PINV04A/101/0/2019

Tutorial Letter 101/0/2019

Ethics
PINV04A

YEAR COURSE

Centre for Business Management

IMPORTANT INFORMATION:
Please register as a user of myUnisa as soon as possible. It is free of charge. Visit https://my.unisa.ac.za
for details. At myUnisa you will be able to get in touch with fellow students, submit your assignments,
update your details, and participate in discussion forums.
It is also important that you provide Unisa with your cellular number because important announcements
may be sent to you by sms.
 CONTENTS

Page

1 INTRODUCTION AND WELCOME 3

2 PURPOSE OF AND OUTCOME FOR THE MODULE 3
3 LECTURER AND CONTACT DETAILS 4
4 MODULE RELATED RESOURCES 4
5 STUDENT SUPPORT SERVICES FOR THE MODULE 5
6 ASSESSMENT 5
7 EXAMINATION 7
8 SUMMARY 7
9 ASSIGNMENT QUESTIONS 8

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 PINV04A/101

Dear Student

1 INTRODUCTION AND WELCOME

Welcome to the module: Ethics (PINV04A). You have enrolled for an interesting, yet challenging
module. Plan your study programme so that you have time for reading and summarizing, as well as
practicing the calculations. Please note the due dates of your assignments for the programme.
Structure your time so that you don’t do them all at the last minute.

1.1 Tutorial matter

The study material for the module Ethics (PINV04A) is only available online on myUnisa. There is no
study guide for this module. You may use outcomes given in this tutorial letter as a guide on what you
need to cover. You need to download the following material.

● Tutorial letter 201 will be available about 2 weeks after the closing date of the second
assignment, which will contain the solutions to assignment 01 and 02.

1.1 To get started…

Please note that the study material for this module is only available online and you therefore need
to go online to see your study materials and complete the learning activities for this course. Go to the
website here: https://my.unisa.ac.za and login with your student number and password. You will see your
module site in the row of modules in the orange blocks across the top of the webpage. Remember to
also check in the –more site- tab if you cannot find it in the orange blocks. Click on the module you want
to open and read the Welcome page.

Please consult with the myStudies @Unisa publication for more information on the activation of
your myLife email address as well as obtaining access to the myUnisa module site.

2 PURPOSE OF AND OUTCOMES FOR THE MODULE

2.1 Purpose
This module will be useful to people who are in investment management, in particular Investment
Analysis and portfolio management. It is intended mainly to equip students with the Code of Ethics and
Standards of Professional Conduct.

2.2 Outcomes
On completion of this module, you should be able to:

describe the structure of the CFA Institute Professional Conduct Program and the process for the
enforcement of the Code and Standards;

state the six components of the Code of Ethics and the seven Standards of Professional Conduct;

explain the ethical responsibilities required by the Code and Standards, including the multiple
subsections of each Standard.

demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by
applying the Code and Standards to situations involving issues of professional integrity;

distinguish between conduct that conforms to the Code and Standards and conduct that violates the
Code and Standards;

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recommend practices and procedures designed to prevent violations of the Code of Ethics and
Standards of Professional Conduct.

3 LECTURER AND CONTACT DETAILS

3.1 Lecturer
Any enquiries of an academic nature concerning this module, such as an enquiry about a specific
calculation in the prescribed book, may (during office hours) be directed to:

Dr. Godfrey Marozva: email: marozg@unisa.ac.za

Fax 086 640 9939
Tel (012) 429 4977

3.2 Department
This module is offered by academic staff members from the Centre for Business Management (CBM).
Administrative queries may be directed to the appropriate department of the Centre for Business
Management. Examples of administrative queries are registration matters, study material matters and
account queries. Refer to the below contact detail:

3.3 University
The Centre for Business Management is a part of the University of South Africa. The contact numbers
for the different administrative departments are supplied below.

