Question #6
Reading: Reading 43 Application of the Code and Standards Level II
PDF File: Reading 43 Application of the Code and Standards Level II.pdf
Page: 4
Status: Correct
Correct Answer: A
Question
Patricia Spraetz is the chief financial officer and compliance officer at Super Selection Investment Advisors. Super Selection is a medium-sized money management firm which has incorporated the CFA Institute Code of Ethics and Standards of Practice into the firm's compliance manual. Karen Jackson is a portfolio manager for Super Selection. She is not a CFA charterholder. Jackson is friendly with David James, president of AMD, a rapidly growing biotech company. James has provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio before buying them for her clients. For three years, Jackson has also served on AMD's board of directors but has never notified Super Selection of this fact. She has received options and fees as compensation. Recently, the board of AMD decided to raise capital by voting to issue shares to the public. This was attractive to board members (including Jackson) who wanted to exercise their stock options and sell their shares to get cash. When the demand for initial public offerings (IPO) diminished, just before AMD's public offering, James asked Jackson to commit to a large purchase of the offering for her portfolios. Jackson had previously determined that AMD was a questionable investment but agreed to reconsider at James' request. Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase AMD for her clients' portfolios. Which of the following statements is NOT correct?
Answer Choices:
A. regarding Conflicts of interest by not disclosing her board membership and ownership of stock options to her employer
B. regarding Disclosure of Additional Compensation by not disclosing additional compensation in the form of cash and stock options received from AMD, as its board member to her employer
C. Jackson violated Standard VI(
Explanation
Jackson has violated Standard III(A) because her first obligation is to her firm's clients.
Standard VI(A) addresses precisely these kinds of situations regarding potential conflict of
interest. Given this conflict of interest, Jackson also compromised her objectivity in
violation of Standard I(B). Her fiduciary duty to her clients takes precedence over her
fiduciary duty to AMD's stockholders under the CFA Institute Code and Standards. By not
disclosing her relationship with AMD, she also violated Standard IV(B). Making past
personal security transactions ahead of purchase of the same securities for her clients has
put Jackson in violation of Standard VI(B). This standard clearly prohibits such actions.