CFA Practice Question

CFA Practice Question

Carmina Aburana is a sales assistant to Drew Door, a sales manager at Hicost Brokerage. Hicost has a policy of requiring at least 20% margin on stocks that are deemed illiquid or extremely risky. For these purposes, it creates and updates a list of such stocks on a weekly basis. Yoddly Yoo, Inc. is an up and coming internet firm whose stock has been on this list for some time now. One of Carmina's "blue chip" clients, Amadeus, has been speculating on Yoddly's stock for the past two weeks, repeatedly going in and out of the market. In this process, he has unfortunately generated significant losses and his margin on the account has fallen to 12%.

To make up for the shortfall, Amadeus calls up Carmina and requests a "borrowing on the account" of 10% for the next 2 weeks, promising to pay a hefty interest rate of 38% on an annualized basis. Since Amadeus has never been in default, Carmina agrees to the arrangement and moves some funds from another client's account. There is no explicit rule at Hicost that prohibits such an arrangement, though it is clearly an oversight on part of the Compliance department. Drew notices this transaction and calls Carmina for an explanation. On hearing the explanation, he tells Carmina that such arrangements are in violation of the company rules and should not be repeated. After 2 weeks, Amadeus supplies the necessary margin for his account.
A. Drew has violated Standard I (D) - Misconduct.
B. Carmina has not violated any CFA Institute code but Drew has violated Standard IV (C) - Responsibilities of Supervisors.
C. Carmina has violated Standard IV (A) - Duties to Employers (Loyalty).
Explanation: Carmina has shown poor judgment in not recognizing the spirit behind Hicost's 20% margin requirement. However, in the absence of any explicit rule in this about fund transfers, she can make a case that she is not in violation of any laws or code of conduct. Drew, on the other hand, has been negligent in his duties. If he understands the importance of the margin rule, then he must take steps to unwind the effects of the infraction as soon as possible. In this case, he should have directed Carmina to terminate the arrangement with Amadeus and require that the requisite margin be posted immediately. Further, verbal admonitions are not enough to satisfy supervisory duties when handling a supposed violation of rules. Drew must determine how best to prevent such occurrences in the future and also discuss with the Compliance Department the need for revising the employee rules handbook.

User Contributed Comments 8

User Comment
eddeb good one, and good explanation
mark98007 Carmina was ultimately in breach of her duties to other clients by making them unknowingly bear the risk of potential default on the margin payment
kevinf12 Hicost has a policy of requiring at least 20% margin on stocks that are deemed illiquid or extremely risky.

Doesnt this mean she was in violation of this rule, which I would say is loyalty to employer...For example, if an employer told you NOT to do something and you did, same thing here...any thoughts?
steved333 I understand your line of thinking, but again, since there is not a regulation at the firm dealing with this type of transfer, it's kind of a maybe she violated, maybe she didn't. On the other hand, there is no question that Drew violated his duties as a supervisor. In this particular case, since B was the only option that had that offense as part of the answer, one would have to go with that.
cong Yes, choose the BEST answer
bodo Carmina would get fired in any firm in the real world!
siggarusfigs Well it seems like Carmina wasn't aware of the policy (violation of IA - Knowledge of the Law?), but since IA is not an option, I'd say Drew must not have communicated the rule to Carmina and thus was in violation of responsibilities of supervisors etc.. didn't even notice the time issue
harrybay So there's a rule but no explicit rule?
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