Mid-afternoon snack (ethics)

I’ll post answers in 1.5 hours. Good luck. Q’Bardius Umumakumbu Case Scenario Q’Bardius Umumakumbu, CFA, is a portfolio manager at Foxtrot Securities with discretionary authority over all of his accounts. One of his clients, Randy Marsh, Chief Executive Officer (CEO) of Benedetti Pipefitting, invites Umumakumbu to lunch. At the restaurant, the CEO reveals the reason for the lunch. “As you know Overlord & Sons has made an unsolicited cash offer for all outstanding shares of Benedetti Pipefitting. Overlord has made it clear that I will not be CEO if they are successful. I can assure you that our shareholders will be better off in the long-term if I’m in charge.” Marsh then shows Umumakumbu his projections for a new plan designed to boost both sales and operating margins. “I know that your firm is the trustee for our firm’s Employee Stock Ownership Plan (ESOP). I hope that the trustee will vote in the best interest of our shareholders—and that would be a vote against the takeover offer.” After looking through Marsh’s business plans, Umumakumbu says, “This plan looks good. I will recommend that the trustee vote against the offer.” Marsh responds, “I remember my friend Flintheart Glomgold telling me that the Glomgold Family’s Trust is managed by your firm. Perhaps the trustee could vote those shares against the acquisition as well. Flintheart Glomgold is a close friend. I am sure that he would agree.” Umumakumbu responds “The Family Trust is no longer managed by Foxtrot.” He adds “I understand that the Trust is very conservatively managed. I doubt it that it would have holdings in Benedetti Pipefitting.” Umumakumbu does not mention that although the Family Trust has changed investment managers, Flintheart Glomgold remains an important client at Foxtrot with significant personal holdings in Benedetti. After lunch, Umumakumbu meets with Herlanda Chimichanga, CFA, trustee of the Benedetti ESOP. He shows her Marsh’s plan for improvements. “I think the plan is a good one and Marsh is one of the firm’s most profitable accounts. We don’t want to lose him.” Chimichanga agrees to analyze the plan. After thoroughly analyzing both the plan and the takeover offer, Chimichanga concludes that the takeover offer is best for the shareholders in the ESOP and votes the plan’s shares in favor of the takeover offer. A few months later the acquisition of Benedetti by Overlord & Sons is completed. Marsh again meets Umumakumbu for lunch. “I received a generous severance package and I’m counting on you to manage my money well for me. While we are on the subject, I would like to be more aggressive with my portfolio. With my severance package, I can take additional risk.” Umumakumbu and Marsh discuss his current financial situation, risk tolerance, and financial objectives throughout lunch. Umumakumbu agrees to adjust Marsh’s investment policy statement (IPS) to reflect his greater appetite for risk and his increased wealth. Back at the office, Umumakumbu realizes that with the severance package, Marsh is now his wealthiest client. He also realizes that Marsh’s increased appetite for risk gives him a risk profile similar to that of another client. He pulls a copy of the other client’s investment policy statement (IPS) and reviews it quickly before realizing that the two clients have very different tax situations. Umumakumbu quickly revises Marsh’s IPS to reflect the changes in his financial situation. He uses the other client’s IPS as a reference when revising the section relating to Marsh’s risk tolerance. He then files the revised IPS in Marsh’s file. The following week, an Foxtrot analyst issues a buy recommendation on a small technology company with a promising software product. Umumakumbu reads the report carefully and concludes it would be suitable under Marsh’s new IPS. Umumakumbu places an order for 10,000 shares in Marsh’s account and then calls Marsh to discuss the stock in more detail. Umumakumbu does not purchase the stock for any other clients. Although the one client has the same risk profile as Marsh, that client does not have cash available in his account and Umumakumbu determines that selling existing holdings does not make sense. In a subsequent telephone conversation, Marsh expresses his lingering anger over the takeover. “You didn’t do enough to persuade Foxtrot’s clients to vote against the takeover. Maybe I should look for an investment manager who is more loyal.” Umumakumbu tries to calm Marsh but is unsuccessful. In an attempt to change the topic of conversation, Umumakumbu states, “The firm was just notified of our allocation of a long-awaited IPO. Your account should receive a significant allocation. I would hate to see you lose out by moving your account.” Marsh seems mollified and concludes the phone call, “I look forward to a long-term relationship with you and your firm.” Foxtrot distributes a copy of its firm policies regarding IPO allocations to all clients annually. According to the policy, Foxtrot allocates IPO shares to each investment manager and each manager has responsibility for allocating shares to accounts for which the IPO is suitable. The statement also discloses that Foxtrot offers different levels of service for different fees. After carefully reviewing the proposed IPO and his client accounts, Umumakumbu determines that the IPO is suitable for 11 clients including Marsh. Because the deal is oversubscribed, he receives only half of the shares he expected. Umumakumbu directs 50% of his allocation to Marsh’s account and divides the remaining 50% between the other ten accounts, each with a value equal to half of Marsh’s account. 38. When discussing the Glomgold Family Trust, does Umumakumbu violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, relating to duties to clients. C. Yes, relating to misrepresentation. 39. When deciding how to vote the ESOP shares, does Chimichanga violate any CFA Institute Standards? A. No. B. Yes, relating to loyalty, prudence, and care. C. Yes, relating to diligence and reasonable basis. 40. The Standard least likely to provide guidance for Umumakumbu when working with the clients’ investment policy statements would be the Standard relating to: A. suitability. B. fair dealing. C. loyalty, prudence, and care. 41. Does Umumakumbu violate any CFA Institute Standards when he places the buy order for shares in the technology company for Marsh’s account? A. No. B. Yes, relating to fair dealing. C. Yes, relating to diligence and reasonable basis. 42. Is Foxtrot’s policy with respect to IPO allocations consistent with required and recommended CFA Institute Standards? A. Yes. B. No, because the IPO policy disadvantages certain clients. C. No, because the different levels of service disadvantage certain clients. 43. Does Umumakumbu violate any CFA Institute Standards in his allocation of IPO shares to Marsh’s account? A. No. B. Yes, because the IPO is not suitable for Marsh. C. Yes, because he does not treat all his clients fairly.

