V(A) Diligence and Reasonable Basis

（1）【IMP】Sufficient Due Diligence（4 题）

• Helen Hawke manages the corporate finance department of Sarkozi Securities, Ltd. The firm is anticipating that the government will soon close a tax loophole（漏洞; (法律、合同等的)空子） that currently allows oil-and-gas exploration companies to pass on drilling expenses to holders of a certain class of shares. Because market demand for this tax-advantaged class of stock is currently high, Sarkozi convinces several companies to undertake new equity financings at once, before the loophole closes. Time is of the essence, but Sarkozi lacks sufficient resources to conduct adequate research on all the prospective issuing companies. Hawke decides to estimate the IPO prices on the basis of the relative size of each company and to justify the pricing later when her staff has time.
• Comment:
  • Sarkozi should have taken on only the work that it could adequately handle.
  • By categorizing the issuers by general size, Hawke has bypassed researching all the other relevant aspects that should be considered when pricing new issues and thus has not performed sufficient due diligence. Such an omission can result in investors purchasing shares at prices that have no actual basis. Hawke has violated Standard V(A).
  • Hawke has violated Standard 5-A by pricing the issues simply based on size without reasonable and adequate analysis.

• Michael Papis is the chief investment officer of his state’s retirement fund. The fund has always used outside advisers for the real estate allocation, and this information is clearly presented in all fund communications. Thomas Nagle, a recognized sell-side research analyst and Papis’s business school classmate, recently left the investment bank he worked for to start his own asset management firm, Accessible Real Estate. Nagle is trying to build his assets under management and contacts Papis about gaining some of the retirement fund’s allocation. In the previous few years, the performance of the retirement fund’s real estate investments was in line with the fund’s benchmark but was not extraordinary. Papis decides to help out his old friend and also to seek better returns by moving the real estate allocation to Accessible. The only notice of the change in adviser appears in the next annual report in the listing of associated advisers.
• Comment:
  • Papis violated Standard V(A). His responsibilities may include the selection of the external advisers, but the decision to change advisers appears to have been arbitrary.
  • If Papis was dissatisfied with the current real estate adviser, he should have conducted a proper solicitation（(对金钱、帮助、支援等的)请求;(意见的)征求） to select the most appropriate adviser.
  • See also Standard IV(C)–Responsibilities of Supervisors, Standard V(B)– Communication with Clients and Prospective Clients, and Standard VI(A)–Disclosure of Conflicts.

• 【IMP】Andre Shrub owns and operates Conduit, an investment advisory firm. Prior to opening Conduit, Shrub was an account manager with Elite Investment, a hedge fund managed by his good friend Adam Reed. To attract clients to a new Conduit fund, Shrub offers lower-than-normal management fees. He can do so because the fund consists of two top-performing funds managed by Reed. Given his personal friendship with Reed and the prior performance record of these two funds, Shrub believes this new fund is a winning combination for all parties. Clients quickly invest with Conduit to gain access to the Elite funds. No one is turned away because Conduit is seeking to expand its assets under management.
• Comment:
  • Shrub violated Standard V(A) by not conducting a thorough analysis of the funds managed by Reed before developing the new Conduit fund. Shrub’s reliance on his personal relationship with Reed and his prior knowledge of Elite are insufficient justification for the investments.
  • The funds may be appropriately considered, but a full review of their operating procedures, reporting practices, and transparency are some elements of the necessary due diligence.

• Bob Thompson has been doing research for the portfolio manager of the fixed-income department. His assignment is to do sensitivity analysis on securitized subprime mortgages. He has discussed with the manager possible scenarios to use to calculate expected returns. A key assumption in such calculations is housing price appreciation (HPA) because it drives “prepays” (prepayments of mortgages) and losses. Thompson is concerned with the significant appreciation experienced over the previous five years as a result of the increased availability of funds from subprime mortgages. Thompson insists that the analysis should include a scenario run with –10% for Year 1, –5% for Year 2, and then (to project a worst-case scenario) 0% for Years 3 through 5. The manager replies that these assumptions are too dire（危急的; 极其严重的; 极差的; 极糟的） because there has never been a time in their available database when HPA was negative.
• Thompson conducts his research to better understand the risks inherent in these securities and evaluates these securities in the worst-case scenario, a less likely but possible environment. Based on the results of the enhanced scenarios, Thompson does not recommend the purchase of the securitization. Against the general market trends, the manager follows Thompson’s recommendation and does not invest. The following year, the housing market collapses. In avoiding the subprime investments, the manager’s portfolio outperforms its peer group that year.

