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Case Study

Case Study. Super Selection. Generalities. If a employee is not a member, may be bound to Code and Standards if they are incorporated in firm’s compliance policies Types of violations having occurred: Responsibilities of Supervisors (III(E)) Disclosure of Conflicts of Interest (III(C))

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Case Study

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  1. Case Study Super Selection

  2. Generalities • If a employee is not a member, may be bound to Code and Standards if they are incorporated in firm’s compliance policies • Types of violations having occurred: • Responsibilities of Supervisors (III(E)) • Disclosure of Conflicts of Interest (III(C)) • Disclosure of Additional Compensation Arrangements (III(D)) • Reasonable Basis and Representations (IV(A.1)) • Fiduciary Duties (IV(B.1)) • Portfolio Investment Recommendations and Actions (IV(B.2)) • Priority of Transactions (IV(B.4))

  3. Responsibilities of Supervisors • Determining whether or not a manager holds supervisory responsibilities depends on a “facts and circumstances” test: • a person who has authority to hire, fire, reward and punish an employee • May be supervisor even if employee does not report directly to manager • Supervisor has responsibility: • to take appropriate steps to prevent violations of applicable laws • to ensure that firm’s policies are being followed and violations addressed

  4. Duty to Employer • Must disclose to employer all conflicts of interest (e.g. ownership of stock options) • Must disclose to employer additional compensation arrangements received; compensation received as a director of a cie (options and cash) should be disclose • Disclosure of conflicts additional compensation provide employer and clients necessary information to evaluate the objectivity of recommendations being made by the member

  5. Reasonable basis • Changing a recommendation under pressure is a violation of IV(A.1) • Members should diligently and thoroughly researched security prior to making a decision • Supervisor should at least annually review investment actions taken by employees to determine if there was a reasonable and adequate basis

  6. Fiduciary Duties • Investing and influencing an IPO in order to boost the price of a stock that we own is a violation of IV(B.1) because it’s a misuse of professional position for own personal benefits (breach of fiduciary duty) • Should invest in the sole interest of clients

  7. Investment Recommendations and Actions • Not taking into consideration needs and circumstances of clients before purchasing a stock is a violation of IV(B.2) • Supervisor should at least annually compare the suitability of investment actions taken for client accounts with investment policy

  8. Priority of Transactions • Placing personal trades before client’s trades (or in close proximity) is a violation of IV(B.4) • AIMR’s Personal Investing Task Force Report recommends that all personal trades be precleared and that duplicate broker confirmations be obtained • Supervisor should review personal account activity on a regular basis

  9. Case Study The Glenarm Company

  10. Generalities • Type of violations having occurred: • Obligation to inform Employer of Code and Standards (III(A)) • Disclosure of Additional Compensation Arrangements (III(D)) • Disclosure of Conflicts to Employer (III(E)) • Duty to Employer (III(B))

  11. Informing the Employer of Code and Standards • Members must: • inform their employer that they are obligated to comply with Code and Standards • deliver a copy of Code and Standards • III(A) applies technically to current employers, but an implication of III(A) is that member should not accept employment in situations that will not allow them to adhere to Code and Standards • Members should make effort to learn about a new firm and individuals working in the firm

  12. Loyalty to Employer • Members should not undertake independent practice that could result in compensation unless they obtain written consent from both employer and client • Members are free to make arrangements to leave employer so long as they respect their duty to current employer (duty not to engage in activities that would be detrimental to employer): • solicitation of clients and prospects violates III(B) (even if carried out in “personal hours” and/or social activities) • solicitation of prospects not corresponding to characteristics of current employer is permitted • misappropriation of employer property (except with consent of employer) violates III(B) (even list of rejected research)

  13. Disclosure of Additional Compensation and Conflicts • Members must to employer in writing any additional compensation arrangements and conflicts of interest (III(C), III(D)): • consultation arrangement should be disclosed so firm could make an informed determination about whether the outside activities impaired ability of member to perform • Members must obtain written permission in advance of entering into relationship

  14. Case Study Preston Partners

  15. Generalities • If viewing two cie leaders is only a small factor in an investment decision-making process, the Mosaic theory applies and no insider information is being used • Good research with Mosaic Theory complies with IV(A.1) Reasonable basis • Types of violations having occurred: • Portfolio Investment Recommendations and Actions (IV(B.2)) • Fair Dealing (IV(B.3)) • Responsibilities of Supervisors (III(E))

  16. Responsibilities to Clients and Interactions with Clients • Members must consider the client’s tolerance for risk, needs, circumstances, goals, and preferences in matching a client with an investment (IV(B.2)): • purchasing shares for all clients without determining suitability and appropriateness of share for each account violates IV(B.2) • Written investment objectives and guidelines policy statements should be prepared for all accounts • Should correct any transactions in contradiction with investment policy (reimbursed losses)

  17. Allocation of Trades • Members should deal fairly with clients when taking investment actions (IV(B.3)): • allocating trade to largest accounts first discriminate and violates IV(B.3) • “Equal treatment” is not necessary • Trade allocation procedures should ensure: • fairness to clients • timeliness and efficiency in execution • accuracy in manager’s record for trade orders and maintenance of client account position • Should disclose procedures to clients (must be fair)

  18. Responsibilities of Supervisors • Failure by supervisor to adopt adequate procedures (e.g. unclear) to prevent violations violates III(E) • Supervisors should know what constitutes an adequate compliance program • Supervisors should ensure that adequate training concerning procedures of the firm is given to each new employee

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