Ethics Q from Allen Res

…Janet Long is a portfolio manager for Harbour Securities and reads Howard’s report after it has been publicly disseminated. Janet decides to sell half of all of her clients’ holdings of Martin International Foods and allocates trades according to the size of her clients’ portfolios. … Question: In regard to Janet’s reduction of exposure to Martin Foods International for all of her client’s portfolios that hold the security she is: a) in violation of Suitability. b) not in violation of any standard. c) in violation of Loyalty, Prudence, and Care. d) in violation of Misrepresentation.

b) not in violation of any standard I cant see any reason why this is a violation

A) The Public report was in general but it may or may not suit her client portfolios.

^^ditto (**edit RCourtney) seems obvious enough. that said, whenever you see a question posted in here you have to really wonder if it was an easy straightforward q that the poster got right?!? …wait for it…

AnishCandy, How do you know that its not suitible - you have just made assumptions about the contents of the report and her clients ?? Or is there more information that I havent seen ?!

I don’t see any violation either.

if she allocates trades according to the portfolio size, she’s selling the largest clients’ stocks first, moving the market downwards. that hurts the smaller clients coz they get lower prices for their stock. so i’d go with C, she’s supposed to be neutral when choosing how to allocate trades.

kundik1, your example doesn’t apply. That would be a violation of Fair Dealing with clients.

@ RCourtney: I chose A because I did not make any assumptions!! If it didn’t mention that Janet re-considered the risk/return measures for ‘ALL’ of her client portfolios then she is in violation. Practically it’s just not right that one report can be good for “ALL” the client portfolios. I could be wrong. Waiting for the answer.

@anish: I don’t believe there is a suitability issue here - a crappy stock is a crappy stock regardless of individual investor circumstances. @kundik1: agree with maratikus. This falls under Fair Dealing.

anishcandy wins a prize. Correct answer: A.) in violation of Suitability. Rationale: There is no indication that Janet reviewed the investment objectives of each client prior to selling half of their position in Martin Foods International. It is quite hard to believe that all of her clients’ investment objectives would be such that each warranted a reduction of exactly half of their holdings in Martin Foods International. If the sentence had read that Janet reduced her clients’ exposure of Martin Foods International in accordance with each client’s IPS or investment objectives, than there would have not been a violation. ARGHH. It simply states “Janet Long is a portfolio manager…” Do you have to assume that she manages money for both little old ladies and 30 year old skydivers? Can’t you assume that if the stock was suitable in the first place that new research resulting in a change in earnings outlook is enough to imply that selling it is suitable? Or is it to be assumed that taxes or dividend yield could still make it a suitable hold and therefore unsuitable to sell for some? I guess not. If it doesn’t say she checked for suitability then she didn’t check. I hate when I get one wrong because I tried to over think it.

@ lola: The question is regarding a company that has operations internationally,…“Martin International Foods.” A US Investor at this time wouldn’t want to hold stocks in an Indian firm at this time just because his return would be lot less, where as, I would prefer an Indian stock just because I am an Indian and I’ll be able to use the return (in Rupees) in India. May be I am not clear enough here. Pardon that.


I have bad experience from level one with these type of questions. It’s hard to hold back the knowledge that we all have otherwise, and just stick to few lines that are given to us to answer a question.

good job, anish!! Just when I thought I had ethics down (if that’s even possible), lol

good question!

Thanks. I still need to start ethics though =)

With Ethics, weirdly enough I find that the more I read it and overthink it, the more questions I get wrong. Go figure.

I thought this q was worth a look. I agree after reading the explanation it make plain sense. That said, let me express my confusion a bit… The answer stated: “It is quite hard to believe that all of her clients’ investment objectives would be such that each warranted a reduction of exactly half of their holdings in Martin Foods International.” Fair enough. Is it “hard” though? I mean if you tell me she is a portfolio manager you are saying ummm, she manages a portfolio… I start thinking ok a portfolio manager thats like a LC growth manager, global equity, small value. Now a manager has a prospectus or an IPS that is specific to that objective and risk. And if the manager’s recommendation is sell half an existing holding, yeah they sell it. If you tell me she is a portfolio manager… I am not thinking hey this is some smith barney rep that manages money for 300 individual clients each with their own IPS and unique tax and income situations. Silly mistake but still that was what that triggered in my mind when I read that q. …was this question using a loose definition of a portfolio manager or is that term just thrown around?

I hear you Slouiscar. That term was just there. I think your thinking or your definition of “portfolio manager” for this question would have been valid if they had mentioned an Investment company!! Since, only one person was mentioned it takes a whole lot difference perspective from my view point. And, the catch was the word ‘all’, I think. I always pause for 2 seconds whenever that word is mentioned. Got so many questions wrong last year just because of this word =(