Question #43
Reading: Reading 42.3 Standards of Professional Conduct Guidance for Standards III
PDF File: Reading 42.3 Standards of Professional Conduct Guidance for Standards III.pdf
Page: 18
Status: Correct
Correct Answer: C
Question
Wanda Brunner, CFA, is reviewing a draft fund prospectus for her new "Leveraged Long Coffee" (LLC), a closed-end fund. LLC uses a of combination fundamental and technical trading models to evaluate individual securities. She notes the LLC prospectus has several disclosures which cause her to worry that prospective clients will avoid her fund. Disclosure 1: "LLC charges a flat 3.00% of assets under management." Disclosure 2: "LLC may invest up to 40% of the fund's assets in securities which are not related to coffee or other consumer products." Disclosure 3: "LLC relies only on fundamental valuation of individual securities." Which of the following standards will most likely be violated by distribution of the prospectus?
Answer Choices:
A. Standard III(
B. Standard III(
C. Duties to Clients: Suitability because it misleads the reader as to the process by which securities are selected
Explanation
LLC must adequately disclose the basic security selection and portfolio construction
process, and the portfolio manager recommendations and investment actions must be
consistent with the stated objectives and constraints of the fund. By failing to acknowledge
the fund's dependence on technical trading, the fund fails to meet this standard.
(Module 42.5, LOS 42: III(C))