CENTRE FOR BUSINESS MANAGEMENT INFORMATION:

Enquires/ Call centre (012) 352-4288 cbm@unisa.ac.za

Assignments (012) 352-4376/ 4174/ 4274 cbmassignments@unisa.ac.za

Certificates (012) 352-4059/ 4058/ 4063/ 4348 cbmceremonies@unisa.ac.za

Examination (012) 352-4252/ 4294 cbmexaminations@unisa.ac.za

Registrations (012) 352-4307 cbmregistrations@unisa.ac.za

Study material (012) 429 4920 cbmstudymaterial@unisa.ac.za

Finance (012) 352 4227/ 4350/ 4215/ 4224/ Cbmfinance@unisa.ac.za

4236/ 4230
Fax number 086 686 3401 -

International +27 12 352 4288

4 MODULE RELATED RESOURCES

4.1 Prescribed book

Standards of Practice Handbook (11th Edition, 2014 – CFA Institute) ISBN 978-0-938367-22-2
This book is available at cfabookstore.com to buy (hardcopy) or download (pdf format) free of charge
from the website address below.

http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2014.n4.1

For this module, PINV04A, students have to study the following pages in the Standards of Practice
Handbook 2014 (11th Edition – CFA Institute) for examination purposes: The Code of Ethics and

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Standards I to VII (pp 1-246) Work through the Sample CFA Institute Standards of Practice Exam
(with Answers and Analysis) (pp 223- 246).

5 STUDENT SUPPORT SERVICES FOR THE MODULE

Important information appears in your myStudies@Unisa brochure including general time

management and planning skills.

6 ASSESSMENT

6.1 Assessment plan

Assignments are seen as part of the learning material for this module. As you do the
assignment, study the reading texts, consult other resources, discuss the work with fellow
students or do research, you are actively engaged in learning. Paying attention to the
assessment criteria for each assignment will help you to understand what is required of you
more clearly.

You may submit written assignments and assignments done on mark-reading sheets either by
post or electronically via myUnisa. Assignments may not be submitted by fax or e-mail. For
detailed information and requirements as far as assignments are concerned, see the brochure
my Studies @Unisa available on the Unisa website.

Compulsory assignment
There are two compulsory assignments for this module in the form of multiple-choice
questions. There are non-negotiable submission deadlines for each of the assignments and
you must submit these assignments if you wish to gain entry to the examination. The
assignments contribute to your year mark.

Year marks
Your year mark, based on the mark obtained for the two compulsory assignments, contributes
20% towards your final mark, while your examination mark contributes 80%.

The combined weighted average of your year mark and examination mark must be 50% or
higher for you to pass the module. However, you must obtain a minimum of 40% in the
examination, regardless of your year mark. If you obtain less than 40% in the examination your
year mark will not be taken into account and you will fail.

For example:
Assignment 01 mark = 50% Assignment 02 mark = 90%. These marks each contribute 50%
towards the final 20% year mark.
Assignment no Mark Weight Total
Ass. 01 50% 50% 25
Ass. 02 90% 50% 45
70 x 20% of final = 14

Assume an examination mark of 50%

80% of the examination mark = 40%

Final mark = (20% assignment mark) + (80% examination mark)

= 14% + 40%
= 54%

For general information and requirements as far as assignments are concerned, see the
brochure my Studies @ Unisa, which you received with your study material.
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6.2. Unique assignment numbers
Each assignment has been allocated a unique number in order to identify it in the Unisa
assessment plans. Please ensure you always indicate the correct unique number when
submitting assignments.

Unique assignment numbers:

Assignment no Unique number Due date

Assignment 01 734484 21 June 2019

Assignment 02 791411 20 September 2019

6.3 Due dates of assignment

As indicated earlier, you should preferably submit your assignments at

https://my.unisa.ac.za prior to the due date of each assignment. Do not wait until the last minute
to submit.

Please ensure that your assignments reach the Unisa main campus by the due dates should
you not be able to submit your assignments at myUnisa and need to mail us your assignments
in hard copy format. Requests for extension of due dates for assignments will not be granted.
These due dates have been set to allow you sufficient time for the completion of other
assignments and your preparation for the examination.

Information about whether Unisa has received your assignment and the mark attained for an
assignment can be obtained from https://my.unisa.ac.za.

6.4 Submission of assignments

To submit an assignment via myUnisa:

 Go to myUnisa at https://my.unisa.ac.za
 Log in with your student number and password.
 Select the module.
 Click on assignments in the left-hand menu.
 Click on the assignment number you want to submit.
 Follow the instructions on the screen.

Only if you do not have access to the Internet you can submit your assignment in hard copy.
For assignments that only consists of multiple choice questions and indicated that you should
use a mark-reading sheet you have to follow the following procedures when completing the
mark-reading sheet.