• Comment:

  • Thompson’s actions in running the scenario test with inputs beyond the historical trends available in the firm’s databases adhere to the principles of Standard V(A). His concerns over recent trends provide a sound basis for further analysis. Thompson understands the limitations of his model, when combined with the limited available historical information, to accurately predict the performance of the funds if market conditions change negatively.
  • See also Standard I(B)–Independence and Objectivity.

    （2）Sufficient Scenario Testing

• Babu Dhaliwal works for Heinrich Brokerage in the corporate finance group. He has just persuaded Feggans Resources, Ltd., to allow his firm to do a secondary equity financing at Feggans Resources’ current stock price. Because the stock has been trading at higher multiples than similar companies with equivalent production, Dhaliwal presses the Feggans Resources managers to project what would be the maximum production they could achieve in an optimal scenario. Based on these numbers, he is able to justify the price his firm will be asking for the secondary issue. During a sales pitch to the brokers, Dhaliwal then uses these numbers as the base-case production levels that Feggans Resources will achieve.

• Comment:

  • pitch：
    • v. 投; 推销; 投球; 当投手; （使产品或服务）针对，面向; 搭（帐篷）; 颠簸; 抛; 触地; 确定标准; (使球)定点落地; 击出大曲线球; 用力扔; 重跌; 定音高
    • n. 沥青; 球场; (尤指乐音的)音高; 投球; (感情、活动等的)程度，力度; （船在水上的）上下颠簸，纵摇; (体育比赛的)场地; 倾斜度; (事物的)最高点; 街头售货摊点; 推销的话
  • When presenting information to the brokers, Dhaliwal should have given a range of production scenarios and the probability of Feggans Resources achieving each level.
  • By giving the maximum production level as the likely level of production, he has misrepresented the chances of achieving that production level and seriously misled the brokers.
  • Dhaliwal has violated Standard V(A).

    （3）Developing a Reasonable Basis

• Brendan Witt, a former junior sell-side technology analyst, decided to return to school to earn an MBA. To keep his research skills and industry knowledge sharp, Witt accepted a position with On-line and Informed, an independent internet-based research company. The position requires the publication of a recommendation and report on a different company every month. Initially, Witt is a regular contributor of new research and a participant in the associated discussion boards that generally have positive comments on the technology sector. Over time, his ability to manage his educational requirements and his work requirements begin to conflict with one another. Knowing a recommendation is due the next day for On-line, Witt creates a report based on a few news articles and what the conventional wisdom of the markets has deemed the “hot” security of the day.

• Comment:

  • Witt’s knowledge of and exuberance（[ɪɡˈzuːbərəns] 热情洋溢; 兴高采烈; 喜气洋洋; 活力勃发） for technology stocks, a few news articles, and the conventional wisdom of the markets do not constitute, without more information, a reasonable and adequate basis for a stock recommendation that is supported by appropriate research and investigation. Therefore, Witt has violated Standard V(A).
  • See also Standard IV(C) – Responsibilities of Supervisors because it relates to the firm’s inadequate procedures.

    （4）Timely Client Updates

• Kristen Chandler is an investment consultant in the London office of Dalton Securities, a major global investment consultant firm. One of her UK pension funds has decided to appoint a specialist US equity manager. Dalton’s global manager of research relies on local consultants to cover managers within their regions and, after conducting thorough due diligence, puts their views and ratings in Dalton’s manager database.

• Chandler accesses Dalton’s global manager research database and conducts a screen of all US equity managers on the basis of a match with the client’s desired philosophy/style, performance, and tracking-error targets. She selects the five managers that meet these criteria and puts them in a briefing report that is delivered to the client 10 days later. Between the time of Chandler’s database search and the delivery of the report to the client, Chandler is told that Dalton has updated the database with the information that one of the firms that Chandler has recommended for consideration lost its chief investment officer, the head of its US equity research, and the majority of its portfolio managers on the US equity product — all of whom have left to establish their own firm. Chandler does not revise her report with this updated information.

• Comment:

  • Chandler has failed to satisfy the requirement of Standard V(A).
  • Although Dalton updated the manager ratings to reflect the personnel turnover at one of the firms, Chandler did not update her report to reflect the new information.

