"morality" exercise:Suitability

来源: 正保会计网校编辑：小鞠橘桔 2020/09/24 09:02:19　字体：大小

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Questions 1:

Colin Caldwell, CFA, is the chief investment officer of Northwest Mutual Fund, whose investment objective is to invest in fixed income emerging market securities. Caldwell allocates the fund’s assets primarily to bonds of commodity producers in emerging markets and invests in a combination of several different investments to ensure an acceptable level of risk. The allocation is clearly disclosed in all fund communications. High volatility in the commodities markets at the start of the year makes Caldwell pessimistic about returns, so he shifts the fund into emerging market and US government securities, positions he maintains at the end of the year. This change is noted in the next annual report to fund shareholders. Caldwell’s investment change least likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct concerning:

A、 diversification.

B、 communication with clients.

C、 investments outside his mandate.

Questions 2:

Christina Ng, a Level I CFA candidate, defaulted on a bank loan she obtained to pay for her Master’s degree tuition when her wedding cost more than expected. A micro finance loan company lent her money to pay off the tuition loan in full including penalties and interest. The micro finance loan company even extended further credit to pay for her parent’s outstanding medical bills. Unfortunately, her parent’s health problems escalated to the point where Ng had to take extensive time away from work to deal with the issues. She was subsequently fired and consequently defaulted on the second loan. As she was no longer employed, Ng decided to file for personal bankruptcy. Do the loan defaults leading up to Ng’s bankruptcy most likely violate Standard I(D)–Misconduct?

A、 No.

B 、Yes, with regard to the first loan default.

C、 Yes, with regard to the second loan default

View answer resolution

【Answer to question 1】A

【analysis】

A is correct because the investment officer has invested in a combination of several different investments to ensure an acceptable level of risk rather than having all assets in a single investment, and he has sought a reasonable amount of diversification. However, the shift into emerging market and US government securities was communicated to clients in the annual report and not on an ongoing basis, in violation of Standard V(B)– Communication with Clients and Prospective Clients. Additionally, the investment officer has not followed the investment style previously communicated to fund investors (i.e., to invest in fixed income emerging market securities), specifically when he invested in US government securities, a violation of Standard III(C)–Suitability.

B is incorrect because the changes were communicated to clients in the annual report and not on an ongoing basis in violation of Standard V(B)–Communication with Clients and Prospective Clients.

C is incorrect because the investment officer has not followed the investment style previously communicated to fund investors, to invest in fixed income emerging market securities. The investment officer has taken investment actions inconsistent with the stated objectives and constraints of the portfolio, specifically when he invested in US government securities, a violation of Standard III(C)–Suitability.

【Answer to question 2】A

【analysis】

A is correct because while Ng’s first loan default, which played a part in the subsequent bankruptcy, is a result of poor financial choices (i.e., paying for higher wedding costs rather than her tuition loan), neither of the loan defaults or bankruptcy involves fraudulent or deceitful business conduct but are based on unfortunate personal circumstances. Therefore, she would most likely not be in violation of Standard I(D)–Misconduct.

B is incorrect because while Ng’s bankruptcy may reflect poor financial choices by paying for higher wedding costs rather than her tuition loan, the bankruptcy does not involve fraudulent or deceitful business conduct. Therefore, she would most likely not be in violation of Standard I(D)–Misconduct.

C is incorrect because the bankruptcy does not involve fraudulent or deceitful business conduct. Therefore, she would most likely not be in violation of Standard I(D)–Misconduct.

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