1. use an HB pencil
2. indicate your student number and the above-mentioned unique number on the mark-
reading sheet
3. follow the instructions for completing mark-reading sheets. Incomplete mark-reading
sheets will be returned to you unmarked
4. submit the assignment in good time. It must have reached the Unisa Main Campus by the
above-mentioned date. Otherwise it might not be in time to be marked by the Assignment
Section.

7 EXAMINATIONS
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Examination admission will be granted to all students who submit the compulsory assignment. Students
who do not submit the assignment 01 will NOT be allowed to write the examination.

The provisional examination dates have been published at https://my.unisa.ac.za

The examination paper for PINV04A will consist of 40 multiple choice questions. A student must attain a
mark of at least 40% in order to qualify for admission to the supplementary examination.

8 SUMMARY

We wish you success in your studies this year and hope that you will find this module interesting and
informative. We believe that doing this module will contribute to both your personal and professional
development.

Best wishes

Your lecturer

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9. ASSIGNMENT QUESTIONS

ASSIGNMENT 01
Due date: 21 June 2019
Unique number: 734484

Select the correct alternative by completing the mark-reading sheet or submitting it online at
https://my.unisa.ac.za. Remember to include the unique number for this assignment.

Questions:

1. The CFA Institute Professional Conduct Program (PCP) has begun an investigation into Richard
Zvoushe, a Level III CFA candidate, and a number of his CFA Charterholder colleagues. Zvoushe
has access to confidential client records that could be useful in clearing his name, and wishes to
share this information with the PCP. Which of the following most accurately describes Jones’s duties
with regard to preservation of confidentiality?

1 Sharing the confidential information with the PCP would violate the Standards.

2 The Standards encourage, but do not require, that Zvoushe support the PCP investigation
into his colleagues.

3 Zvoushe may share confidential information about former clients with the PCP, but may not
share confidential information about current clients.

4 Zvoushe may share confidential information about prospects with the PCP, but may not
share confidential information about former clients.

2. Nokutenda Povani, CFA, works for a small money management firm that specializes in pension
accounts. Recently, a friend asked her to act as an unpaid volunteer manager for the city’s street
sweep pension fund. As part of the position, the city would grant Povani a free parking space in front
of her downtown office. Before Povani accepts, she should most appropriately:

1 do nothing since this is a volunteer position.

2 inform her current clients in writing and discuss the offer with her employer.

3 disclose the details of the volunteer position to her employer and obtain written
permission from her employer.

4 inform the prospective clients only.

3. Lucretia Chopera, a portfolio manager, is offered a bonus directly by a client if Chopera meets certain
performance goals. To comply with the Standard that governs additional compensation
arrangements, Chopera should:

1 decline to accept a bonus outside of her compensation from her employer.

2 not disclose this arrangement to her employer since it is confidential information.

3 disclose this arrangement to her employer only if she actually meets the
performance goals and receives the bonus.

4 disclose this arrangement to her employer in writing and obtain her employer’s
permission.

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4. A member or candidate who has supervisory responsibility:

1 should place particular emphasis on enforcing investment related compliance

policies.

2 is responsible for instructing those to whom he has delegated authority about

methods to detect and prevent violations of the law and the Code and
Standards.

3 has complied with the Standards if he reports employee violations to upper

management and provides a written warning to the employee to cease such
activities.

4 is not responsible for violation that constitute a subordinate that is not a

member.

5. Which of the following actions is a required, rather than recommended, action under the Standard
regarding diligence and a reasonable basis for a firm’s research recommendations?

1 Compensate analysts based on a measure of the quality of their research.

2 Have a policy requiring that research reports and recommendations have a basis that can be
substantiated as reasonable and adequate.

3 Have a policy that requires every recommendation to be approved by the

compliance officer.

4 Review the assumptions used and evaluate the objectivity of third-party

research reports.

6. Claire Dongo, CFA, manages an investment fund specializing in foreign currency trading. Dongo
writes a report to investor that describes the basic characteristics of her strategy, which is based on
an expected appreciation of the euro relative to other major currencies. Dongo shows the projected
returns from the strategy if the euro appreciates less than 5%, between 5% and 10%, or more than
10%, while clearly stating that these forecasts are her opinion. Has Dongo violated the Standard
related to communication with clients?