    （5）【IMP】Group Research Opinions

• Evelyn Mastakis is a junior analyst who has been asked by her firm to write a research report predicting the expected interest rate for residential mortgages over the next six months. Mastakis submits her report to the fixed-income investment committee of her firm for review, as required by firm procedures. Although some committee members support Mastakis’s conclusion, the majority of the committee disagrees with her conclusion, and the report is significantly changed to indicate that interest rates are likely to increase more than originally predicted by Mastakis. Should Mastakis ask that her name be taken off the report when it is disseminated?

• Comment:

  • The results of research are not always clear, and different people may have different opinions based on the same factual evidence. In this case, the committee may have valid reasons for issuing a report that differs from the analyst’s original research. The firm can issue a report that is different from the original report of an analyst as long as there is a reasonable and adequate basis for its conclusions.
  • Generally, analysts must write research reports that reflect their own opinion and can ask the firm not to put their name on reports that ultimately differ from that opinion. When the work is a group effort, however, not all members of the team may agree with all aspects of the report. Ultimately, members and candidates can ask to have their names removed from the report, but if they are satisfied that the process has produced results or conclusions that have a reasonable and adequate basis, members and candidates do not have to dissociate from the report even when they do not agree with its contents.
  • If Mastakis is confident in the process, she does not need to dissociate from the report even if it does not reflect her opinion.

    （6）Reliance on Third-Party Research

• Gary McDermott runs a two-person investment management firm. McDermott’s firm subscribes to a service from a large investment research firm that provides research reports. McDermott’s firm makes investment recommendations on the basis of these reports.

• Comment:

  • Members and candidates can rely on third-party research but must make reasonable and diligent efforts to determine that such research is sound.
  • If McDermott undertakes due diligence efforts on a regular basis to ensure that the research produced by the large firm is objective and reasonably based, McDermott can rely on that research when making investment recommendations to clients.

    （7）Due Diligence in Submanager Selection

• Paul Ostrowski’s business has grown significantly over the past couple of years, and some clients want to diversify internationally. Ostrowski decides to find a sub manager to handle the expected international investments. Because this will be his first subadviser, Ostrowski uses the CFA Institute model “request for proposal” to design a questionnaire for his search. By his deadline, he receives seven completed questionnaires from a variety of domestic and international firms trying to gain his business. Ostrowski reviews all the applications in detail and decides to select the firm that charges the lowest fees because doing so will have the least impact on his firm’s bottom line.

• Comment:

  • The selection of an external adviser or subadviser should be based on a full and complete review of the adviser’s services, performance history, and cost structure. In basing the decision on the fee structure alone, Ostrowski may be violating Standard V(A).
  • See also Standard III(C) – Suitability because it relates to the ability of the selected adviser to meet the needs of the clients.

    （8）Use of Quantitatively Oriented Models

• Espacia Liakos works in sales for Hellenica Securities, a firm specializing in developing intricate（错综复杂的） derivative strategies to profit from particular views on market expectations. One of her clients is Eugenie Carapalis, who has become convinced that commodity prices will become more volatile over the coming months. Carapalis asks Liakos to quickly engineer a strategy that will benefit from this expectation. Liakos turns to Hellenica’s modeling group to fulfill this request. Because of the tight deadline, the modeling group outsources parts of the work to several trusted third parties. Liakos implements the disparate components of the strategy as the firms complete them.

• Within a month, Carapalis is proven correct: Volatility across a range of commodities increases sharply. But her derivatives position with Hellenica returns huge losses, and the losses increase daily. Liakos investigates and realizes that although each of the various components of the strategy had been validated, they had never been evaluated as an integrated whole. In extreme conditions, portions of the model worked at cross-purposes with other portions, causing the overall strategy to fail dramatically.

• Comment:

  • disparate：[ˈdɪspərət]
    • adj. 完全不同的; 迥然不同的; 无法比较的; 由不同的人(或事物)组成的
    • n. 无法比较的东西
  • Liakos violated Standard V(A).
  • Members and candidates must understand the statistical significance of the results of the models they recommend and must be able to explain them to clients.
  • Liakos did not take adequate care to ensure a thorough review of the whole model; its components were evaluated only individually.
  • Because Carapalis clearly intended to implement the strategy as a whole rather than as separate parts, Liakos should have tested how the components of the strategy interacted as well as how they performed individually.

