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Reading Asset Manager Code of Professional Conduct FinQuiz.com FinQuiz.com CFA Level III Item-set - Question Study Session June 2018 Copyright © 2010-2018 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com FinQuiz.com © 2018 - All rights reserved Reading Asset Manager Code of Professional Conduct FinQuiz.com FinQuiz Item-set ID: 11813 Questions 1(11814) through 6(11819) relate to Reading Fennini Associates Case Scenario Fennini Associates is an asset management firm providing investment management services to individual and institutional clients Fennini Associates was founded and continues to be owned by the Fennini family Due to the firm’s relatively small size, it has sufficient capacity to cater to domestic (Italian) clients only Benito Galeazzi, CFA is one of the portfolio managers serving the firm Galeazzi manages the investment portfolio of Izraac Inc.’s defined benefit pension fund Employees participating in the defined benefit pension fund have an average age of 50 years In addition the plan offers early retirement provisions for those employees wanting to terminate their employment prior to the retirement The fund’s portfolio is currently invested in AAA-rated long term corporate bonds, Treasury bonds, and low-beta equity securities The fund’s policy statement expressly prohibits investing in high-risk ventures which may threaten the fund’s retirement obligations Galeazzi believes the fund’s investment mandate is too conservative He feels the fund ought to be taking greater risks in order to secure higher returns to fund the retirements of its employees who are not far away from retirement After carefully evaluating the possible investment options, Galeazzi identifies a venture capital firm as a potential investment for the fund Venture capital deals have had a 60% success rate in Italy over the past two years with 80% of these firms being able to make a public offering of their shares With the success rate of these deals in mind, Galeazzi allocates 10% of the pension fund’s funds to a local venture capital firm, LeQ-Twon, stock The investment will be locked for a five-year period and is subject to an early withdrawal penalty However, according to Galeazzi, the high expected returns on the investments make the risk bearing worthwhile Antwan Pate is another portfolio manager serving the firm Pate manages an endowment fund’s investment portfolio His expertise primarily pertains to U.S corporate small-cap growth stocks The endowment fund has engaged Pate primarily due to his specialized skills with respect to these stocks Pate has now decided to explore small-cap growth stocks of corporations situated in emerging market countries Prior to allocating the stocks to the fund’s portfolio, he notifies and receives the fund sponsor’s agreement His notification includes an explanation of the investment’s risk factors and the proportion of leverage to be used The fund will retain the stocks in its portfolio for a one-year period during which the stocks’ performance may be observed Should the fund wish to liquidate the stocks, at the end of the one-year observation period, it may so without any penalties The chief executive officer at Fennini Associates believes the firm needs to adopt stronger measures to ensure greater compliance to the Asset Manager Code If the firm is able to implement the Code, it, he quotes, “will hold a special rank in the asset management market” FinQuiz.com © 2018 - All rights reserved Reading Asset Manager Code of Professional Conduct FinQuiz.com The chief executive recommends the firm adopt the following two measures to aid its compliance with the Code Measure 1: Appoint a chief compliance officer Due to the firm’s limited resources, the firm’s senior portfolio manager can be reappointed to this position The chief compliance officer should report directly to the firm’s board The role of the chief compliance officer should include communicating compliance policies and procedures to employees, conducting employee training, and investigating possible breaches of compliance procedures with managers Measure 2: Implement a disaster recovery plan To ensure the firm’s and client’s records are kept safe, in the event of a natural disaster or financial market disruption, the firm must implement a contingency plan This plan should cover: conducting staff training related to the compliance procedures back-up plans to ensure communications with mission critical vendors, suppliers, and clients is maintained testing the plan to ensure its integrity and robustness on a firm-wide basis maintaining back-up copies of records in an electronic format Bruno Macari is one of Fennini Associates’ clients His portfolio is managed by Ron David When requested by Macari, David discloses the incentive fees, specific management fees, and commissions periodically charged to Macari for managing his portfolio In addition to this practice, David discloses the periodic gross-of fees returns to all existing clients whose portfolio he manages and discloses an estimate fees figure to any prospect who wishes to engage him as manager The chief executive has drafted the following policies which he believes will enhance the firm’s compliance with the Asset Manager Code Policy 1: Policy 2: Client portfolio holdings must be valued on an annual basis or as circumstances dictate It is encouraged that holdings be valued using an internal valuation model which has been developed by the firm’s senior portfolio managers The valuation basis must be disclosed to clients and the disclosure should be asset-class specific The firm’s proxy voting policies should be disclosed to clients covering issues such as the actions needed to be taken when votes are against firm management and how shareholding responsibility is delegated Information pertaining to how client shares were voted should be disclosed to the concerned client upon request FinQuiz Question ID: 11814 With respect to the venture capital investment, Galeazzi violated the Asset Manager Code in all of the following ways except for: A failing to disclose the state of the venture capital market to his clients B failing to conduct stress tests on the venture capital investment prior to the allocations C failing to determine the suitability of the investment FinQuiz.com © 2018 - All rights reserved Reading Asset Manager Code of Professional Conduct FinQuiz.com FinQuiz Question ID: 11815 With respect to the allocation of emerging market stocks to the fund’s portfolio, Pate has most likely: A complied with the Asset Manager Code B violated the Code by imposing a one-year observation period C violated the Code by not adequately disclosing the change in investment strategy to the fund FinQuiz Question ID: 11816 Measure fails to comply with guidelines of the Asset Manager Code with respect to: A the independence of the senior portfolio manager as chief compliance officer B failing to engage an independent party as chief compliance officer C the chief compliance officer’s duties FinQuiz Question ID: 11817 Has the chief executive officer accurately outlined the contents of the disaster recovery plan (in measure 2)? A Yes B No, he has failed to consider the procedures to test the plan on a firm-wide basis C No, he has failed to ensure alternative plans are in place for monitoring, analyzing and trading investments if primary systems become unavailable FinQuiz Question ID: 11818 In context of his fee disclosure practices, David has violated the Asset Manager Code with respect to: A both Macari and prospects B Macari only C prospects only FinQuiz Question ID: 11820 Which of the following policies most closely complies with Asset Manager Code guidelines? A Both policies B C FinQuiz.com © 2018 - All rights reserved .. .Reading Asset Manager Code of Professional Conduct FinQuiz.com FinQuiz Item- set ID: 11813 Questions 1(118 14) through 6(11819) relate to Reading Fennini Associates Case... Scenario Fennini Associates is an asset management firm providing investment management services to individual and institutional clients Fennini Associates was founded and continues to be owned by the... the Asset Manager Code If the firm is able to implement the Code, it, he quotes, “will hold a special rank in the asset management market” FinQuiz.com © 2018 - All rights reserved Reading Asset
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