CFA Practice Question

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CFA Practice Question

Andrew Walker, CFA, is the CIO for Hamilton Trust (HT), an investment advisor. Walker recently assigned one of his portfolio managers, Nolan Brown, to manage several accounts that primarily invest in thinly traded micro-cap stocks. Walker soon notices that Brown places many stock trades for these accounts on the last day of the month, towards the market's close. Walker finds this trading activity unusual and speaks to Brown, who explains that the trading activity was completed at a client's request. Walker does not investigate further. Six months later, regulatory authorities sanction HT for manipulating micro-cap stock prices at month end in order to boost account values. Did Walker violate any CFA Institute Standards of Professional Conduct?
A. Yes, because he failed to reasonably supervise Brown.
B. Yes, because he did not report his findings to regulatory authorities.
C. No
Explanation: The CFA Institute Standard on Responsibilities of Supervisors requires members or candidates to take steps to detect and prevent violations of laws, rules, and regulations. Walker failed in his supervisory role when he accepted Brown's explanation of the unusual trading activity. Walker should have reviewed the client's goals, objectives, and records to see if he or she in fact requested month-end trading. Regardless of the explanation provided by Brown, Walker should have investigated further.

User Contributed Comments 3

User Comment
alles The standards do not require B (but only recommend.)
paynito1 But how do you know that wasn't his strategy, like buy at the end of the month it's always cheaper, instead of market manipulation. Don't you have to point to some previous case from the SEC?
gyee2012 The Assumption is...

Key phrase - "...assigned to one of his" assuming additional responsibility- IV. Duties of the Employer - Responsibilities of Supervisor

Indicates Supervisors must help their underlings comply with all rules and regulations or they will take the fall - This is more of a reassurance clause if anything happens to any lesser workers and investor/ potential investors
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