CFA Practice Question

CFA Practice Question

Garfield and Associates manages funds for its clients based on quantitative models and research. It has successfully managed hundreds of millions of dollars for its clients over the past decade. Due to a change in the market structure, it has discovered that its models need to be updated to include global variables for projecting risk and return, and identifying attractive investments with a potential of above average return. Without informing its clients, Garfield makes the change in 2011 and its research director, Candy Brower delivers a banner year for its clients. Candy
A. has not violated any standard.
B. has violated Standard V (B) - Communication with Clients and Prospective Clients.
C. has violated Standard II (A) - use of Material Nonpublic Information in estimating her models.
Explanation: Candy should inform her clients of a material change in the portfolio management process. Use of a new model which includes global economic variables is a major shift in investment analysis and requires that clients be notified so that they make the appropriate decision regarding their accounts. It is possible that some clients are already investing globally and do not need any additional global exposure. Candy also needs to maintain detailed research records to comply with the standards. She also needs to maintain all records of model validation, otherwise she would be in violation of Standard V (C) - Record Retention.

User Contributed Comments 4

User Comment
DAS11 Is it really the research director's responsibility or the firm's responsibility to inform clients? What if Candy assumed that clients were informed of this changed.
iambroke dont assume things beyond the scope of the question
pamachado "update the model" = new model?
mary11 blah - I don't think any client cares about you changing your variables. The premise of the model is still the same.
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