm. Once compliance procedures are established, the supervisor must also make reasonable efforts to ensure that the procedures are monitored and enforced. According to Standard IV© Responsibilities of Supervisors, adequate compliance procedures require that once a violation is discovered, McKenzie conduct a thorough investigation to determine the scope of wrongdoing. 49. A is correct. As stated on page ix of the Standards of Practice Handbook, “Members and candidates must self disclose on the annual Professional Conduct Statement all matters that question their professional conduct, such as involvement in civil litigation, a criminal investigation, or being the subject of a written complaint.” Standard VII(A) Conduct as Members and Candidates in the CFA Program prohibits conduct that compromises the reputation of the CFA Designation including misrepresenting information on the Professional Conduct Statement. Members are encouraged but not required to report violations of others. At a minimum, McKenzie should remind Wiggum of her duty to report the investigation.
thanks! 2/6, I’m kind of rusty as well