    （9）【IMP】Successful Due Diligence/Failed Investment

• Alton Newbury is an investment adviser to high-net-worth clients. A client with an aggressive risk profile in his investment policy statement asks about investing in the Top Shelf hedge fund. This fund, based in Calgary, Alberta, Canada, has reported 20% returns for the first three years. The fund prospectus states that its strategy involves long and short positions in the energy sector and extensive leverage. Based on his analysis of the fund’s track record, the principals involved in managing the fund, the fees charged, and the fund’s risk profile, Newbury recommends the fund to the client and secures a position in it. The next week, the fund announces that it has suffered a loss of 60% of its value and is suspending operations and redemptions until after a regulatory review. Newbury’s client calls him in a panic（恐慌; 惊恐; 惶恐不安; 人心惶惶的局面） and asks for an explanation.

• Comment:

  • Newbury’s actions were consistent with Standard V(A). Analysis of an investment that results in a reasonable basis for recommendation does not guarantee that the investment has no downside risk.
  • Newbury should discuss the analysis process with the client while reminding him or her that past performance does not lead to guaranteed future gains and that losses in an aggressive investment portfolio should be expected.

    （10）【IMP】Quantitative Model Diligence

• Barry Cannon is the lead quantitative analyst at CityCenter Hedge Fund. He is responsible for the development, maintenance, and enhancement of the proprietary models the fund uses to manage its investors’ assets. Cannon reads several high-level mathematical publications and blogs to stay informed of current developments. One blog, run by Expert CFA, presents some intriguing research that may benefit one of CityCenter’s current models. Cannon is under pressure from firm executives to improve the model’s predictive abilities, and he incorporates the factors discussed in the online research. The updated output recommends several new investments to the fund’s portfolio managers.

• Comment:

  • Cannon has violated Standard V(A) by failing to have a reasonable basis for the new recommendations made to the portfolio managers.
  • He needed to diligently research the effect of incorporating the new factors before offering the output recommendations. Cannon may use the blog for ideas, but it is his responsibility to determine the effect on the firm’s proprietary models.
  • See Standard VII(B) regarding the violation by “Expert CFA” in the use of the CFA designation.

    （11）Selecting a Service Provider

• Ellen Smith is a performance analyst at Artic Global Advisors, a firm that manages global equity mandates for institutional clients. She was asked by her supervisor to review five new performance attribution systems and recommend one that would more appropriately explain the firm’s investment strategy to clients. On the list was a system she recalled learning about when visiting an exhibitor booth at a recent conference.

• The system is highly quantitative and something of a “black box” in how it calculates the attribution values. Smith recommended this option without researching the others because the sheer complexity of the process was sure to impress the clients.

• Comment:

  • booth：(餐馆中的)火车座，卡座; 售货棚; 不受干扰的划定空间(如电话亭、投票间等); 临时货摊(或放映棚等);
  • Smith’s actions do not demonstrate a sufficient level of diligence in reviewing this product to make a recommendation for selecting the service.
  • Besides not reviewing or considering the other four potential systems, she did not determine whether the “black box” attribution process aligns with the investment practices of the firm, including its investments in different countries and currencies.
  • Smith must review and understand the process of any software or system before recommending its use as the firm’s attribution system.

    （12）Subadviser Selection

• Craig Jackson is working for Adams Partners, Inc., and has been assigned to select a hedge fund subadviser to improve the diversification of the firm’s large fund-of-funds product. The allocation must be in place before the start of the next quarter. Jackson uses a consultant database to find a list of suitable firms that claim compliance with the GIPS standards. He calls more than 20 firms on the list to confirm their potential interest and to determine their most recent quarterly and annual total return values.

• Because of the short turnaround, Jackson recommends the firm with the greatest total return values for selection.

• Comment:

  • turnaround：好转; 转机; (接活到交活之间的)周转期，时限; 彻底转变; 起色; (轮船、飞机的)终点装卸时间
  • By considering only performance and GIPS compliance, Jackson has not conducted sufficient review of potential firms to satisfy the requirements of Standard V(A).
  • A thorough investigation of the firms and their operations should be conducted to ensure that their addition would increase the diversity of clients’ portfolios and that they are suitable for the fundof-funds product.

