killer ethics

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thunderanalyst

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Janice Melfi is a portfolio manager for Soprano Advisors. Soprano has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Soprano model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. The director of research frequently alters the model based on rigorous research�an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers use the model to assist them in making portfolio decisions, but, based on their own fundamental research, are allowed to purchase securities not recommended by the model. This fact is not disclosed to the clients, because the head of marketing does not think it is relevant. Which of the following statements regarding the portfolio manager�s investment decisions is TRUE?

A) Melfi is violating the Standards by using two investment processes that are in conflict with each other.

B) Soprano is violating the Standards by not disclosing the fundamental research aspect of the investment process.

C) Melfi is violating the Standards by using a research process that she did not participate in developing.

D) There is no violation of the Standards.
 
Fundamental research (ie reasonable basis, and adequate diligence is being maintained) hence no disclosure is required.
 
Yes thats what I thought. Clients know the fundamentals of the investment process, and the standard doesn't require you to inform them each and every detail.

But, answer is B... willi is correct (according to schweser). Willi can you please explain how you arrived at that?
 
"The director of research frequently alters the model based on rigorous research�an aspect that is well explained to clients, although the specific alterations are not continually disclosed."

I think you have to let the clients know of the specific alterations.
 
This is another crappy Schweser question that we likely won't see on exam day (hopefully). I believe that B is correct because under standard V(B) - Communication with Clients, you would need to disclose your investment process. If you tell them that you are using quantitative research, and then decide to also incorporate fundamental research, you are not fulfilling your duty with respect to client communication.
 
BTW, Connery, I don't think that you need to disclose all the details (for many clients you would likely be way over their head if you tried to explain the mathematics behind your complex models). I'm pretty sure that the violation occurs with respect to the fundamental research.

thunder, do you have an excerpt of Schweser's explanation to the answer, or was it extremely vague?
 
Willi - what you say makes sense, schweser ans also talks about investment process that you have to explain to the client.
I hope questions like this don't show up on actual exam.
 
Agree with Willi, clients should at least know you are going outside of the model sometimes. Could come back to bite you.
 
I am starting to think, for ethic i'll just rememeber everythign thats in SOPH, trying apply my own judgement gets me wrong.
 
Maybe I'm mistaken, but can a company be in violation of the Standards?? I thought only individual charter holders could be in violation?

That's what made me rule B out right away...
 
SirViper Wrote:
-------------------------------------------------------
> Maybe I'm mistaken, but can a company be in
> violation of the Standards?? I thought only
> individual charter holders could be in violation?
>
> That's what made me rule B out right away...

hmmmm.... I don't know
 
Good call, I didn't catch that. It doesn't seem like it would apply to the company, but maybe since it is run by CFA charter holders?
 
... here I go again. Just looked at the answers and imemdiately picked B. Didn't read the text. This has been working for me so far!!!! Is this ethical? :-)
 
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