Question

Ethics in the Investment Industry

The following information assumes that the CFA Institute Code of Ethics and Standards are applicable.

1. Mark Butler, an investment adviser, has two clients: Larry King, 60 years old, and Gabriel Lanai, 40 years old. Both clients earn roughly the same salary, but King has a much higher risk tolerance because he has a large asset base. King is willing to invest part of his assets very aggressively; Lanai wants only to achieve a steady rate of return with low volatility to pay for his children’s education. Butler recommends investing 20 percent of both portfolios in zero- yield, small-cap, high-technology equity issues. Did Butler’s statements to King and Lanai violate the CFA Institute Code and Standards?

1. Neither statement violated the Code and Standards
2. Only in King’s case did Butler violate the Code and Standards
3. Only in Lanai’s case did Butler Violate the Code and Standards

The standard breached is (linking to correct CFA standard):

2. The mosaic theory holds that an analyst:

A. Violates the Code and Standards if the analyst fails to have knowledge of and comply with applicable laws

B. Can use material public information and nonmaterial nonpublic information in the analyst’s analysis

C. Should use all available and relevant information in support of an investment recommendation

The standard breached is(linking to correct CFA standard):

Answer 1

The correct answer is

Only in Lanai’s case did Butler Violate the Code and Standards

Other options are not correct because Larry king has large asset base so he wants to invest aggressively so given his age 20% might be appropriate but in the case of Lanai, Lanai wants to achieve a steady rate of return with low volatility so in his case this small cap high technology might not be suitable.

The code applicable here is suitability

The correct answer is

Can use material public information and nonmaterial nonpublic information in the analyst’s analysis

The mosaic theory says that analyst can use material public information and non-material non-public information to value a security but they should maintain the records

The code applicable is Material Non-public information