Hi everyone, I have a problem with one of the ethics questions in the mock test PM session (1st one) from CFA Institute (under candidate resources). I really believe the explanation is incorrect. Here it goes:
“Norman Bosno, CFA, acts as an outside portfolio manager to a sovereign wealth fund. Raphael Palmeti, a fund official, approaches Bosno to interest him in investing in Starlite Construction Company. He tells Bosno that if he approves a $2 million investment in Starlite by the fund, Bosno will receive a “bonus” that will make him wealthy. Palmeti also adds that if Bosno decides not to invest, he will lose the fund account. After doing a quick and simple analysis, Bosno determines the investment is too risky for the fund. If Bosno agrees to make the investment, which of the Standards of Professional Conduct is least likely to be violated?”
a) Diligence and Reasonable Basis
b) Additional Compensation Arrangements
c) Loyalty, Prudence, and Care
You might obviously try to think about it before reading the solution below:)
But let me first tell you what I thought the solution was and my reasoning:
I selected b) Additional Compensation Arrangements – because this standard belongs to Duties to Employers and the request has come from the representative of Bosnos’s employer, Bosno wouldn’t fail to disclose any additional compensation arragements to his employer since these were in fact offered to him by the employer directly. On the other hand, he would violate Loyalty to his client, investor in the fund, by engaging in this activity. Also, he didn’t have reasonable basis to make the investment (in fact, his analysis indicated that the investment wasn’t suitable). Therefore, standard “Additional Compensation Arrangements” was least likely to be violated.
I thought this was pretty sound reasoning, but OUCH!
Here goes the correct asnwer according to CFAI and the explanation:
Despite Bosno undertaking a quick and simple analysis to determine that the investment would be too risky for the sovereign wealth fund, that analysis does not necessarily mean he was not diligent and did not have a reasonable basis for making that determination.”
So I guess they are saying the correct answer should have been a).
I personally strongly believe this is simply not true. Specifically, Bosno’s analysis might be sufficient but if he DOES agree to make the investment, he will not have established a reasonable basis for this investment action (in fact, quite the direct opposite!) and therefore will have violated the related standard, Diligence and Reasonable Basis.
Therefore, option a) cannot be the right answer.
What do you guys think?
I think (b) is definitely a good candidate for violation because direct monetary compensation for investment is not allowed whether you disclose it or not…
HOWEVER, I do see your point. The key phrase here is “if Bosno agrees to make the investment”. Since the question already establishes that the fund is too risky, if Bosno agrees to invest, he is directly going against his analysis, which is not diligent nor reasonable.
I think the CFAI twisted the question one too many times and was caught out themselves – it took me a few reads to work through the logic as well. It’s these questions that worry me in the exam, but I’ve been told that if there was such a question, it will probably end up being (a) and (b) accepted as right answers.
Good spot @Prosper0!
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