1 Yes.

2 No, because she disclosed the basic characteristics of the investment.

3 No, because she distinguished fact from opinion and discussed how the strategy
may perform under a range of scenarios.

4 No, because the opinion is based on facts.

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7. Shadreck Misheck, CFA, is an analyst who covers several stocks including Horizon Company.
Misheck’s aunt owns 30,000 shares of Horizon. She informs Misheck that she has created a trust in
his name into which she has placed 2,000 shares of Horizon. The trust is structured so that Misheck
will not be able to sell the shares until his aunt dies, but may vote using the proxy of the shares.
Misheck is due to update his research coverage of Horizon next week. Misheck should most
appropriately:

1 update the report as usual, since he is not a beneficial owner of the stock.

2 advise his superiors that he is no longer able to issue research recommendations on

Horizon.

3 disclose the situation to his employer and, if then asked to prepare a report, also disclose his
beneficial ownership of the shares in his report.

4 No need to disclose the situation to the employer and in the report since the holding is very
small and immaterial.

8. Nonola Muthupa, CFA, is an equity analyst. Muthupa enters two transactions for her personal
account. Muthupa sells 500 shares of Eagle P/L, a stock on which her firm currently has a “Buy”
recommendation. Muthupa buys 200 shares of Hayfield Co., and the following day issues a research
report on the Hayfield with a “Buy” recommendation. Has Muthupa violated the Code and Standards?

1 No.

2 Yes, both of her actions violate the Code and Standards.

3 Yes, if Eagle P/L. shares were in one of the client portfolios.

4 Yes, but only one of her actions violates the Code and Standards.

9. RachyMarav Investments provides monthly emerging market research to Baker Brokerage in

exchange for prospective client referrals and European equity research from Baker. Clients and
prospects of RachyMarav are not made aware of the agreement, but clients unanimously rave about
the high quality of the research provided by Baker. As a result of the research, many clients with non-
discretionary accounts have earned substantial returns on their portfolios. Managers at RachyMarav
have also used the research to earn outstanding returns for the firm’s discretionary accounts.
RachyMarav has most likely:

1 not violated the Code and Standards.

2 violated the Code and Standards by using third-party research in discretionary

accounts.

3 violated the Code and Standards by failing to disclose the referral agreement
with Baker to both current and prospects.

4 Violated the Code and Standards by failing to disclose the referral agreement to
existing clients.

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10. After writing the CFA Level II exam, Chipo Maravanyika goes to the internet discussion site
Analyst.com to express her frustration. Maravanyika writes, “CFA Institute is not doing a competent
job of evaluating candidates, because none of the questions in the June exam touched on Alternative
Investments.” Maravanyika most likely violated the Standard related to conduct as a candidate in the
CFA program by:

1 publicly disputing CFA Institute policies and procedures.

2 disclosing subject matter covered or not covered on a CFA exam.

3 participating in an internet forum that is directed toward CFA Program participants.

4 mentioning that CFA institute is not doing a competent job.

11. Tonderai is a portfolio manager. One of his firm’s clients has told Tonderai that he will compensate
him beyond the compensation provided by his firm on the basis of the capital appreciation of his
portfolio each year. Tonderai should:

1 not receive a written permission from his employers as this is categorized under gifts.

2 obtain permission from his employer prior to accepting the compensation arrangement.

3 turn down the additional compensation because it will result in conflicts with the interests of
other clients’ accounts.

4 turn down the additional compensation because it will create undue pressure on him to
achieve strong short-term performance.

12. One of the discretionary accounts managed by Woodhill is the Johnstone Corporation employee
profit-sharing plan. Johnstone, the company president, recently asked Woodhill to vote the shares in
the profit-sharing plan in favor of the slate of directors nominated by Johnstone Corporation and
against the directors sponsored by a dissident stockholder group. Woodhill does not want to lose this
account because he directs all the account’s trades to a brokerage firm that provides Woodhill with
useful information about tax- free investments. Although this information is not of value in managing
the Johnstone Corporation account, it does help in managing several other accounts. The brokerage
firm providing this information also offers the lowest commissions for trades and provides best
execution. Woodhill investigates the director issue, concludes that the management-nominated slate
is better for the long-run performance of the company than the dissident group’s slate, and votes
accordingly. Woodhill:

1 violated the Code and Standards in voting the shares in the manner requested by Johnstone
and by directing trades to the brokerage firm.

2 violated the Standards in voting the shares in the manner requested by Johnstone but not in
directing trades to the brokerage firm.

3 did not violate the Standards in voting the shares in the manner requested by Johnstone or in
directing trades to the brokerage firm.

