PINV04A/201/0/2019

Tutorial letter 201/0/2019

Programme in Investment Analysis and
Portfolio Management

Ethics
PINV04A

Year Course

Centre for Business Management

This tutorial letter contains the answers to

your assignment questions
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CONTENTS

1 INTRODUCTION

2 SUGGESTED SOLUTIONS TO ASSIGNMENT 01

3 SUGGESTED SOLUTIONS TO ASSIGNMENT 02

4 EXAMINATION GUIDELINES

5 CONCLUDING REMARKS

1 INTRODUCTION

The purpose of this tutorial letter is to provide you with suggested answers to Assignment 01 and
02, and give you guidelines for the examination.

2 SUGGESTED ANSWERS TO ASSIGNMENT 01

Question Choice Relevant standard

1 2 According to standard III(E) Preservation of

Confidentiality. Members and Candidates must keep
information about current, former, and prospective
clients confidential unless:
i) The information concerns illegal activities
on the part of the client or prospective
client,
ii) Disclosure is required by law, or
iii) The client or prospective client permits
disclosure of the information.

2 3 According to Standard IV(B) Additional

Compensation Arrangements, Povani should
disclose the details of the volunteer position to his
employer and obtain a written permission from his
employer.

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3 4 According to Standard IV(B) Additional

Compensation Arrangements, Paul should disclose
the details of the volunteer position to his employer
and obtain a written permission from his employer.

4 2 Standard IV(C) states that members and candidates

must take steps to prevent persons acting under
their supervision from violating laws, rules,
regulations, firm policies, or the Code and
Standards.
5 4 According to standard V(A) Diligence and
Reasonable Basis members and Candidates must:
i) Exercise diligence, independence, and
thoroughness in analyzing investments,
making investment recommendations, and
taking investment actions.
ii) Have a reasonable and adequate basis,
supported by appropriate research and
investigation, for any investment analysis,
recommendation, or action.

6 1 According to standard V(B) Communication with

Clients and Prospective Clients Members and
Candidates must:
i) Disclose to clients and prospective clients the
basic format and general principles of the
investment processes they use to analyze
investments, select securities, and construct
portfolios and must promptly disclose any
changes that might materially affect those
processes.
ii) Use reasonable judgment in identifying which
factors are important to their investment
analyses, recommendations, or actions and
include those factors in communications with
clients and prospective clients.
iii) Distinguish between fact and opinion in the
presentation of investment analyses and
recommendations.
7 3 According to Standard V(B) Communication with
Clients and Prospective Clients, Misheck should
disclose the situation to his employer and, if then
asked to prepare a report, also disclose the situation
in the report.

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8 4 According to standard VI(B) Priority of Transactions
Investment transactions for clients and employers
must have priority over investment transactions in
which a Member or Candidate is the beneficial
owner. Muthupa violates the standard by front
running 200 shares of Hayfield Co before clients had
enough time to act on the recommendation.
9 3 RachyMarav has violated Standard VI(C) by not
disclosing the referral arrangement at Baker to his
clients. Standard VI(C) does not distinguish between
referral payments paid by a third party for referring
clients to the third party and internal payments paid
within the firm to attract new business to a
subsidiary. Members and candidates must disclose
all such referral fees. Therefore, RachyMarav is
required to disclose, at the time of referral, any
referral fee agreement in place among Baker’s
departments. The disclosure should include the
nature and the value of the benefit and should be
made in writing.
10 2 Standard VII(A) does not cover expressing opinions
regarding the CFA Program or CFA Institute.
Members and candidates are free to disagree and
express their disagreement with CFA Institute on its
policies, procedures, or any advocacy positions
taken by the organization. When expressing a
personal opinion, a candidate is prohibited from
disclosing content-specific information, including any
actual exam question and the information as to
subject matter covered or not covered in the exam.
11 4 Turn down the additional compensation because it
will create undue pressure on him to achieve strong
short-term performance.

12 3 Did not violate the Standards in voting the shares in

the manner requested by Johnstone or in directing
trades to the brokerage firm.

13 4 Phineas did not violate the Code and Standards.

14 3 Michael violated the Standards because he failed to

separate opinion from fact.

15 3 By reporting Smith to the CFA Institute, Austin has

misused the Professional Conduct Program, thus
violating the Code and Standards.

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3 SUGGESTED ANSWERS TO ASSIGNMENT 02

Question Choice Relevant standard

1 4 According to standard II (A) Material Nonpublic

Information Members and Candidates who possess
material nonpublic information that could affect the
value of an investment must not act or cause others
to act on the information.

Mosaic Theory. A financial analyst gathers and

interprets large quantities of information from many
sources. The analyst may use significant
conclusions derived from the analysis of public and
nonmaterial nonpublic information as the basis for
investment recommendations and decisions even if
those conclusions would have been material inside
information had they been communicated directly to
the analyst by a company. Under the “mosaic
theory,” financial analysts are free to act on this
collection, or mosaic, of information without risking
violation.
2 1 According to standard III(A) Loyalty, Prudence, and
Care Members and Candidates have a duty of
loyalty to their clients and must act with reasonable
care and exercise prudent judgment. Members and
Candidates must act for the benefit of their clients
and place their clients’ interests before their
employer’s or their own interests.

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3 3 According to standard V(B) Communication with
Clients and Prospective Clients Members and
Candidates must:
i) Disclose to clients and prospective clients the
basic format and general principles of the
investment processes they use to analyze
investments, select securities, and construct
portfolios and must promptly disclose any
changes that might materially affect those
processes.
ii) Use reasonable judgment in identifying which
factors are important to their investment
analyses, recommendations, or actions and
include those factors in communications with
clients and prospective clients.
iii) Distinguish between fact and opinion in the
presentation of investment analyses and
recommendations.
4 2 Refer to standard III(C) Suitability.

5 2 Shava violated Standard VII(B) Reference to CFA

Institute, the CFA Designation, and the CFA
Program because of her criticism of Tagwirei’s
credentials.
6 2 Refer to standard I(A) Knowledge of the Law.

7 4 According to standard IV(B) Additional

Compensation Arrangements. Members and
Candidates must not accept gifts, benefits,
compensation, or consideration that competes with
or might reasonably be expected to create a conflict
of interest with their employer’s interest unless they
obtain written consent from all parties involved.
8 4 Standard IV(C) states that members and candidates
must take steps to prevent persons acting under
their supervision from violating laws, rules,
regulations, firm policies, or the Code and
Standards.
9 1 Refer to Standard III: Duties to Clients

10 2 According Standard III(D) Performance Presentation

When communicating investment performance
information, Members and Candidates must make
reasonable efforts to ensure that it is fair, accurate,
and complete.
11 3 All of the pension plan beneficiaries.

12 2 Buying assets that are inconsistent with the

portfolio’s IPS
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13 4 No, only the demand for a short-term interest credit

is consistent.

14 1 No.

15 2 Yes.

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4 EXAMINATION GUIDELINES

The examination paper will consist of 40 multiple choice questions. All the questions will be based
on the learning outcome statements.

5 CONCLUDING REMARKS

I suggest that you go through your assignment and compare your answers and more importantly
how you got to your answers, with the proposed solutions. This is a vital component of the
learning process and will help to improve your understanding of the study material.

You are welcome to contact me via e-mail, telephonically, to discuss any problems you may
encounter in your studies.

Best wishes,

Godfrey Marozva, CFA, PhD

DEPARTMENT OF FINANCE, RISK MANAGEMENT AND BANKING

UNISA 2019