    （13）Manager Selection

• Timothy Green works for Peach Asset Management, where he creates proprietary models that analyze data from the firm request for proposal questionnaires to identify managers for possible inclusion in the firm’s fund-of-funds investment platform. Various criteria must be met to be accepted to the platform. Because of the number of respondents to the questionnaires, Green uses only the data submitted to make a recommendation for adding a new manager.

• Comment:

  • By failing to conduct any additional outside review of the information to verify what was submitted through the request for proposal, Green has likely not satisfied the requirements of Standard V(A).
  • The amount of information requested from outside managers varies among firms. Although the requested information may be comprehensive, Green should ensure sufficient effort is undertaken to verify the submitted information before recommending a firm for inclusion. This requires that he go beyond the information provided by the manager on the request for proposal questionnaire and may include interviews with interested managers, reviews of regulatory filings, and discussions with the managers’ custodian or auditor.

    （14）Technical Model Requirements

• Jérôme Dupont works for the credit research group of XYZ Asset Management, where he is in charge of developing and updating credit risk models. In order to perform accurately, his models need to be regularly updated with the latest market data.

• Dupont does not interact with or manage money for any of the firm’s clients. He is in contact with the firm’s US corporate bond fund manager, John Smith, who has only very superficial（表面的; 肤浅的; 表层的; 浅薄的; 外表的; 表皮的; 粗略的; 外面的; 粗枝大叶的） knowledge of the model and who from time to time asks very basic questions regarding the output recommendations. Smith does not consult Dupont with respect to finalizing his clients’ investment strategies.
• Dupont’s recently assigned objective is to develop a new emerging market corporate credit risk model. The firm is planning to expand into emerging credit, and the development of such a model is a critical step in this process. Because Smith seems to follow the model’s recommendations without much concern for its quality as he develops his clients’ investment strategies, Dupont decides to focus his time on the development of the new emerging market model and neglects to update the US model.
• After several months without regular updates, Dupont’s diagnostic statistics start to show alarming signs with respect to the quality of the US credit model. Instead of conducting the long and complicated data update, Dupont introduces new codes into his model with some limited new data as a quick “fix”. He thinks this change will address the issue without needing to complete the full data update, so he continues working on the new emerging market model.
• Several months following the quick “fix”, another set of diagnostic statistics reveals nonsensical results and Dupont realizes that his earlier change contained an error. He quickly corrects the error and alerts Smith. Smith realizes that some of the prior trades he performed were due to erroneous model results. Smith rebalances the portfolio to remove the securities purchased on the basis of the questionable results without reporting the issue to anyone else.

• Comment:

  • Smith violated standard V(A) because exercising “diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions” means that members and candidates must understand the technical aspects of the products they provide to clients.
  • Smith does not understand the model he is relying on to manage money. Members and candidates should also make reasonable enquiries into the source and accuracy of all data used in completing their investment analysis and recommendations.
  • Dupont violated V(A) even if he does not trade securities or make investment decisions. Dupont’s models give investment recommendations, and Dupont is accountable for the quality of those recommendations.
  • Members and candidates should make reasonable efforts to test the output of preprogramed analytical tools they use. Such validation should occur before incorporating the tools into their decision-making process.
  • See also Standard V(B) – Communication with Clients and Prospective Clients.

    V(B) Communication with Clients and Prospective Clients

    （1）Sufficient Disclosure of Investment System

• Sarah Williamson, director of marketing for Country Technicians, Inc., is convinced that she has found the perfect formula for increasing Country Technicians’ income and diversifying its product base. Williamson plans to build on Country Technicians’ reputation as a leading money manager by marketing an exclusive and expensive investment advice letter to high-net-worth individuals. One hitch in the plan is the complexity of Country Technicians’ investment system — a combination of technical trading rules (based on historical price and volume fluctuations) and portfolio construction rules designed to minimize risk. To simplify the newsletter, she decides to include only each week’s top five “buy” and “sell” recommendations and to leave out details of the valuation models and the portfolio structuring scheme.

• Comment:

  • hitch：
    • v. 搭便车; 提起，拉起(衣服); 拴住; 免费搭车; 跃上; 攀上
    • n. 故障; (某种)结; 障碍; 暂时的困难(或问题)
  • leave out：遗漏; 省略; <主美方>离开; 排除; 不理会，忽视; 使留在露天; <方>结束一天的工作
  • Williamson’s plans for the newsletter violate Standard V(B).
  • Williamson need not describe the investment system in detail in order to implement the advice effectively, but she must inform clients of Country Technicians’ basic process and logic.
  • Without understanding the basis for a recommendation, clients cannot possibly understand its limitations or its inherent risks.