4 violated the Standards in directing trades to the brokerage firm but not in voting the shares
as requested by Johnstone.
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13. Phineas was recently terminated as one of a team of five managers of an equity fund. The fund had
two value-focused managers and terminated one of them to reduce costs. In a letter sent to
prospective employers, Phineas presents, with written permission of the firm, the performance history
of the fund to demonstrate his past success.

1 Phineas violated the standard by not acknowledging that the return may be inflated due to
survivorship bias.

2 Phineas violated the Code and Standards by claiming the performance of the entire fund as
his own.

3 Phineas violated the Code and Standards by including the historical results of his prior
employer.

4 Phineas did not violate the Code and Standards.

14. Michael works for a regional brokerage firm. He estimates that Eddie Industries will increase its
dividend by US$1.50 a share during the next year. He realizes that this increase is contingent on
pending legislation that would, if enacted, give Eddie a substantial tax break. The U.S. representative
for Eddie’s home district has told Michael that, although she is lobbying hard for the bill and
prospects for its passage are favourable, concern of the U.S. Congress over the federal deficit could
cause the tax bill to be voted down. Eddie Industries has not made any statements about a change in
dividend policy. Michael writes in his research report, “We expect Eddie’s stock price to rise by at
least US$8.00 a share by the end of the year because the dividend will increase by US$1.50 a share.
Investors buying the stock at the current time should expect to realize a total return of at least 15
percent on the stock.” According to the Standards:

1 Michael did not violate any standard.

2 Michael violated the Standards because he used material inside information.

3 Michael violated the Standards because he failed to separate opinion from fact.

4 Michael violated the Standards by basing his research on uncertain predictions of future
government action.

15. Jane Austin, CFA, is a portfolio manager for CON Investments Limited. Over the years, Austin has
made several poor personal investments that have led to financial distress and personal bankruptcy.
Austin feels that her business partner, John Smith, is mostly to blame for her situation since “he did
not invest enough money in her investment opportunities and caused them to fail.” Austin reports
Smith to the CFA Institute claiming Smith violated the Code and Standards relating to misconduct.
Which of the following statements is CORRECT?

1 Neither Austin nor Smith violated the Code and Standards.

2 Austin’s bankruptcy reflects poorly on her professional reputation and thus violates the Code
and Standards.

3 By reporting Smith to the CFA Institute, Austin has misused the Professional Conduct
Program, thus violating the Code and Standards.

4 Smith’s lack of investment in Austin’s opportunities violated the priority of transactions, and
he was appropriately reported to CFA Institute.

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ASSIGNMENT 02

Due date: 20 September 2019

Unique number 791411

Aim: To evaluate your knowledge of Guidance for Standards I–VII

Answer the following questions and submit your assignment at https://my.unisa.ac.za

Questions:

Item set for Questions 1 to 5

Rodrick Tagwirei, CFA, a buy side stock analyst and fund manager at Cornerstone Investments, has
been hearing rumours for months that Econet Wireless was near a breakthrough on a next-generation
telecommunications microchip. Econet is best known for its expert design engineers, perennially shaky
balance sheet, and extremely volatile stock.

One morning, as he is listening to a recorded Phineas’s interview with Econet’s CEO, who is also a CFA
charterholder, he learns that Econet has struck a licensing agreement with Themba Foundry, a privately
held chip fabricator in Botswana. Then he reads in The Asian Wall Street Journal that a Botswana bank
has loaned P500 million to Themba for construction of a new plant.

Tagwirei owns an apartment in Lusaka that is leased to Portia Thomas, CFA. The lease is about to
expire, and Tagwirei and Thomas are currently in the process of renegotiating the terms of the lease.
Tagwirei has other potential tenants for the apartment who are willing to pay more than what Thomas is
currently paying, so he would like to negotiate a significant increase in the monthly payments.

Thomas works for a Lusaka public relations firm that handles accounts for a lot of Asian technology
companies. Tagwirei calls Thomas, and after learning that her firm handled the Themba account, he
asks what she knows about the Themba loan. Thomas says Themba has inked a deal with a big U.S.
firm to make a new kind of microchip. She refuses to identify the firm but does provide some impressive
performance numbers for the new chip.

After conducting a detailed patent search using the chip performance figures as a guide, Tagwirei learns
that a Econet engineer has filed for a series of patents related to the new technology over the past 18
months and confirms Thomas’s information on the performance of the new chip.

