CFA Practice Question
Rapster Inc. is considering a new equity issue and it has short listed three investment banking firms, among which Carson and Larson is on the top of the list. Carson and Larson's pension portfolios own 2% of MacHeath Entertainment which is the target of a fierce takeover battle between Rapster and a competitor, Marsh and Cleveland. Gary, a partner at Carson and Larson asks Stella, a senior portfolio manager, to vote their 2% share of MacHeath stock in favor of Rapster which will cement their relationship with Rapster and lead to the equity placement contract. Stella believes that MacHeath would be a better fit with Marsh and Cleveland. Stella should
A. defy Gary and vote for merger with Marsh and Cleveland.
B. discard the proxies so as to avoid conflict of interest.
C. refer the matter to the principal of the firm and ask him to make the decision.
Explanation: By voting in favor of a merger with Rapster, Stella will be violating Standard III (A) - Loyalty, Prudence, and Care. By not voting the proxy, she would also be violating the same standard.
User Contributed Comments 11
| User | Comment |
|---|---|
| Check08 | ...think you'll quite often have to look for a new job if you adhere to this ;-) |
| mark98007 | ... that's why it seems "C" is more appropriate. You could argue that you don't have "reasonable basis" to make the call and hand it off . These questions and CFA Institute encourage people to think they need to be cowboys and get fired |
| jayjunk | It says Stella is a "senior portfolio manager". Hence the decision should be made by Stella rather than passed up to the principal. |
| AusPhD | I know the answer is right, but that doesn't mean it isn't a joke. I think I would take the risk of taking it to the Principle and looking like a fool on the basis of what mark98007 said rather than guarantee my job being lost by going ahead and voting directly against instructions without discussing it with anyone. Do you really want to take the chance that you are wrong....?! |
| krisc | I think here the isuues is figuring out the client and to whom the duty is owed. The client is the pension fund benefiaries and therefore choice A makes sense!!!!! |
| JHeld | GAry is just a partner... Stella is the Senior MAnager.. |
| scotty21 | While A may be correct, I certainly dont see how C could possibly be an incorrect answer - i.e. in breach of the CFAI code |
| Allen88 | interesting, inaction is also a violation of the code. |
| indrayudha | I think inaction is not in violation with the code, it's all depending on which Standard we're talking about. For example, on certain underwriting data falsification, disassociation (hence inaction) may well be in compliance with the code. |
| moneyguy | The word "defy" made me think she was ignoring a direct order. If she outranks Gary, her decision is not defying him. |
| Procbaby1 | Partner > Senior Portfolio Manager |