Midland Investment Banking issues a prospectus for its open-end Midland Gold Fund. In the prospectus, the investment policy is disclosed as, “We will maintain an investment posture of 50% or more in gold stocks and/or bullion, depending upon market conditions.” This policy is maintained until the price of gold falls by 20%, leaving the fund 40% invested in gold stocks and bullion. Management decides that since the allocation was affected by market conditions, no action to either change the investment policy or to rebalance the portfolio is required. This decision is: A) under the circumstances, not in violation of the Code and Standards. B) in violation of the Standard concerning disclosure of investment processes. C) in violation of the Standard concerning fiduciary duties to clients. D) in violation of the Standard concerning prohibition against misrepresentation. B or D my friends


I’ll go with D

I want C!!

I’ll go with D as well.

I wanted C, but I’ll guess B so we have a hung jury.

I’ll go with C.

I like C. Isnt misreprentation when you promise performance or misrepresent what your firm is capable of such as “I guarentee you will make 50% return this year” The problem with B is that they already disclosed their investment process. They are just not following it so I dont know if disclosure itself is an issue.


let’s jazz this up… how about A?? I mean the policy says, “depending upon market conditions” - doesn’t that imply the possibility of NOT maintaining the stated 50%?? hence no violation?

Mumukada just made me change my answer to A.

The mandate say 50% or more. That means that 50% is a floor. They may increase there exposure to gold up to 70% if conditions are favorable, but not down below 50%. That is my take anyway.

hmm…true that… dunno what i’d change my answer to though!

I would guess C.

C - because the investment manager should stick to the mandate of the fund… otherwise it is a violation of fiduciary duty.

I would say A…I seem to remember it is not a violation to veer off track for short periods of time if the intent is to stay with the stated objective

rekooh, “Management decides that since the allocation was affected by market conditions, no action to either change the investment policy or to rebalance the portfolio is required” They aren’t planning on correcting it.

D? - The management misrepresented the IPS statement. It could be 50% or more depending on the market conditions. But If it goes less than 50% then they should have rebalanced it as an fiduciary duty to the client. Instead they misrepresented the unclear statement and decided to ignore the 20% bullion investment by not bringing it back to 50% levels. What a Bull-S question.

And the answer is B. Standard V(B) Communication with Clients and Prospective Clients requires members to disclose “general principles and investment processes” to clients and to “promptly disclose any changes that might significantly affect those processes.” Under the Standard, Midland management is required either to: rebalance the portfolio in a timely manner so as to maintain compliance with the investment policy or communicate an intended change in that policy well in advance of the actual change so as to afford investors time to act prior to the change in investment policy taking place. Midland is in violation of the Standard

I am with dinesh if we have to guess B or D, I would pick D. I would have got this wrong for sure though as I would have picked C. Edit: pink just posted the answer. I missed it twice!