Prohibition Against Misrepresentation

Brad South, CFA, has recently started his own investment management firm, South & Company, specializing in small capitalization stocks. South had been a small cap stock portfolio manager at a large investment firm for the past 12 years, where he had averaged a 16% compound annual rate of return on his portfolios. The following statements are included in South’s marketing materials. Identify which statement would most likely be in violation of Standard IV (B.6) – Prohibition Against Misrepresentation: a. I have 12 years experience finding attractive small cap investment opportunities. b. Compare our returns: 16% annually vs current CD rates of 4.1% annually. c. Small cap stocks often offer better returns than large cap stocks. d. CFA charterholders have passed a rigorous set of exams covering a broad array of investment knowledge.



D looks to be a statement of fact to me. He is not claiming superior knowledge as a result of that statement (or at least I do not see it).

D . why embellish it with ‘rigorous’ and ‘broad’ ?

I would say B…

A and D are fine i think… B seems to violate the standard… mind you that C doesn;lt sound that good. I’d stick with B as the violator.

B is factual, he has 12 years on small cap and his fund did return 16% compounded. D seems fall into one of the category: “don’t exaggerate the meaning of CFA”. If he say I am CFA charter holder since 200X, it maybe perfectly fine. My 2 cents Steve

D seems to be a fact to me. B should be the violation

why is B a violation?.He is not guaranteeing future returns of 16%.

Sorry, I read it too fast. I think now B is violating, since he started his company recently can’t use 16% as his return. 16% was when he manage funds for previous job. B

Not my area of expertise but I think it’s B. let me paraphrase that choice B. Compare some apples and oranges: 16% in the past with no guarantee that I can continue it going forward on equity investments with a relatively high level of risk, and rates you can lock in for a specified number of days on highly rated fixed income bank investments

B because 16% returns wee in his previous company. By this statement he is misrepresenting the capability of his new firm

B is a violation. He AVERAGED 16% return, therefore not in all years the return was 16% as he suggested in the marketing materials.

IT’S B It is misleading to compare Small Cap returns to CD rates, given the significant difference in risk/return profiles, especially the risk component. A is fact C is obfuscated (“often”) enough to be OK D is straight from the AIMR web site as well as the standards of practice handbook.

B - misleading client that 16% was from current co. also that risk profile is the same of CDs

B Simply because the 16% was achieved annualized at his previous firm and he shouldn’t be comparing it to current CD rates which also are not the appropriate benchmark. They could have probably made us think harder if they compared it to say the Russell 2000 index.