John Smith, an investment manager at a large brokerage firm, is presenting his firm's credentials to a prospective client. The client asks John which portfolios John's firm includes in their composites and how fee-paying portfolios and discretionary portfolios are handled by the firm.

Which statement(s) is (are) incorrect?

I. Only portfolios that pay management fees will be included in the composite.
II. Non-fee-paying portfolios may be included in the composite but special disclosure is required.
III. Non-fee-paying portfolios may be included in the composite but prior permission from CFA Institute is required.
IV. Only portfolios which the firm has discretion over the management of may be included.

Correct Answer: III only

Only portfolios that pay management fees will be included in the composite. Non-fee-paying portfolios may be included in the composite but special disclosure is required.

Only portfolios which the firm has discretion over the management of may be included. Portfolios that have restrictions or guidelines on management that prevent the manager from managing in a certain manner are termed non-discretionary for the purpose of assigning portfolios to composites.

Non-discretionary portfolios may only be included if special disclosure is provided.