#1. Mohawk Asset Management buys on-the-run Treasuries at auction for its standard fee accounts. When these move off-the-run, they are placed in performance-based accounts via in-house cross-trades at prevailing market prices, and replaced in the standard fee accounts with new on-the-run issues. Which standard is violated, if any? A) The Standard concerning Independence and Objectivity. B) The Standard concerning Fiduciary Duty. C) The Standard concerning Priority of Transactions. D) No Standard is violated. #2. Chuck Thomas is the trustee of a trust of which Jill Wyatt is the main beneficiary. Wyatt’s husband is the president of a company. In emptying the recycling bin at home, Wyatt finds some papers that lead her to believe that her husbands company will make a tender offer to acquire another firm. Wyatt takes the information to Thomas, who uses it to purchase shares of the company for the trust, but does not further disclose the information. Thomas has: A) violated the Standards concerning loyalty, prudence, and care. B) violated the Standards concerning preservation of confidentiality. C) violated the Standards concerning material nonpublic information. D) not violated any Standards.
B and the second is tough. I’ll go with A.
b and c
i was thinking D, C.
#1. B #2. C
can someone say why they think #1 is B? is it because its churning?
I’ll go B and C as well.
B and C as well.
b and c
to be honest, i used process of elimination. i’m not even sure how what they are doing would benefit anyone, specifically, the client. as a fiduciary, your job is to look after your client’s interests. if i can’t see how the transactions benefit the client, and the fiduciary is the one transacting them, i got to think it’s violation of fiduciary duty. ofcourse, i’m probably wrong, but that’s what i was thinking.
I was thinking that since off-the-run treasuries usually have a higher yield (less liquidity than on-the-run), by only purchasing them in performance based accounts, you are trying to increase your performance based fee. Your standard fee accounts should still be able to hold off-the-run treasuries. Although I have no idea if that is really what they are looking for.
Most of you did pretty well on both the questions. B and C are the correct answers. #1. The correct answer was B) The Standard concerning Fiduciary Duty. In addition to being a violation of the Standard concerning Fair Dealing, this constitutes a violation of Mohawks Fiduciary Duty. Why? Because the on-the-run issues are benchmarks and trade at lower yields than the off-the-run issues. In essence, the off-the-run issues have marginally higher returns, and this will boost the returns in the performance-based fee accounts. Mohawk is allocating trades based upon compensation arrangements, and this is not permissible under the Code and Standards. #2. The correct answer was C) violated the Standards concerning material nonpublic information. Thomas cannot act or cause others to act on material nonpublic information. **** I have a slight confusion regarding #2. The wording of the question is- Wyatt finds some papers that *lead her to believe* that her husbands company will make a tender offer to acquire another firm. How do we know that it IS actually material non public information? It might not be so also…it’s just her “belief”. Isn’t this similar to that situation where two CEOs are talking and an analyst sees them (and might not have heard word to word) and believes that the information is material and non public?
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the first two ethics questions i got right today
I think the difference Ruhi is that they tell us she found it by emptying the recylcle bin. “How do we know that it IS actually material non public information? It might not be so also…it’s just her “belief”. Isn’t this similar to that situation where two CEOs are talking and an analyst sees them (and might not have heard word to word) and believes that the information is material and non public?”
I don’t get number 2. I thought it was D. In order to get that question right you have to read too much into the question. It assumes that Wayatt told Thomas that she found the information in the trash bin and that it is nonpublic information. Assuming it is publc information, if Wyatt presents the information to Thomas as if she had a tip and he acts on it, the answer would be a violation of the Standards concerning loyalty, prudence, and care (V). However, if he goes further and does his own research (which we assume he doesn’t) to find out that it is indeed a good buy then he would not be in violation.
Red, I agree with you. Even I thought that it is D. The question is a little unclear and expects us to assume certain things, which I’m not very comfortable doing.
Yep, I sure hope (and quite frankly I think it’s the case) that CFAI is a bit clearer than that on exam-day.