Georgia Jones, CFA, is an analyst for Johnson, Thomas & Co. She also serves as an outside director for Dewey Manufacturing, Inc. In the course of her duties, she begins to believe that Dewey’s income statement for the most recent period may have been misstated. Georgia should do all of the following EXCEPT: A) inform the Securities and Exchange Commission. B) consult with Johnson, Thomas’ legal counsel. C) refrain from voting to approve any of Dewey’s financial statements that include the element in question. D) consult with Dewey Manufacturing’s legal counsel. Jones must pursue her concerns about a possible misstatement, because, if material, it may be misleading to investors. Consistent with Standard I(A), Jones must not knowingly participate or assist in a regulatory violation. As long as her concerns exist, she must not validate any financial statements by voting to approve them. In addition she should seek competent legal counsel both at her own firm and at Dewey Manufacturing. She should not go to regulatory bodies until she has more certainty about the possible misstatement and has received counsel that she should proceed. Jim Kent is an individual investment advisor in San Francisco with 300 clients. Kent uses open-ended mutual funds to implement his investment policy. For most of his clients, Kent has used the Baker fund, a small company growth fund based in Boston, for a portion of their portfolio. As a result he has become very friendly with Keith Dunston, the manager of the fund, whom Kent feels is mainly responsible for Baker’s performance. One day Dunston calls Kent and tells him that he will be leaving the fund in four weeks and moving to San Francisco to work for a different money management company. Dunston is seeking suggestions on housing in the area. Baker has not yet announced Dunston’s departure. Kent immediately finds a fund that is a suitable replacement for the Baker fund, and over the next two days he calls his 30 clients with the largest dollar investments in the funds and tells them he feels they should switch their holdings. Baker feels the remaining clients’ positions are small enough to wait for their annual review to switch funds. Kent has: A) violated the Standards by not dealing fairly with clients but has not violated the Standards regarding material nonpublic information. B) violated the Standards by not dealing fairly with clients and regarding material nonpublic information. C) violated the Standards regarding nonpublic information but has not violated the Standards in failing to deal fairly with clients. D) not violated the Standards.
B- he didn’t treat all clients fairly and he used nonpublic information.
A?
B
I would think A for the Kent question. He should not have moved only his top 30 clients over. He should have moved everyone, so he did not treat his clients fairly. MNP Information does not figure here. CP
A - it’s an open ended fund, so it’s not material - the manager moving shouldn’t be expected to change the price, as the price is not governed by supply and demand, but by NAV. He probably should have done it for all his clients, irrespective of size though. I think!
i think it’s B. A manager leaving the fund is material.
How is it material to the price of the fund?
Kent question: ID #39247 Kent must treat all clients fairly in acting on the information, regardless of the size of the investment. The information concerning the fund manager’s departure is not material nonpublic information because its release would have no effect on individual security prices.
B) violated the Standards by not dealing fairly with clients and regarding material nonpublic information.
That’s what the question says: “As a result he has become very friendly with Keith Dunston, the manager of the fund, whom Kent feels is mainly responsible for Baker’s performance” In hedge fund industry, if a manager leaves, that would be material information. I assume it’s the same in mutual fund industry. It might be material because without the manager, the fund’s returns might potentially become lower because of worse stock selection, etc.
The answer is A guys… Manager is NOT material to price of the security. Kent question: ID #39247 Kent must treat all clients fairly in acting on the information, regardless of the size of the investment. The information concerning the fund manager’s departure is not material nonpublic information because its release would have no effect on individual security prices.
The correct answer was A. (honestly, this is the correct answer) Kent must treat all clients fairly in acting on the information, regardless of the size of the investment. The information concerning the fund manager’s departure is not material nonpublic information because its release would have no effect on individual security prices.
>In hedge fund industry, if a manager leaves, that would be material information. I >assume it’s the same in mutual fund industry. You misunderstand the meaning of “material” in this context. Material information is information that would be expected to alter the price of the security if it were known - for instance an impending profits warning, CEO leaving, bid happening etc. It’s material in the sense that you’d sell the fund, but it’s not material to the price of the asset now because its open ended. If this was a closed ended fund, it would be material, because it would reasonable be expected to change the price. Most hedge funds are open ended so it wouldn’t be material (in this sense) in either case.
nice clarification, christmaths.
I think the question just boils down to Open-Ended and Closed-Ended Hedge-Funds. As per Wiki, http://en.wikipedia.org/wiki/Open-end_fund Most open-end funds are actively managed, meaning that a portfolio manager picks the securities to buy. So it’s the Fund Managers capability thats causing the good performance. He leaving the fund, might cause a material impact. Ethics Sucks… - Dinesh S
Thanks maratikus. dinesh - no, as cpk123 has posted, the answer is A: >Kent question: ID #39247 Kent must treat all clients fairly in acting on the information, regardless of the size of the investment. The information concerning the fund manager’s departure is not material nonpublic information because its release would have no effect on individual security prices. /> IT’S NOT MATERIAL TO THE PRICE OF THE FUND. The test you need to apply is “if this information was known to the market, would it cause a change in the price of the asset?” If the answer is yes, you have material non-public information. If the answer is no, you don’t. In this case, it wouldn’t change the price, because it’s open-ended.