- CFA Exams
- CFA Level I Exam
- Study Session 1. Ethical and Professional Standards
- Reading 3. Guidance for Standards I-VII
- Subject 13. Standard IV (B) Additional Compensation Arrangements
CFA Practice Question
There are 361 practice questions for this study session.
CFA Practice Question
Ethan Walker, CFA, acts as an outside portfolio manager to a sovereign wealth fund. Roger Sawyer, a fund official, approaches Walker to interest him in investing in Slegg Construction Company. He tells Walker that if he approves a two-million-dollar investment in Slegg by the fund, Walker will receive a "bonus" that will make him wealthy. Sawyer also adds that if Walker decides not to invest, he will lose the fund account. After doing a quick and simple analysis, Walker determines that the investment is too risky for the fund. If Walker agrees to make the investment, what standard is least likely to be violated?
A. Loyalty, Prudence, and Care
B. Additional Compensation Arrangements
C. Diligence and Reasonable Basis
Explanation: The fact that Walker undertook a quick and simple analysis to determine whether the investment would be too risky for the sovereign wealth fund doesn't necessarily mean that he was not diligent and did not have a reasonable basis for making that determination.
User Contributed Comments 8
|Eli1334||A quick and simple analysis is considered diligence and reasonable basis?|
|bergje11||If it is too risky for the fund how is there reasonable basis?|
|MathW||That's what I thought too! But on reflection I suppose that it is a more flagrant breach of Additional Compensation Agreements and the requirement of Loyalty, Prudence and Care.|
|alles||The bonus is not an additional compensation agreement. It's fraud. So if he agrees to make the investment, he is not even violating this standard. A and B are clearly violated. Impossible to be diligent and have a reasonable basis through a "quick and simple" analysis.|
|rjdelong||A little tricky, but yes seems this one is clear if you think about it. It was probably very immediately obvious it was an inappropriate investment for the fund. Like selling an elderly person some commodities derivatives... you can make a quick analysis and know it's not appropriate.|
|b25331||Very good question... reminds us how carefully we must read these questions.
Especially the phrasing here: the analysis has been done by Walker, but if he nevertheless engages in the investment, the other two standards may indeed be violated
|walterli||because he has done the due diligence whether it is simple or not.|
|JNW1980||This makes very little sense to me. The answer explanation talks about how he had a reasonable basis to decline investing.
So if he HAD invested (premise of the question) then how is that reasonable in ANY universe? Not only would he have done research but the research would tell him it's too risky to invest. It would be completely UNREASONABLE to invest at that point.
At first glance it seems like additional compensation is violated but if he is making the decision to invest he hasn't receive it yet. It's also a bribe and likely fraud.