    （2）【IMP】Providing Opinions as Facts

• Richard Dox is a mining analyst for East Bank Securities. He has just finished his report on Boisy Bay Minerals. Included in his report is his own assessment of the geological extent of mineral reserves likely to be found on the company’s land. Dox completed this calculation on the basis of the core samples from the company’s latest drilling. According to Dox’s calculations, the company has more than 500,000 ounces of gold on the property. Dox concludes his research report as follows: “Based on the fact that the company has 500,000 ounces of gold to be mined, I recommend a strong BUY.”

• Comment:

  • If Dox issues the report as written, he will violate Standard V(B).
  • His calculation of the total gold reserves for the property based on the company’s recent sample drilling is a quantitative opinion, not a fact.
  • Opinion must be distinguished from fact in research reports.

    （3）Proper Description of a Security

• Olivia Thomas, an analyst at Government Brokers, Inc., which is a brokerage firm specializing in government bond trading, has produced a report that describes an investment strategy designed to benefit from an expected decline in US interest rates.

• The firm’s derivative products group has designed a structured product that will allow the firm’s clients to benefit from this strategy. Thomas’s report describing the strategy indicates that high returns are possible if various scenarios for declining interest rates are assumed. Citing the proprietary nature of the structured product underlying the strategy, the report does not describe in detail how the firm is able to offer such returns or the related risks in the scenarios, nor does the report address the likely returns of the strategy if, contrary to expectations, interest rates rise.

• Comment:

  • Thomas has violated Standard V(B) because her report fails to describe properly the basic characteristics of the actual and implied risks of the investment strategy, including how the structure was created and the degree to which leverage was embedded in the structure.
  • The report should include a balanced discussion of how the strategy would perform in the case of rising as well as falling interest rates, preferably illustrating how the strategies might be expected to perform in the event of a reasonable variety of interest rate and credit risk–spread scenarios.
  • If liquidity issues are relevant with regard to the valuation of either the derivatives or the underlying securities, provisions the firm has made to address those risks should also be disclosed.

    （4）Notification of Fund Mandate Change

• May & Associates is an aggressive growth manager that has represented itself since its inception as a specialist at investing in small-cap US stocks. One of May’s selection criteria is a maximum capitalization of US$250 million for any given company. After a string of successful years of superior performance relative to its peers, May has expanded its client base significantly, to the point at which assets under management now exceed US$3 billion. For liquidity purposes, May’s chief investment officer (CIO) decides to lift the maximum permissible market-cap ceiling to US$500 million and change the firm’s sales and marketing literature accordingly to inform prospective clients and third-party consultants.

• Comment:
  • Although May’s CIO is correct about informing potentially interested parties as to the change in investment process, he must also notify May’s existing clients. Among the latter group might be a number of clients who not only retained May as a small-cap manager but also retained mid-cap and large-cap specialists in a multiple-manager approach. Such clients could regard May’s change of criteria as a style change that distorts their overall asset allocations.
  • retain：保持; 保留; 持有; 聘请(律师等); 继续拥有; 继续容纳

• Rather than lifting the ceiling for its universe from US$250 million to US$500 million, May & Associates extends its small-cap universe to include a number of non-US companies.

• Comment:

  • Standard V(B) requires that May’s CIO advise May’s clients of this change because the firm may have been retained by some clients specifically for its prowess at investing in US small-cap stocks.
  • Other changes that require client notification are introducing derivatives to emulate a certain market sector or relaxing various other constraints, such as portfolio beta. In all such cases, members and candidates must disclose changes to all interested parties.
  • prowess：[ˈpraʊəs] 造诣; 高超的技艺; 非凡的技能
  • emulate：
    • vt. 仿真; 仿效, 模仿; 比得上, 赛得过; 务力赶上(或超过)
    • adj. <古>有野心的，竞争心强的

      （5）Notification of Changes to the Investment Process

• RJZ Capital Management is an active value-style equity manager that selects stocks by using a combination of four multifactor models. The firm has found favorable results when back testing the most recent 10 years of available market data in a new dividend discount model (DDM) designed by the firm. This model is based on projected inflation rates, earnings growth rates, and interest rates. The president of RJZ decides to replace its simple model that uses price to trailing 12-month earnings with the new DDM.