Tagwirei works up some revenue and market-share projections then concludes that if the new
technology works, it could triple the company’s profits over the next three years. He writes up a research
report on Econet, detailing the licensing deal, specs on the new chip, and his opinion about the
company’s growth potential. Tagwirei then raises his rating on Econet from neutral to high-risk buy.

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Tendai Mukurazhizha, lead portfolio manager for Cornerstone Investments, calls Tagwirei into her office
after reviewing the analyst’s report. Mukurazhizha asks Tagwirei about his sources and methodology,
and Tagwirei explains his thinking process. She then thanks Tagwirei for his good work and tells him he
will receive Cornerstone’s World Series tickets this year. After Tagwirei leaves, Mukurazhizha makes
minor edits to the report and sends it to the fulfillment department for inclusion in the daily e-mail report
and weekly printed report for clients and prospects. Then Mukurazhizha instructs the trading desk to
purchase Econet stock for all client accounts after the reports have been issued.

The day after Tagwirei’s report is released, rival analyst Rumbidzo Mazviita Shava, CFA, publishes her
own analysis of Econet Wireless. She has talked with executives at Werfel Wafers, and she believes
Econet will never reap the profits from the new technology because she thinks Econet infringed on one
of Werfel’s patents. In her report, Shava specifically cites Tagwirei’s report, quoting him directly and
rebutting his conclusions point by point with her own research, criticizing his lack of thoroughness and
questioning his abilities as an analyst and his academic and professional credentials. Specifically, she
says that she’s a better analyst than he is because “he earned his charter way back in 1986, when the
CFA® exam was a lot easier to pass than it is today, but I earned my charter last year”.

1. In the production of his research report, Tagwirei violated:

1 Standard V(B) Communications with Clients and Prospective and Standard V(A)
Diligence and Reasonable Basis.

2 Standard V(B) Communications with Clients and Prospective Clients.

3 Standard V(A) Diligence and Reasonable Basis.

4 none of the Standards.

2. Which of the following statements regarding potential violations of Standard III(A) Loyalty, Prudence,
and Care in this scenario is most accurate?

1 Neither Tagwirei, Thomas, nor Econet violated the Standard.

2 Tagwirei violated the Standard by using Thomas’s information.

3 Thomas violated the Standard by revealing information about her client, Themba.

4 Tagwirei, Thomas, and Econet violated the Standard.

3. Which of the following statements, if found in Tagwirei’s report without clarification, would most likely
violate Standard V(B) Communications with Clients and Prospective Clients?

1 Econet controlled 25% of the communications-chip market five years ago but
commands just a 14% share today.

2 Econet’s sales have faltered in recent years, but I believe the new technology will bring back
the days of 25% revenue growth.

3 After a few phone calls and an analysis of the relevant information from our internal
database, I concluded that Econet’s new technology was more than just a rumor.

4 Econet is a market leader in the communications-chip industry.

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4. Which of Mukurazhizha’s actions most likely violated the Code and Standards? Her:

1 newsletter instructions violated Standard III(B) Fair Dealing.

2 trading instructions violated Standard III(C) Suitability.

3 handling of Tagwirei’s research report violated Standard IV(C) Responsibilities of

Supervisors.

4 trading instructions violated Standard III(B) Fair Dealing.

5. According to CFA Institute Standards of Professional Conduct, Shava violated:

1 Standard V(A) Diligence and Reasonable Basis.

2 Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program
because of her criticism of Tagwirei’s credentials.

3 Standard I(B) Independence and Objectivity because of her criticism of Tagwirei’s

research report and conclusions.

4 Standard I(C) Misrepresentation for her use of material from Tagwirei’s report.

Item set for Questions 6 to 10

Joseph Zimuto, CFA, a South African resident, is an employee of Datvest Asset Management (DAM), an
asset management company based in South Africa. DAM manages and sells its branded mutual funds
and unit trusts through agents across Africa. Zimuto was recently sent to Uganda to oversee DAM's new
agency agreement with Mazvanya Brokers (Mazvanya), a licensed Ugandan stock brokerage company
with a strong retail customer base. Part of Zimuto’s oversight role is to establish policies and procedures
to ensure the Ugandan sales force represents DAM in a professional manner. As a condition of its
agency agreement, DAM requires all of Mazvanya’s sales agents to adhere to South African financial
regulations, generally considered to be stricter than those in Uganda. DAM also requires all of its sales
agents to abide by the CFA Code of Ethics and Standards of Professional Conduct. DAM’s lawyer has
indicated South African laws are stricter than the CFA Code and Standards.

