CFA INSTITUTE

ETHICS IN PRACTICE:

Billing and Fees - Case 6

CASE STUDY

Murdoch is founder, president, and head portfolio manager of IOM Capital Management (IOM), an investment adviser providing investment advice to four affiliated hedge funds as well as separate client accounts. IOM accumulates and uses soft dollar credits primarily at a single broker/dealer through equity and options trading for the IOM funds and individual client accounts. IOM discloses allowable uses of soft dollars through its regulatory filings and offering memoranda for IOM funds. The disclosures provide that soft dollars may be used for "overhead expenses," including "office services, equipment, and supplies." IOM rents a portion of Murdoch's personal residence to conduct its business. IOM pays $6,000 in rent to a company Murdoch owns, which, in turn, pays $5,855 to a local bank to cover the monthly mortgage payment for the property. Eventually, IOM and Murdoch request that the broker use soft dollars to make the rental payment. Once the broker starts paying rent using soft dollars, Murdoch raises the rent first to $10,000 per month and then to $15,000 per month. Murdoch's actions are

1. appropriate because rental payment on office space is an acceptable use of soft dollars.
2. appropriate because IOM disclosed that it would use soft dollars for overhead expenses.
3. appropriate because Murdoch may charge (and increase) rental rates for use of his property to the extent that the market will bear.
4. inappropriate.
5. none of the above.

CFA INSTITUTE

ETHICS IN PRACTICE: Client Advice - Case 4

CASE STUDY

Duri is a registered account representative providing financial advice to retail clients. She is also principal partner of Tabak Accountants. Duri assists a number of advisory clients who want to

move their retirement assets from existing superannuation accounts to establish self-managed superannuation funds (SMSFs) that have the goal of investing in direct residential property. When clients express interest in these types of SMSFs, Duri defers to their reasons for wanting to invest in direct property and presumes that they have the time and expertise to manage their superannuation affairs. She reclassifies their investment objectives as "growth" to match their new investment strategy. Duri charges her clients for establishing the SMSF and recommends that her firm, Tabak Accountants, prepare their annual accounts and tax returns. Duri's actions are

1. acceptable because she is following the directives of her clients.
2. acceptable if the SMSFs invested in direct residential property provide superior returns to her client's prior investments.
3. acceptable if the services provided by Tabak Accountants are reasonable and the costs of services are competitive.
4. unacceptable.
5. none of the above.

CFA INSTITUTE

ETHICS IN PRACTICE:

Client Relationships - Case 5

CASE STUDY

Kinner is an investment adviser with a number of elderly high-net-worth clients. One of her clients, Abbott, an 87-year-old globally well-known photographer, has been Kinner's client for more than 30 years. She visits Kinner's offices regularly to discuss her investment portfolio. Over the past several visits, Kinner has noticed that Abbott has increasing difficulty communicating and seems to be confused about concepts and ideas that she formerly was familiar with and able to understand. Abbott also appears significantly physically diminished. Lately, she has been accompanied by her grandson who describes himself as Abbott's caregiver.

During her most recent visit, Abbott asks Kinner to move a portion of her assets into some speculative investments and to withdraw a significant amount of funds so that she can invest in a bakery that her grandson is opening. Abbott assures Kinner that these are her wishes, stating, "I have talked about these changes with my grandson, and we are sure these are good investments." Kinner is alarmed by Abbott's new investment directives, believes Abbott's physical and mental health may be declining, and suspects Abbott has been improperly influenced by her grandson, who is taking advantage of Abbott's wealth. Kinner does not make the changes to Abbott's portfolio that Abbott requested. Instead, Kinner reports her concerns to a government agency charged with administering assistance to the elderly and infirm, as permitted by applicable law. Kinner's actions are

1. inappropriate because Kinner should have contacted a close family member or trusted professional, such as Abbott's attorney or accountant, about her concerns regarding Abbott's apparent decline.
2. appropriate because Kinner is working to protect Abbott's interests and is following applicable law.
3. inappropriate because Kinner is violating her duty of confidentiality under the CFA Institute Standards of Professional Conduct by discussing Abbott's investments with the government agency.
4. appropriate if Kinner speaks separately with Abbott's grandson in his role as Abbott's caregiver to advise against changing the investment directives.

CFA INSTITUTE

ETHICS IN PRACTICE:

Investments and Trading - Case 7

CASE STUDY

Zhang is an investment adviser offering clients fixed-income investment advice through numerous separately managed accounts and two pooled investment vehicles. She charges clients an advisory fee for assets under management (AUM) and does not charge clients based on trading activity. Zhang generally invests her fixed-income portfolios in nonrated, tax-exempt, and thinly traded municipal bonds that are issued to finance the construction of senior living facilities, schools, and prisons.

Zhang often holds a controlling institutional position in the bonds held across client accounts. Zhang frequently arranges for authorized cross-trading in these securities to facilitate portfolio management and provide liquidity for terminating clients. By effecting cross trades among clients, rather than trading in the secondary market, Zhang provides selling clients with liquidity in an otherwise illiquid market while maintaining a controlling position in the securities.

At the end of each month, Zhang prices the holdings in each client's portfolio by obtaining bid-side evaluation quotes (bid price) from the various broker/dealers who underwrote each of the bonds. Frequently, Zhang challenges the prices quoted by the broker/dealers as too low and, in certain instances, the broker/dealers revise their quotes to Zhang's proposed alternative price. When arranging cross trades, Zhang selects broker/dealers who are willing to execute cross trades at favorable, predetermined spreads that are narrower than the average bid-ask spread of trades in the same or similar securities executed in the secondary market. The trades are executed at the bid price obtained for month-end valuation purposes. Zhang's actions are

1. inappropriate.
2. appropriate because Zhang charges an advisory fee for AUM and thus does not benefit from the cross trades.
3. appropriate because Zhang is valuing thinly traded securities in her clients' portfolios by using price quotes from the underwriting broker/dealers who are familiar with the securities.
4. appropriate because Zhang seeks best execution by using broker/dealers who are willing to execute the cross trades at favorable bid-ask spreads that are narrower than spreads in the secondary market.

CFA INSTITUTE

ETHICS IN PRACTICE:

Performance Reporting - Case 3

CASE STUDY

Jergens is the portfolio manager for the Volare Investment Management (VIM) fund, a registered collective investment scheme (CIS) organized under the laws of South Africa. VIM's 2018 regulatory disclosure and marketing material for the fund, as produced by Jergens, presents annual investment performance data for the 2010-16 period that is accurate and calculated correctly. The performance history is that of a composite of separate accounts that followed the strategy used by the VIM

fund prior to the assets being moved over to the CIS environment in 2017. In presenting the fund's performance history, Jergens' actions are

A. appropriate because the investment performance is accurate.

B. inappropriate because the investment performance is misleading.

C. appropriate as long as the performance calculations are net of fees.

D. inappropriate if Jergens was not the manager of the composite of segregated accounts from 2010.