• Comment:
  • Because the introduction of a new and different valuation model represents a material change in the investment process, RJZ’s president must communicate the change to the firm’s clients.
  • RJZ is moving away from a model based on hard data toward a new model that is at least partly dependent on the firm’s forecasting skills. Clients would likely view such a model as a significant change rather than a mere refinement of RJZ’s process.

• RJZ Capital Management loses the chief architect of its multifactor valuation system. Without informing its clients, the president of RJZ decides to redirect the firm’s talents and resources toward developing a product for passive equity management — a product that will emulate the performance of a major market index.
• Comment:
  • By failing to disclose to clients a substantial change to its investment process, the president of RJZ has violated Standard V(B).

• At Fundamental Asset Management, Inc., the responsibility for selecting stocks for addition to the firm’s “approved” list has just shifted from individual security analysts to a committee consisting of the research director and three senior portfolio managers.
• Eleanor Morales, a portfolio manager with Fundamental Asset Management, thinks this change is not important enough to communicate to her clients.
• Comment:
  • Morales must disclose the process change to all her clients. Some of Fundamental’s clients might be concerned about the morale（士气） and motivation among the firm’s best research analysts after such a change.
  • Moreover, clients might challenge the stock-picking track record of the portfolio managers and might even want to monitor the situation closely.

• Michael Papis is the chief investment officer of his state’s retirement fund. The fund has always used outside advisers for the real estate allocation, and this information is clearly presented in all fund communications. Thomas Nagle, a recognized sell-side research analyst and Papis’s business school classmate, recently left the investment bank he worked for to start his own asset management firm, Accessible Real Estate.
• Nagle is trying to build his assets under management and contacts Papis about gaining some of the retirement fund’s allocation. In the previous few years, the performance of the retirement fund’s real estate investments was in line with the fund’s benchmark but was not extraordinary. Papis decides to help out his old friend and also to seek better returns by moving the real estate allocation to Accessible. The only notice of the change in adviser appears in the next annual report in the listing of associated advisers.

• Comment:

  • Papis has violated Standard V(B). He attempted to hide the nature of his decision to change external managers by making only a limited disclosure. The plan recipients and the fund’s trustees need to be aware when changes are made to ensure that operational procedures are being followed.
  • See also Standard IV(C)– Responsibilities of Supervisors, Standard V(A) – Diligence and Reasonable Basis, and Standard VI(A)– Disclosure of Conflicts.

    （6）【IMP】Sufficient Disclosure of Investment System

• Amanda Chinn is the investment director for Diversified Asset Management, which manages the endowment（捐赠; 天赋; 捐款; 资助; 才能; 天资） of a charitable organization. Because of recent staff departures, Diversified has decided to limit its direct investment focus to large-cap securities and supplement the needs for small-cap and mid-cap management by hiring outside fund managers. In describing the planned strategy change to the charity, Chinn’s update letter states, “As investment director, I will directly oversee the investment team managing the endowment’s large-capitalization allocation. I will coordinate the selection and ongoing review of external managers responsible for allocations to other classes.” The letter also describes the reasons for the change and the characteristics external managers must have to be considered.

• Comment:

  • Standard V(B) requires the disclosure of the investment process used to construct the portfolio of the fund.
  • Changing the investment process from managing all classes of investments within the firm to the use of external managers is one example of information that needs to be communicated to clients.
  • Chinn and her firm have embraced the principles of Standard V(B) by providing their client with relevant information. The charity can now make a reasonable decision about whether Diversified Asset Management remains the appropriate manager for its fund.

    （7）Notification of Errors

• Jérôme Dupont works for the credit research group of XYZ Asset Management, where he is in charge of developing and updating credit risk models. In order to perform accurately, his models need to be regularly updated with the latest market data.