To inform the Mazvanya sales agents of their responsibilities under the DAM agency agreement, Zimuto
holds a meeting with them to discuss the financial regulations of South Africa and the CFA Code and
Standards. To conclude the meeting, Zimuto describes DAM’s annual competition amongst its sales
agents where the winner is determined by the value of products sold (assets under management), fees
generated, and the number of new clients brought in. The competition prize is an all expense paid two-
week holiday for two to Zimbabwe. Zimuto advises the staff they should concentrate their sales efforts on
DAM’s front-end load funds since they earn the highest fees. He adds staff should not disclose this
competition to clients.

Zimuto next meets with Mazvanya supervisors to specifically discuss their roles in upholding the CFA
Standards. He informs them they are responsible for the prevention of any violations of laws, rules,
regulations or the Code and Standards by the staff directly under their supervision. To make their job
easier, instead of focusing equally on all of the requirements Zimuto suggests the supervisors should
concentrate on:

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  Communicating compliance policies and procedures to all covered staff;

 Undertaking periodic reviews to ensure procedures are followed; and

 Enforcing investment related policies.

Later that day, Zimuto scrutinizes Mazvanya’s marketing material with Mazvanya’s most successful
sales agent, Obey Mhofu, another CFA Charterholder. They are preparing for a sales meeting to
introduce DAM products to a potential client. Zimuto notices Mazvanya’s responsibility to uphold the CFA
Code and Standards is not mentioned anywhere in the marketing material. Neither does the material
mention that some of Mazvanya’s employees are CFA Charterholders. Zimuto notices Mhofu does not
use the CFA designation on his business card. When Zimuto asks him why, he responds, “If I use it,
people will think I have a duty to Mazvanya’s clients. I don’t have a duty to clients, as stockbrokers in
Uganda are not required to uphold a fiduciary duty. I don’t want to mislead our clients by using the CFA
designation.”

During the sales meeting with the potential client, Mhofu makes the following statements:

Statement 1: “Before making an investment for any of our mutual funds or unit trusts, Mazvanya follows
an extensive due diligence process and research analysis. We will only invest in the company if that
investment meets the investment criteria that I have outlined to you.”

Statement 2: “Every six months you will be mailed an itemized investment statement with cash flows so
that you can see if your portfolio is meeting your investment objectives. In addition, you can obtain other
information about our firm and investment process from our website, which is updated on a regular basis
to ensure the integrity of the site as well as offer confidentiality and security to our clients. For your
security, we do not post client statements on the website.”

6. According to the CFA Code and Standards, if there is a conflict, Zimuto should most likely adhere to:

1 Uganda’s laws and regulations.

2 South Africa’s laws and regulations.

3 the CFA Code of Ethics and Standards of Professional Conduct.

4 the policies of the firm.

7. By participating in DAM’s annual competition, Mazvanya employees least likely violate which of the
following CFA Standards?

1 Misrepresentation.

2 Additional compensation and misrepresentation.

3 Independence and Objectivity.

4 Additional Compensation Arrangements.

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8. In her meeting with Mazvanya supervisors, Zimuto is least likely correct with regard to:

1 communicating with staff.

2 undertaking periodic reviews.

3 not enforcing investment policies.

4 enforcing investment related policies.

9. Given Mhofu’s comment regarding his reason for not using the CFA designation, he will most likely
violate which of the following CFA Standards?

1 Duties to Clients.

2 Misrepresentation.

3 Independence and objectivity.

4 Reference to CFA Designation.

10. What CFA Standard did Mhofu most likely violate in his Statement 1?

1 Suitability.

2 Misrepresentation.

3 Professionalism.

4 Diligence and Reasonable Basis.

Use the information in the following case study to answer question 11 to 15

Kwazulu Natal Regional Government Employees

David Rudisha, CFA, has recently been hired as the Chief Investment Officer of the Kwazulu Natal
Regional Government Employees’ Pension Fund (the Fund). Currently, he is conducting evaluations of
all external managers employed by the Fund to ensure that they are providing the highest possible
returns for their mandates, while complying with all applicable laws and regulations.

