I’m rereading Ethics for the 3rd time now because it is still my lowest score and the only one keeping me from passing the mocks. I’ll put the actual question I have from page 95 Example 5 to save you the trouble of opening the book yourselves as it is probably an easy question for you to answer. (Sorry for the long-windedness in advance)
My question is this: In a situation where the investment is not suitable for the client’s portfolio but the CFA member/candidate continues to invest anyway after doing “extensive analysis” always going to be a violation of BOTH Standard IIIC Suitability (that one is obvious) AND Standard IIIA Loyalty, prudence, and care? I know that they have to follow the IPS and breaking that is violating IIIA, so does that mean this cross over results in a violation of every investment in an unsuitable asset? If that is the case, couldn’t IIIC just all be incorporated into IIIA because I don’t really see the difference in the two anymore…
The example is quoted as follows:
Max Gubler, CIO of a property/casualty insurance subsidiary of a large financial conglomerate, wants to improve the diversification of the subsidiary’s investment portfolio and increase its returns. The subsidiary’s investment policy statement provides for highly liquid investments, such as large-cap equities and government, surpranatural, and corporate bonds with a minum credit rating of AA and maturity of no more than five year. In a recent presentation, a venture capital group offered very attractive prospective returns on some of its private equity funds that provide seed capital to ventures. An exit strategy was already contemplated, but investors would have to observe a minum three-year lockup period and a subsequent ladderred exit option for a maximum of one-third of their shares per year. Gubler does not want to miss this opportunity. After extensive analysis, with the intent to optimize the return on the equity assets within the subsidiary’s current portoflio, he invests 4% in this seed fund, leaving the porfolio’s total equity exposure still well below its upper limit…