Scenario: Victoria Adebayo (CIO) faces political pressure from a Governor to fund a mining project and from a Finance Minister to fund an infrastructure project (job creation). * Key Issue: Standard I(B) Independence and Objectivity. * Analysis: Adebayo must refuse to succumb to political pressure. She should create a merit-based selection framework. * Violation: Succumbing to political influence to protect her job or please superiors violates the duty to maintain independence. The goal of “economic development” does not justify abandoning rigorous investment due diligence.
Scenario: Anthony Corrales hires “subadvisers” with no financial experience but close government ties to secure deals. He books these payments as “operating expenses.” * Key Issue: Standard I(C) Misrepresentation and Standard I(A) Knowledge of the Law. * Analysis: * Bribery: Paying government-connected individuals for access is likely bribery (Violation of I(A)). * Accounting: Labeling bribes as “operating expenses” is a misrepresentation to investors (Violation of I(C)). * Due Diligence: Relying on subadvisers is allowed, but not if they lack expertise and are used solely for influence.
Scenario: 1. Adebayo (whose membership lapsed due to unpaid dues) introduces herself as a “CFA Charterholder.” Mehrotra knows this but stays silent. 2. Mehrotra teaches a prep course and tells students the exam was “more difficult than expected” but does not reveal specific questions. * Key Issues: Standard VII(B) Reference to CFA Institute and Standard VII(A) Conduct as Participants. * Analysis: * Reference: Adebayo violated VII(B) by using the designation with lapsed membership. Mehrotra violated Standard I(A) (assisting a violation) by remaining silent when a client was misled. * Exam Integrity: Mehrotra did not violate VII(A) by sharing general opinions on difficulty. He would violate it if he solicited or shared specific exam questions.
Scenario: Analysts call Hockett’s team with recommendation changes 45 minutes before they are published on the website. The team acts on this info for discretionary accounts immediately. * Key Issue: Standard III(B) Fair Dealing. * Analysis: Acting on the information before it is disseminated to all clients (via the website) gives discretionary clients an unfair advantage. * Violation: The team must wait until the recommendation is distributed generally to all clients before trading.
Scenario: 1. Hockett & Lopez recommend a “balanced portfolio” to new clients (the Kochanskis) without asking about their specific objectives or risk tolerance. 2. Lopez presents a “Model Portfolio” performance record but excludes terminated accounts to make it look better. 3. Hockett invests conservative clients in high-beta stocks to generate short-term “alpha” for a bonus. 4. Lopez posts on social media: “Just opened an account for Mr. Kochanski.” * Key Issues: Suitability (III-C), Performance Presentation (III-D), Confidentiality (III-E). * Analysis: * Suitability: Recommending any portfolio without an IPS or inquiry into client needs is a violation. * Performance: Excluding terminated accounts helps inflate returns (Survivorship bias) and violates III(D). * Bonus/Risk: Investing conservative clients in high-risk stocks for a bonus violates Suitability and Conflict of Interest. * Confidentiality: Disclosing a client’s name on social media without permission is a violation.
Scenario: 1. David Plume writes research on companies owned by his firm’s parent company. He receives a bonus based on IPO proceeds. 2. He rates stocks “Buy” despite zero revenue, predicting prices will double. 3. He shorts a stock he rated “Buy” without disclosure. * Key Issues: Independence (I-B), Disclosure of Conflicts (VI-A), Market Manipulation (II-B). * Analysis: * Independence: Compensation tied to IPO success compromises research objectivity. * Shorting: Trading against his own recommendation is a violation (Misconduct/Conflicts). * Promotional Research: Guaranteeing price doubling without basis is Misrepresentation.
Scenario: 1. Benning leaves Kodiak. After resigning, she contacts former clients using public info. 2. At Global, she allocates hot IPO shares only to institutions who agree to buy more shares in the aftermarket (Tie-in agreement). 3. She modifies a client’s (Deacon) account forms and processes withdrawals at the husband’s request without written authorization. * Key Issues: Solicitation (IV-A), Market Manipulation (II-B), Client Control (III-A). * Analysis: * Solicitation: Contacting clients after leaving (assuming no non-compete breach) is generally permitted. * IPO Allocation: “Tie-in” agreements (forcing aftermarket buying) artificially inflate prices and violate Standard II(B) Market Manipulation. * Account Changes: Altering forms and acting on a spouse’s verbal instruction without Power of Attorney violates Standard I(D) Misconduct and Standard III(A) Loyalty to Clients.
Scenario: 1. Tony Hill presents a fund’s returns “Gross of Fees” (Pre-fee) in marketing materials. 2. Hill appears on TV and accepts a “gift bag” from the show. * Key Issues: Performance Presentation (III-D), Gifts (I-B). * Analysis: * Gross of Fees: Permitted if disclosed. If Hill clearly states returns are “pre-fee,” he has not violated III(D). * Gifts: Small token gifts (gift bags) from media outlets do not reasonably compromise independence; disclosure to employer is recommended but not strictly a violation if de minimis.
Scenario: 1. Graeme puts the Delaneys (risk-averse, retired) into speculative new issues. 2. Milgram (another client) complains about performance. 3. Balmer (Supervisor) asks Graeme about it but does not investigate further when Graeme dismisses the worry. * Key Issues: Suitability (III-C), Supervision (IV-C). * Analysis: * Suitability: Putting risk-averse clients into speculative IPOs violates III(C). * Supervision: Balmer violated IV(C) by failing to investigate the red flag (complaint) thoroughly. Relying solely on the employee’s explanation is insufficient supervision.
Scenario: 1. Client (Hie) refuses to answer “KYC” (Know Your Client) questions, deposits $15m cash, and requests secrecy. 2. Hie transfers money in/out rapidly (suspected money laundering). Sim reports to her boss (Yousoff), who tells her to ignore it. 3. Sim sells a complex structured note to an elderly client (Madam Tan) who doesn’t speak English well, based on a brochure she can’t read. * Key Issues: Illegal Activity (I-A), Suitability (III-C). * Analysis: * Money Laundering: Sim suspects illegal activity. Reporting to her supervisor was the first step. If the firm does nothing, she must dissociate (refuse to process trades). Continuing to process trades while suspecting money laundering violates I(A). * Suitability: Selling a complex product to a client who does not understand it (language barrier) and for whom it is not suitable violates III(C).