Rudisha is evaluating the activity of Botha Growth Managers (BGM), a local money manager allocated
10 percent of the Fund’s assets. He realizes that any reduction in the allocation to this local manager will
be met with considerable political pressure. The investment policy statement (IPS) for BGM’s portion of
the Fund’s assets states that BGM is to actively manage an equity portfolio of local small-cap, high-tech
companies.

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Upon his review of BGM’s activity, Rudisha is concerned about two items that he would like explained. At
a meeting with BGM’s portfolio manager, Abigail Chitsvene, CFA, Rudisha asks her to comment on each
item:

Commodities Positions

Rudisha: “Over the last year, several large positions in commodities have been taken by the Fund’s
portfolio. This is inconsistent with the IPS.”

Chitsvene: “Commodities have significantly outperformed high-tech equities recently. I added

commodities to larger clients’ portfolios on a temporary basis. Clients were not informed because the
positions will be sold once market sentiment shifts. I have not managed commodities before, but I am
getting good returns.”

Rudisha: “I am uncomfortable with these investments in this portfolio.”

IPO Share Allocation

Rudisha: “The Fund’s portfolio received 50,000 shares of an initial public offering (IPO) on 1 April. On 15
May, 30,000 shares were removed at the current market price.”

Chitsvene: “There was a problem with BGM’s IPO allocation algorithm. Initially, you were over-allocated
and when we discovered the error, your account was adjusted.”

Rudisha: “Short-term interest should have been credited to the Fund for use of its cash to cover the
trade. In any case, this was an IPO of a large international high-tech company. It was not an appropriate
investment for the portfolio.”

After the meeting, Rudisha is not satisfied with Chitsvene’s comments and decides that further action is
required. He also decides that he will allow BGM to continue to manage Fund assets until he finishes his
evaluation. This decision is based on the superior returns of the BGM-managed assets, the significant
diversification this portfolio adds to the Fund, and also the political implications of firing the local money
manager.

The next week, Rudisha calls Chitsvene and outlines several conditions that must be fulfilled for BGM to
continue as a manager for the Fund. One of the conditions outlined relates to trade allocations.

Trade Allocation

Rudisha: “Provide written trade allocation procedures consistent with the CFA Institute Standards of
Professional Conduct.”

Chitsvene: “I will mail you a copy of our new procedures stating that trade allocations must be reviewed
at the end of each month against clients’ IPS. It also says that interest will be credited to accounts that
have been incorrectly allocated shares and debited from those accounts that should have received
shares.”

With his evaluation complete, Rudisha must now consider whether to retain BGM as one of the Fund’s
asset managers.

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11. According to the CFA Institute Standards of Professional Conduct, Rudisha owes his primary duty of
loyalty in managing the Fund to:

1 the plan trustees.

2 all the plan trustees and beneficiaries.

3 all of the pension plan beneficiaries.

4 the KwaZulu Natal Regional Government.

12. With respect to the commodities positions, which of the following actions best describes Chitsvene’s
violation of the CFA Institute Standards of Professional Conduct? Chitsvene violated CFA Institute
Standards by:

1 buying an asset class in which she has no prior management experience.

2 buying assets that are inconsistent with the portfolio’s IPS.

3 buying assets she was not exposed to before.

4 failing to notify the client that she would temporarily deviate from the client’s IPS.

13. With regard to the IPO share allocation, are both BGM’s method of trade correction on 15 May and
Rudisha’s demand for a short-term interest credit, respectively, consistent with the CFA Institute
Standards of Professional Conduct?

1 No.

2 Yes.

3 No, only the method of trade correction is consistent.

4 No, only the demand for a short-term interest credit is consistent.

14. After his initial meeting with Chitsvene, does Rudisha’s decision to allow BGM to continue managing
the portfolio violate the CFA Institute Standards of Professional Conduct?

1 No.

2 Yes.

3 Yes, because he allowed political factors to influence his decision.

4 Yes, because he is obligated to immediately suspend BGM until he finishes his evaluation.

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15. With regard to Rudisha’s condition regarding trade allocation, does Chitsvene’s response violate the
CFA Institute Standards of Professional Conduct with respect to allocation reviews and interest
adjustments, respectively?

1 No.

2 Yes.

3 No, it violates the standards only with respect to allocation reviews.

4 No, it violates the standards only with respect to interest adjustments.

©
UNISA 2019

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