is it ok without disclosure?

CFA Level III Ethics
#1

aaa

#2

Yes… passive investment

#3

.

#4

seems like conflicting answers…

#5

Can not find anything similar in the CFA material. I have a ghost of a memory of a question in the CFAI books of an employee buying a diversified mutual fund owning a restricted stock which was ok. Went back all three levels, can not find it… This case seems to be different than a diversified fund.

#6

If the mutual fund invests heavily in a certain sector and you do business in that sector, it needs to be disclosed

#7

This example was directly in the curriculum in the case study section

#8

This is a question in Volume 1 on page 161:

During a round of golf, Rodriguez, chief financial officer of Mega Retail, mentions to Hart, a local investment adviser and long-time personal friend, that Mega is having an exceptional sales quarter. Rodriguez expects the results to be almost 10 percent above the current estimates. The next day, Hart initiates the purchase of a large stake in the local exchange-traded retail fund for her personal account.

Answer is: A. Hart violated the Code and Standards by investing in the exchange- traded fund that included Mega Retail.

I believe in your case would be similar and would be a violation. Your firm would have materical non-public information on those companies (hence placing them on the restricted list) therefore investing in a fund that contain them would be a violation. The implication here is that the fund you are investing in is not a market index fund, but rather an industry specific ETF or Mutual Fund that focuses on shares of the company(ies) in question or the industry the companies are in.

#9

I always go by the rule - ‘when in doubt you disclose’

So figured it should be a violation.

#10

agreed with zerobonus

#11

That’s interesting GPM, I wouldn’t have thought about it that way. The example you give shows clear intent to make use of material non-public information for personal gain, the original question that started this thread is more vague on that point and discusses disclosure. Although companies should be put on restricted list when the firm has material information about them, does that mean that simply being on the restricted list means that the employees have material non-public information about the companies in question?

My reasoning would be that this situation was akin to that of the engineer who ran an energy-focused fund and invested into energy issues via blind trust (I think this was reading 4). The recommendation there was that to avoid a conflict of interest he should invest into energy issues via a specialized mutual fund managed by a third-party instead of a blind trust. So from that perspective an open-ended mutual fund would be okay for the employees.

As far as disclosure, I’m not even sure how that would work on a practical level, would you tell the clients that the firm’s employees may invest into ETFs that trade restricted stocks? Finally, wasn’t there a mention that restricted lists shouldn’t be broadly distributed as they encourage the type of trading that they were meant to prevent?

I do think that your reasoning/answer is ultimately correct as opposed to my approach, but it does bother me that we’ll never know the real answer.

#12

I dont know the answer to this, but I’m with Markd.

If you just owned an active fund, you may not even know what’s in the fund, its at the manager’s discretion.

Anther factor that came into my mind was that my employer doesnt not require quartley disclosure of any MF transactions but ETFs are mandatory.

EDIT: I had a bad example that’s irrelevant

#13

From a ‘real life’ perspective, I know that I work for a large IBank with stringent compliance policies and any investment where we do not have discretion is permitted. I believe the premise would be that the fund could choose to change composition at almost any time and you have no control over weighting or composition.

#14

markd10027-I agree, the question is open ended and we’ll never know, arggggg.

Without getting into details that would discuss the question futher, there was elaboration on the situation beyond what was in the initial post. But I believe it is fine to discuss this in the context of conflict of interest vs. material non-public information.

I do recall the case you’re referencing. It was “The Consultant” in book 1, on page 243. The case discussion said:

  1. the ideal way to avoid conflict of interest real or perceived is to refrain from investing in the energy sector

  2. alternatively, establish the blind trust where his advisor has full discretionary authority

  3. or invest in mutual funds that invest in energy related investments where he has no authority

So the question is, is this solely a case of conflict of interest (in which case it would follow “The Consultant”) or is this a case of material non-public information (and it would follow the “Mega Retail” question).

Clearly it is a case of conflict of interest, but I believe the addition of the stocks being of the firm’s restricted list (and the manner of purchase being used to circumvent direct investment which would be a violation) raises it to the level of MNPI and it should therefore follow “Mega Retail”. To invest in that manner would be a violation that would not be alleviated by mere disclosure.

#15

.

#16

The problem I face in answering ethics question is inability to access further information and unfamiliarity with the context. If it was real life, we could clarify many doubts.

What is important here is the intention. If employees knew the fund had substantial investment in “restricted list” and purchase decision was driven by that , they are in a violation, IMHO.

I’m not familiar with US system, can any of you enlighten me, can an investor know list of companies and their weights in the open end fund before investing in the fund?

#17

What is important is the intention.

#18

Chaddy, that’s the dumbest ideal ever. You should limit you’re hypothetical senarios to ideas that are even remotely possible.

I’m not saying that I truly know what the right answer is, you’re example of creating 500 MF’s isn’t going to convince anybody.

#19

???

#20

Thnx everybody,

just another questions, am i in violation if i didnt allocate to my wife parents?

is the advisor in violation because he didnt disclose or bcoz of misrepr.?