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1. John Smith is a portfolio manager at ABC Investment
Management, a firm that follows the CFA Institute Code of
Ethics and Standards of Professional Conduct. He is
responsible for managing the portfolios of several high-networth clients, including his brother-in-law, Peter Jones.
Smith has a discretionary authority over Jones' portfolio
and does not charge him any fees for his services. Smith
also does not disclose this arrangement to his employer or
his other clients. Which of the following statements is most
accurate regarding Smith's actions?
A) Smith is violating the Standard of Loyalty, Prudence,
and Care by not charging Jones any fees.
B) Smith is violating the Standard of Fair Dealing by
giving preferential treatment to Jones.
C) Smith is violating the Standard of Disclosure of
Conflicts to Employer by not informing his employer of his
relationship with Jones.
D) *Smith is violating the Standard of Disclosure of
Conflicts to Clients by not informing his other clients of his
relationship with Jones.*
Rationale: Smith is violating the Standard of Disclosure of
Conflicts to Clients by not disclosing his relationship with
Jones to his other clients, who may perceive this as a
potential conflict of interest that could compromise Smith's
objectivity and fairness. Smith should either terminate his
relationship with Jones or obtain written consent from his
other clients after disclosing the nature and scope of his
arrangement with Jones.
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