Question #5 - Reading 42.5 Standards of Professional Conduct Guidance for Standards V

Reading: Reading 42.5 Standards of Professional Conduct Guidance for Standards V

PDF File: Reading 42.5 Standards of Professional Conduct Guidance for Standards V.pdf

Page: 4

Status: Correct

Correct Answer: C

Shared Context

- According to the CFA Institute's Standards of Professional Conduct, Fleming's execution of Waverly's trade order after confirming the appropriateness of the trade is most likely in violation of: A) Standard I(C)—Misrepresentation for not disclosing to Waverly that he did not read the marketing materials, but is not in violation of Standard III(C)—Suitability because the client analyzed the investment thoroughly. B) Standard V(B)—Communication with Clients and Prospective Clients for not separating fact from opinion, but is not in violation of Standard I(C )— Misrepresentation because his guarantee of future investment performance was not a written representation. C) Standard V(A)—Diligence and Reasonable Basis for not exercising diligence and thoroughness in his analysis of the investment and Standard III(C)—Suitability for recommending an investment before determining if the investment was appropriate for the client.

Question

According to CFA Institute Standards of Professional Conduct, which of the following of Fleming's actions is most likely a violation of Standard I(C)—Misrepresentation? Fleming:

Answer Choices:

A. tells the CIO of Crocket Foundation that shares of DCH’s IPO outperformed the S&P 500 by at least 15% in each of the last three years since the offering

B. executes the trades on DCH Corp. per Waverly’s instructions without first referring to Waverly’s IPS

C. tells the CIO of the Crockett Foundation that DCH’s secondary offering will earn at least the lowest return earned on its IPO shares over the last three years

Explanation

Standard I(C)—Misrepresentation prohibits members and candidates from making any untrue statements or omissions of facts that may be false or misleading. Guaranteeing a particular rate of return on an investment is in direct violation of the standard. Fleming has essentially guaranteed a minimum rate of return on the secondary offering equal to the lowest rate of return earned on the IPO shares over the last three years. Even though a specific number isn't mentioned in the question, it would be observable by the Crockett Foundation. The other statements might also be considered violations of the standards but are not specifically violations of I(C)—Misrepresentation as noted in the question.

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