CFA Practice Question

CFA Practice Question

Katy Olson is a portfolio manager for Mystic Capital Management. She directs her clients' trades to the brokerage firm of Polly and Black (P&B). In return P&B underwrite Karen's annual trip to Europe where she takes a skiing vacation in the French Alps and attends a local conference on investment opportunities in northern France. Katy has violated

I. Standard III (A) - Loyalty, Prudence, and Care.
II. Standard I (B) - Independence and Objectivity.
III. Standard IV (B) - Additional Compensation Arrangements.
A. I and II.
B. II and III.
C. So long as she is getting the best price and execution for her clients, and does not compromise her objectivity and independence, Katy has not violated any standard.
Explanation: By directing client brokerage for personal benefit she has violated Standard III (A) - Loyalty, Prudence, and Care. Client commission is client's property and is to be used for the client's benefit. By not reporting the vacation trip as a gift from an outsider, a gift whose value clearly exceeds $100, Katy is in violation of Standard I (B) - Independence and Objectivity.

User Contributed Comments 13

User Comment
cheekywinky seems to me that there is no correct answer. All 3 standards have clearly been violated.
nike this is not a compensation but expensive gift that could impair her independence and judgement.
anricus But it is compensation! She is receiving payment on an annual basis. Its not cash but still is comnpensation which she could expect to receive periodically and this clearly relates to the fact that she's routing trades through a preferred broker
DAS11 I agree with anricus but we have to expect these types of questions on the exam. Not every question is going to be crystal clear.
jayjunk The exact wording of standard IV (B) is "gifts, benefits, compensation, or consideration". Hence IV (B) certainly seems violated.
joshnick additional comp pertains to employers. You notify them so they can deem if you might be in danger of losing independence or objectiveity if 3 was disclosure of conflict of interest it would be correct.
ontrack independence and objectivity is not affected here since she is not writing any recommendadtion per the Qs. She has not discolsed the additional compensation (gift) and she has not performed fiduciary duty to select best brokerage (lowest cost etc)
jackwez I (B) - Independence and Objectivity says:

Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity.

You don't need to write any reports to violate the standard.

IV(B) Additional Compensation Arrangements is for employee-employer relationships. The question is not clear if the employer knows the arrangement or not. Accepting gifts is allowed, but you must inform your employer in writing before accepting.
pjdeschenes In response to jackwez, it is not clear that her objectivity has been compromised. In addition to not writing reports, she does not give any advice at all. II is questionable.

In example 2 on pg 75 of the Program Curriculum, Vol 1, the example is for non-monetary comp from a board position for a non-related company. The comp is not related to his work, and is non-monetary, but is still a violation, b/c he hasn't reported it in writing. To be consistent with the CFA Institute's example, III must hold. The answer should be B.
charliedba No pjdeschenes. "Additional Compensation Arrangements" applies when you are involved in a competing business and accepting compensation. This gift is more like a gift defined in I(B).
StanleyMo Similar questions on the example by CFA text book
StanleyMo additional compensation arrangements is link with employer, by directing the business to the brokerage house, it hurts the clients, but not the employer.
pigletin it's Karen's ANNUAL trip?A trip is a trip not related to her work in anyway, she takes this kind of personal trip every year whether it is paid by herself or by others. If her Daddy underwrites the trip, it will be perfectly fine since it is not considered additional compensation.
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