Question #31
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: 17
Status: Correct
Correct Answer: A
Question
Midland Investment Banking issues a prospectus for its open-end Midland Gold Fund. In the prospectus, the investment policy is disclosed as, "We will maintain an investment posture of 50% or more in gold stocks and/or bullion, depending upon market conditions." This policy is maintained until the price of gold falls by 20%, leaving the fund 40% invested in gold stocks and bullion. Management decides that since the allocation was affected by market conditions, no action to either change the investment policy or to rebalance the portfolio is required. This decision is:
Answer Choices:
A. in violation of the Standard concerning disclosure of investment processes
B. under the circumstances, not in violation of the Code and Standards
C. in violation of the Standard concerning fiduciary duties to clients
Explanation
Standard V(B) Communication with Clients and Prospective Clients requires members to
disclose "general principles and investment processes" to clients and to "promptly disclose
any changes that might significantly affect those processes." Under the Standard, Midland
management is required either to:
1. rebalance the portfolio in a timely manner so as to maintain compliance with the
investment policy or
2. communicate an intended change in that policy well in advance of the actual change
so as to afford investors time to act prior to the change in investment policy taking
place.
Midland is in violation of the Standard.
(Module 42.8, LOS 42: V(B))