Read the following scenario to answer Question 1 listed at the end of this scenario.

Ryan Reynolds, CFA, is a portfolio manager at Q10 Investments with discretionary authority over all of his accounts. One of his clients, Hugh Jackman, Chief Executive Officer (CEO) of Elixir Manufacturing, invites Reynolds to lunch.

At the restaurant, the CEO reveals the reason for the lunch. As you know Oumuamua Partners has made an unsolicited cash offer for all outstanding shares of Elixir Manufacturing. Oumuamua 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 Im in charge. Jackman then shows Reynolds his projections for a new plan designed to boost both sales and operating margins. I know that your firm is the trustee for our firms 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 Jackmans business plans, Reynolds says, This plan looks good. I will recommend that the trustee vote against the offer.

Jackman responds, I remember my friend Meester Leighton telling me that the Leighton Familys Trust is managed by your firm. Perhaps the trustee could vote those shares against the acquisition as well. Meester Leighton is a close friend. I am sure that she would agree.

Reynolds responds The Family Trust is no longer managed by Q10. He adds I understand that the Trust is very conservatively managed. I doubt it that it would have holdings in Elixir Manufacturing. Reynolds does not mention that although the Family Trust has changed investment managers, Meester Leighton remains an important client at Q10 with significant personal holdings in Elixir.

After lunch, Reynolds meets with Dan Brown, CFA, trustee of the Elixir ESOP. He shows her Jackmans plan for improvements. I think the plan is a good one and Jackman is one of the firms most profitable accounts. We dont want to lose him. Brown agrees to analyse the plan. After thoroughly analysing both the plan and the takeover offer, Brown concludes that the takeover offer is best for the shareholders in the ESOP and votes the plans shares in favour of the takeover offer.

A few months later the acquisition of Elixir by Oumuamua Partners is completed. Jackman again meets Reynolds for lunch. I received a generous severance package and Im 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. Reynolds and Jackman discuss his current financial situation, risk tolerance, and financial objectives throughout lunch. Reynolds agrees to adjust Jackmans investment policy statement (IPS) to reflect his greater appetite for risk and his increased wealth.

Back at the office, Reynolds realises that with the severance package, Jackman is now his wealthiest client. He also realises that Jackmans increased appetite for risk gives him a risk profile similar to that of another client. He pulls a copy of the other clients investment policy statement (IPS) and reviews it quickly before realising that the two clients have very different tax situations. Reynolds quickly revises Jackmans IPS to reflect the changes in his financial situation. He uses the other clients IPS as a reference when revising the section relating to Jackmans risk tolerance. He then files the revised IPS in Jackmans file.

The following week, a Q10 analyst issues a buy recommendation on a small technology company with a promising software product. Reynolds reads the report carefully and concludes it would be suitable under Jackmans new IPS. Reynolds places an order for 10,000 shares in Jackmans account and then calls Jackman to discuss the stock in more detail. Reynolds does not purchase the stock for any other clients. Although the one client has the same risk profile as Jackman, that client does not have cash available in his account and Reynolds determines that selling existing holdings does not make sense.

In a subsequent Zoom conversation, Jackman expresses his lingering anger over the takeover. You didnt do enough to persuade Q10s clients to vote against the takeover. Maybe I should look for an investment manager who is more loyal. Reynolds tries to calm Jackman but is unsuccessful. In an attempt to change the topic of conversation, Reynolds 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. Jackman seems mollified and concludes the conversation, I look forward to a long-term relationship with you and your firm.

Q10 distributes a copy of its firm policies regarding IPO allocations to all clients annually. According to the policy, Q10 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 Q10 offers different levels of service for different fees.

After carefully reviewing the proposed IPO and his client accounts, Reynolds determines that the IPO is suitable for 11 clients including Jackman. Because the deal is oversubscribed, he receives only half of the shares he expected. Reynolds directs 50% of his allocation to Jackmans account and divides the remaining 50% between the other ten accounts, each with a value equal to half of Jackmans account.

1. When discussing the Leighton Family Trust, does Reynolds violate any CFA Institute Standards of Professional Conduct? Please discuss and cite relevant examples with specific standards (2 marks).

Identify: Consider: Act: Reflect:

2. When deciding how to vote the ESOP shares, does Brown violate any CFA Institute Standards? Please discuss and cite relevant examples with specific standards (2 marks).

Identify: Consider: Act: Reflect:

3. What do you think of Jackmans behaviour towards Reynolds? What choices does Reynolds have? Please discuss and cite relevant examples with specific standards (2 marks).

Identify: Consider: Act: Reflect:

4. Does Reynolds violate any CFA Institute Standards when he places the buy order for shares in the technology company for Jackmans account? Please discuss and cite relevant examples with specific standards (2 marks).

Identify: Consider: Act: Reflect:

5. Is Q10s policy with respect to IPO allocations consistent with required and recommended CFA Institute Standards? Please discuss and cite relevant examples with specific standards (2 marks).

Identify: Consider: Act: Reflect:

6. Does Reynolds violate any CFA Institute Standards in his allocation of IPO shares to Jackmans account? Please discuss and cite relevant examples with specific standards (2 marks).

Identify:

Consider:

Act:

Reflect: