CFA Practice Question

CFA Practice Question

High Return Capital Management (HRCM) manages several pension funds. In order to motivate its managers, it has decided to award them performance bonuses based on their meeting certain benchmarks. This arrangement is not disclosed to the pension trustees. HRCM's portfolio managers use aggressive equity strategies to meet or beat their target return. When a portfolio manager, David, was confronted by one of the trustees for high risk securities in his plan, David was at a loss for an answer. David,
A. has not violated any standard as he is doing his best to maximize the return on the plan's portfolio.
B. has violated Standard III (C) - Suitability.
C. has violated both Standards VI (A) and III (C).
Explanation: David has violated Standard VI (A) as he has failed to disclose his compensation arrangement with the firm to the pension funds' trustees. He has also violated Standard III (C) by not looking into the suitability of investments for the pension fund's portfolio.

User Contributed Comments 6

User Comment
nmirza is it not assumed that managers get compensation based on how well their portfolios do. the majority of the bonus will be from the return generated on protfolio, and although i can see compensation being linked to commissions generated for firm, that is an implicit trust understanding ebtween clients and managers. should managers be discosing that they get paid by the firm>? i dont understanding why a firm compensating tis manager son performance benchmarks is a breach of disclose of conflcit rule?!?!?
leitho nmirza: you need to disclose such arrangement, and you need to consider the suitability of investments for your clients. e.g you cannot invest everything in risky futures for your pension clients.
cong I think the way the question was worded suggested that employee compensation arragenments need to be disclosed to the clients, especially when suitability is doubtful in the meantime.
Bobokoko you don't have to memorize what number a particular standard is, it will be provided.
pepper no company reveal how much they pay their employees. If this is a case of re-selling 3rd party product, yes.. you have to reveal, as it is a commission.
SKIA Bobokoko - are you sure about that?
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