Reading 4

Asset Manager Code of Professional Conduct

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CFA Level III Item-set - Question
Study Session 2
June 2018

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Reading 4

Asset Manager Code of Professional Conduct

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FinQuiz Item-set ID: 11813
Questions 1(11814) through 6(11819) relate to Reading 4

Fennini Associates Case Scenario
Fennini Associates is an asset management firm providing investment management services to
individual and institutional clients. Fennini Associates was founded and continues to be owned
by the Fennini family. Due to the firm’s relatively small size, it has sufficient capacity to cater to
domestic (Italian) clients only.

Benito Galeazzi, CFA is one of the portfolio managers serving the firm. Galeazzi manages the
investment portfolio of Izraac Inc.’s defined benefit pension fund. Employees participating in the
defined benefit pension fund have an average age of 50 years. In addition the plan offers early
retirement provisions for those employees wanting to terminate their employment prior to the
retirement. The fund’s portfolio is currently invested in AAA-rated long term corporate bonds,
Treasury bonds, and low-beta equity securities. The fund’s policy statement expressly prohibits
investing in high-risk ventures which may threaten the fund’s retirement obligations.
Galeazzi believes the fund’s investment mandate is too conservative. He feels the fund ought to
be taking greater risks in order to secure higher returns to fund the retirements of its employees
who are not far away from retirement. After carefully evaluating the possible investment options,
Galeazzi identifies a venture capital firm as a potential investment for the fund. Venture capital
deals have had a 60% success rate in Italy over the past two years with 80% of these firms being
able to make a public offering of their shares. With the success rate of these deals in mind,
Galeazzi allocates 10% of the pension fund’s funds to a local venture capital firm, LeQ-Twon,
stock. The investment will be locked for a five-year period and is subject to an early withdrawal
penalty. However, according to Galeazzi, the high expected returns on the investments make the
risk bearing worthwhile.
Antwan Pate is another portfolio manager serving the firm. Pate manages an endowment fund’s
investment portfolio. His expertise primarily pertains to U.S. corporate small-cap growth stocks.
The endowment fund has engaged Pate primarily due to his specialized skills with respect to
these stocks. Pate has now decided to explore small-cap growth stocks of corporations situated in
emerging market countries. Prior to allocating the stocks to the fund’s portfolio, he notifies and
receives the fund sponsor’s agreement. His notification includes an explanation of the
investment’s risk factors and the proportion of leverage to be used. The fund will retain the
stocks in its portfolio for a one-year period during which the stocks’ performance may be
observed. Should the fund wish to liquidate the stocks, at the end of the one-year observation
period, it may do so without any penalties.
The chief executive officer at Fennini Associates believes the firm needs to adopt stronger
measures to ensure greater compliance to the Asset Manager Code. If the firm is able to
implement the Code, it, he quotes, “will hold a special rank in the asset management market”.


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Reading 4

Asset Manager Code of Professional Conduct

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The chief executive recommends the firm adopt the following two measures to aid its
compliance with the Code.
Measure 1: Appoint a chief compliance officer
Due to the firm’s limited resources, the firm’s senior portfolio manager can be reappointed to
this position. The chief compliance officer should report directly to the firm’s board. The role of
the chief compliance officer should include communicating compliance policies and procedures
to employees, conducting employee training, and investigating possible breaches of compliance
procedures with managers.
Measure 2: Implement a disaster recovery plan.
To ensure the firm’s and client’s records are kept safe, in the event of a natural disaster or
financial market disruption, the firm must implement a contingency plan. This plan should cover:
conducting staff training related to the compliance procedures
back-up plans to ensure communications with mission critical vendors, suppliers, and clients
is maintained
testing the plan to ensure its integrity and robustness on a firm-wide basis
maintaining back-up copies of records in an electronic format
Bruno Macari is one of Fennini Associates’ clients. His portfolio is managed by Ron David.
When requested by Macari, David discloses the incentive fees, specific management fees, and
commissions periodically charged to Macari for managing his portfolio. In addition to this
practice, David discloses the periodic gross-of fees returns to all existing clients whose portfolio

he manages and discloses an estimate fees figure to any prospect who wishes to engage him as
manager.
The chief executive has drafted the following policies which he believes will enhance the firm’s
compliance with the Asset Manager Code.
Policy 1:

Policy 2:

Client portfolio holdings must be valued on an annual basis or as circumstances
dictate. It is encouraged that holdings be valued using an internal valuation model
which has been developed by the firm’s senior portfolio managers. The valuation
basis must be disclosed to clients and the disclosure should be asset-class specific.
The firm’s proxy voting policies should be disclosed to clients covering issues
such as the actions needed to be taken when votes are against firm management
and how shareholding responsibility is delegated. Information pertaining to how
client shares were voted should be disclosed to the concerned client upon request.

FinQuiz Question ID: 11814

1. With respect to the venture capital investment, Galeazzi violated the Asset Manager Code in
all of the following ways except for:
A. failing to disclose the state of the venture capital market to his clients.
B. failing to conduct stress tests on the venture capital investment prior to the allocations.
C. failing to determine the suitability of the investment.

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Reading 4


Asset Manager Code of Professional Conduct

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FinQuiz Question ID: 11815

2. With respect to the allocation of emerging market stocks to the fund’s portfolio, Pate has
most likely:
A. complied with the Asset Manager Code.
B. violated the Code by imposing a one-year observation period.
C. violated the Code by not adequately disclosing the change in investment strategy to the
fund.
FinQuiz Question ID: 11816

3. Measure 1 fails to comply with guidelines of the Asset Manager Code with respect to:
A. the independence of the senior portfolio manager as chief compliance officer.
B. failing to engage an independent party as chief compliance officer.
C. the chief compliance officer’s duties.
FinQuiz Question ID: 11817

4. Has the chief executive officer accurately outlined the contents of the disaster recovery plan
(in measure 2)?
A. Yes.
B. No, he has failed to consider the procedures to test the plan on a firm-wide basis.
C. No, he has failed to ensure alternative plans are in place for monitoring, analyzing and
trading investments if primary systems become unavailable.
FinQuiz Question ID: 11818

5. In context of his fee disclosure practices, David has violated the Asset Manager Code with
respect to:

A. both Macari and prospects.
B. Macari only.
C. prospects only.
FinQuiz Question ID: 11820

6. Which of the following policies most closely complies with Asset Manager Code guidelines?
A. Both policies.
B. 1
C. 2

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