If a portfolio manager purchases a large cap stock for a small cap fund, isn’t that a violation of suitability? Even if the other characteristics of the stock are appropriate, presumably investors buy the fund for exposure to small cap stocks only. I’d think this would be a violation of Suitability but just did a mock q that says you have to consider the investment in the context of the entire portfolio. I understand the portfolio aspect but my point still stands, I think
If the IPS does not explicitly state no large cap stocks, then yes.
Otherwise, small cap stocks are selected as a big part of a portfolio based on investment returns and risk objectives, which are usually large.
If a big cap stock fits the criteria, then why not?
I know the question you’re talking about too well - I’ve (literally) had a nightmare about it.
It’s the one where the portfolio is small cap & value-oriented, and the PM buys an overpriced large cap & growth-focused holding. When the client asks him “hey what the hell are you doing?” he responds “oh don’t worry, it looks odd but I’ve considered it in the context of the portfolio and I’ve decided it fits”. For some reason that’s not a violation.
I distinctly remember my thought process - “oh, that’s obviously an unsuitable investment, he’s wrong”, and then seeing the answer…
I have to decide when to blindly trust the statements in the vignettes and when to question them. It’s not easy.
haha, good to hear we’re in the same boat wecfanow. While we’re on that vignette, an analyst who shares a conversation he/she had with the CFO of a company (and these growth opps will be part of a future research report) seems like he/she could be violating the standards, whether there was insider information or whether it’s MNPI because her report could move the stock in the future.
Oh! Yes, that too!
“Yeah John, before we go into this meeting – I just spoke with the CFO of the company, he mentioned they have some great growth opportunities lined up. But keep it on the hush-hush, I haven’t published my research report with that info yet.”
Apparently that does not constitute MNPI (unambiguous impact on the stock price from a reliable source? nah) What bugs me the most is that the answer doesn’t even mention why it’s not a problem!
Where’s that unethical ethics thread…
edit: I know I’m kind of just venting frustration - but if anyone legitimately can explain this vignette, that would be wonderful. It’s item sets like these that make me want to bring some dice to the exam.
Which mock was it in specifically?
Online CFAI questions, not the mock. First or second of the 6 or so ethics vignettes.
I hate these questions where I read the solution and I’m not sure if I’ve learned anything. You may recall a PM mock q about what’s least consistent with Misrepresentation. The correct answer was the org chart, which is fine and understandable. But that answer implies that it’s ok for a firm to guarantee a minimum investment return. Even if that’s underwritten by an investment grade insurance co, that doesn’t mean it’s actually guaranteed.
I’m just venting at this point too.
I think if you re-read the excerpt the analyst did NOT convey nonpublic information. He only explained the “RESEARCH PROCESS” to ‘John’. A research process isn’t considered nonpublic information.
Well, the direct quote is as follows:
“Several minutes prior to the start of the meeting, Robinson introduces Carlyle to one of his existing clients. Carlyle reviews with the client a recent conversation she had with the Paladin CFO regarding new growth opportunities, which she plans to include in her next research report”
They talk about the research process after , in the meeting. I understand that part is okay. But this is before the meeting - and I’m not sure why this is okay.
Nevermind - I think I figured out what I was missing. This is an existing client that Carlyle is meeting - the question is asking about potential clients, and therefore this conversation isn’t included. Tricky tricky…