Question #51
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: 21
Status: Correct
Correct Answer: B
Question
The following information pertains to the Galaxy Trust, a trust established by Stephen P. House and managed by Gamma Investment LLC: At the time the trust was established House provided $5 million in cash to fund the trust, but Gamma was aware that 93% of his personal assets were in the form of Oracle stock. Gamma has been asked to view his funds and the trust as a single entity for planning purposes, since House's will stipulates that all of his estate will pass to the trust upon his death. The investment policy statement, developed in September 1996, stipulates that the trust should maintain a short position in Oracle stock and use the proceeds to diversify the trust more adequately. House was able to sell all of his Oracle shares back to the corporation in January 1999 for cash. The policy statement redrawn in September 1999 continues to stipulate that the trust hold a short position in Oracle stock. House has given the portfolio manager in charge of the trust an all-expenses paid vacation package anywhere in the world each year at Christmas. The portfolio manager has reported this fact in writing to his immediate supervisor at Gamma. Which of the following is most correct? The investment manager is:
Answer Choices:
A. not in violation of the Code and Standards for not properly updating the investment policy statement in light of the change in the circumstances and is not in violation with regard to the acceptance of the gift from House
B. in violation of the Code and Standards by not properly updating the investment policy statement in light of the change in the circumstances but is not in violation with regard to the acceptance of the gift from House
C. in violation of the Code and Standards by not properly updating the investment policy statement in light of the change in the circumstances and is in violation with regard to the acceptance of the gift from House
Explanation
The investment manager is in violation of the Standard requiring him to make a
reasonable inquiry into the client's financial situation and update the investment policy
statement since such a dramatic change in the client's circumstances would undoubtedly
alter the investment policy statement and would probably eliminate the need to hold a
short position in Oracle. The investment manager is not in violation of the Standard
concerning additional compensation, since the gift has been reported to his supervisor
and has come from a client. If there was a failure to report such a gift, if the firm had a
rule in place against the acceptance of gifts from clients, or if the gift had come from a
non-client, there would be a violation of the standard.