No takers this afternoon? 38. B is correct. Umumakumbu has a duty to preserve the confidentiality of current, former, and prospective clients. Umumakumbu violates Standard III(E) Preservation of Confidentiality when he reveals that the firm managed the assets of Glomgold Family Trust. 39. A is correct. Chimichanga conducts an independent and careful analysis of the plans’ benefits for shareholders as well as the takeover offer. In doing so she puts the client’s interests ahead of the firm’s. Chimichanga’s actions are consistent with Standard III(A) Loyalty, Prudence, and Care; Standard V(A) Diligence and Reasonable Basis; and Standard III(B) Fair Dealing. 40. B is correct. Umumakumbu is not likely to receive appropriate guidance on developing or revising investment policy statements from the Standard relating to Fair Dealing. Standard III(B) provides members with guidance on treating clients fairly when making investment recommendations, providing investment analysis, or taking investment action. Umumakumbu could obtain guidance from the Standards relating to Loyalty, Prudence, and Care and Suitability. Both Standard III(A) and © provide guidance for members in determining client objectives and the suitability of investments. 41. A is correct. Umumakumbu determines that the other client does not have the cash available in his account and selling existing holdings does not make sense. Moreover, Umumakumbu is careful to consider the investment’s suitability for Marsh’s account. Umumakumbu’s actions are consistent with CFA Institute Standards III(A) Loyalty, Prudence, and Care and III(B) Fair Dealing. 42. B is correct. The firm violates Standard III(B) Fair Dealing. Under Foxtrot’s policy, some clients for whom an IPO is suitable may not receive their pro-rata share of the issue. CFA Standards recommend that firms allocate IPOs on a pro-rata basis to clients, not to portfolio managers. 43. C is correct. Umumakumbu violates Standard III(B) Fair Dealing by over-allocating shares to Marsh. Umumakumbu carefully reviews both the proposed IPO and his client accounts to determine suitability. He fails to allocate the IPO shares on a pro-rata basis to all clients for whom the investment is suitable.

ahhh … you jumped the gun on me. I was just working on it now. Premature cjones!!! :wink:

BCBBBC 4/6, need to improve… Thanks for posting

5/6 this time …

A A B A B C 5/6, not bad.