Hi All, 2 Questions on Ethic which I think answer was probably ambiguous. Appreciate anyone who could help. I’m pretty sure these questions will come up again in the upcoming exam. 1.) Geno Hanson is a portfolio manager at Bigtime Investments. James Ward, an old friend of Hanson’s, is an executive recruiter in the same city. Ward refers to Hanson’s firm any high level executives that Hanson places locally. In return, Hanson allows Ward to play a round of golf at Hanson’s country club for each new client referred. According to Standard VI © Referral Fees, Hanson is required to disclose the arrangement with Ward to: A.) His employers, all clients and all prospective clients. ----> Majority would choose this B.) Prospective clients referred by Ward C.) His employer and to prospective clients referred by Ward. —> Correct answer The arguments indicated in the answer was only disclose to employees and affected clients according to referral fees standard. But dont usually they have to disclose it to all the clients? How do we differentiate which one to disclose to all clients and which one do we dont disclose to all the clients. 2.) Nicholas Hart, CFA, is a retails broker for a national financial instituition and has a client base composed mainly of high net worth individuals. During the past year, Hart’s wife was extremely ill and hospitalized for several months. Hart was financially responsible for her mounting medical bills and tried to pay them as best as he could. Despite his best efforts to meet his obligations, Hart was forced to declare personal bankruptcy, but did not disclose this to any of his clients. According to CFA Institutes, Hart: A.) is not in violation of any Standard —>Correct Answer B.) is in violation of Standard V (B) Communication with Clients and Prospective Clients for not disclosing his bankruptcy to his clients —> Most people would answer this C.) is in violation of Standard I (D) Misconduct for personal misconduct that reflects adversely on his professional reputation. Again, isnt bankruptcy a major thing that he has to disclose to his clients? Are bankruptcy an “exception”, therefore no need to disclose? Anyone who could help would be appreciated.
C.) His employer and to prospective clients referred by Ward. —> Correct answer All parties INVOLVED must be notified. All clients could give a toot. A.) is not in violation of any Standard —>Correct Answer Bankruptcy in itself is not a violation. Bankruptcy by hiding assets is a violation.
Agree with Ditchdigger on Q1. As to Q2 - the key is that this is a *personal* bankruptcy. There is no sign that Hart’s personal finances are tied to his client’s portfolios in any way (that would’ve been very bad). Bankruptcy is not considered “misconduct” if there is no fraud or any illegal activities involved. Falling on bad times isn’t misconduct.
For Q2 It is good to see that CFAI is doing the right thing by omitting personal bankruptcy, especially for health problems. With our medical system, health problems are the no.1 cause of bankruptcy and have absolutely nothing to do with an individuals ability to handle finances, his or others. Any organization that used cancer to measure ones ability to make financial decisions is not one that I would belong to.
#1 makes sense, existing clients aren’t affected by this agreement. #2 is a massive grey area. If that same situation somehow conflicted with work in anyway, including performance, it would be considered a violation. Tricky tricky.
#1 is fuzzy. You are supposed to tell *all* clients if you go by whats in the book - it makes no distinction between clients affected and those not affected. However, common sense would dictate there would be no reason to tell clients who have nothing to do with this situation about the arrangement. #2, I agree with the reasons stated above. It’s a little fuzzy but makes sense.
#1 is confusing, book says to inform all existing and Prospective clients, Question does not says to inform all existing clients who are affected by this, so I would assume that one should inform all existing and Prospective clients I would have marked A on the exam if I did not read this thread. bummer