• Dupont does not interact with or manage money for any of the firm’s clients. He is in contact with the firm’s US corporate bond fund manager, John Smith, who has only very superficial knowledge of the model and who from time to time asks very basic questions regarding the output recommendations. Smith does not consult Dupont with respect to finalizing his clients’ investment strategies.
• Dupont’s recently assigned objective is to develop a new emerging market corporate credit risk model. The firm is planning to expand into emerging credit, and the development of such a model is a critical step in this process. Because Smith seems to follow the model’s recommendations without much concern for its quality as he develops his clients’ investment strategies, Dupont decides to focus his time on the development of the new emerging market model and neglects to update the US model.
• After several months without regular updates, Dupont’s diagnostic statistics start to show alarming signs with respect to the quality of the US credit model. Instead of conducting the long and complicated data update, Dupont introduces new codes into his model with some limited new data as a quick “fix”. He thinks this change will address the issue without needing to complete the full data update, so he continues working on the new emerging market model.
• Several months following the quick “fix”, another set of diagnostic statistics reveals nonsensical results and Dupont realizes that his earlier change contained an error. He quickly corrects the error and alerts Smith. Smith realizes that some of the prior trades he performed were due to erroneous model results. Smith rebalances the portfolio to remove the securities purchased on the basis of the questionable results without reporting the issue to anyone else.

• Comment:

  • Smith violated V(B) by not disclosing a material error in the investment process. Clients should have been informed about the error and the corrective actions the firm was undertaking on their behalf.
  • See also Standard V(A)–Diligence and Reasonable Basis.

    （8）【IMP】Notification of Risks and Limitations

• Quantitative analyst Yuri Yakovlev has developed an investment strategy that selects small-cap stocks on the basis of quantitative signals. Yakovlev’s strategy typically identifies only a small number of stocks (10–20) that tend to be illiquid, but according to his backtests, the strategy generates significant risk-adjusted returns. The partners at Yakovlev’s firm, QSC Capital, are impressed by these results. After a thorough examination of the strategy’s risks, stress testing, historical back testing, and scenario analysis, QSC decides to seed the strategy with US$10 million of internal capital in order for Yakovlev to create a track record for the strategy.

• After two years, the strategy has generated performance returns greater than the appropriate benchmark and the Sharpe ratio of the fund is close to 1.0. On the basis of these results, QSC decides to actively market the fund to large institutional investors.
• While creating the offering materials, Yakovlev informs the marketing team that the capacity of the strategy is limited. The extent of the limitation is difficult to ascertain（查明; 弄清） with precision; it depends on market liquidity and other factors in his model that can evolve over time. Yakovlev indicates that given the current market conditions, investments in the fund beyond US$100 million of capital could become more difficult and negatively affect expected fund returns.
• Alan Wellard, the manager of the marketing team, is a partner with 30 years of marketing experience and explains to Yakovlev that these are complex technical issues that will muddy the marketing message. According to Wellard, the offering material should focus solely on the great track record of the fund. Yakovlev does not object because the fund has only US$12 million of capital, very far from the US$100 million threshold.
• Comment:
  • muddy：
    • adj. 泥泞的; 浑浊的; 多泥的; 含泥的; 灰暗的; 暗淡的
    • vt. 使变得泥泞; 使浑浊
  • object：
    • n. (极欲得到、研究、注意等的)对象; 目的; 目标; 物体; 物品; 宗旨; 东西; 宾语
    • v. 反对; 不同意; 不赞成; 提出…作为反对的理由; 抗辩说
  • Yakovlev and Wellard have not appropriately disclosed a significant limitation associated with the investment product. Yakovlev believes this limitation, once reached, will materially affect the returns of the fund.
  • Although the fund is currently far from the US$100 million mark, current and prospective investors must be made aware of this capacity issue.
  • If significant limitations are complicated to grasp and clients do not have the technical background required to understand them, Yakovlev and Wellard should either educate the clients or ascertain whether the fund is suitable for each client.

• 【IMP】Brickell Advisers offers investment advisory services mainly to South American clients. Julietta Ramon, a risk analyst at Brickell, describes to clients how the firm uses value at risk (VaR) analysis to track the risk of its strategies. Ramon assures clients that calculating a VaR at a 99% confidence level, using a 20-day holding period, and applying a methodology based on an ex ante Monte Carlo simulation is extremely effective. The firm has never had losses greater than those predicted by this VaR analysis.
• Comment:
  • Ramon has not sufficiently communicated the risks associated with the investment process to satisfy the requirements of Standard V(B).
  • The losses predicted by a VaR analysis depend greatly on the inputs used in the model. The size and probability of losses can differ significantly from what an individual model predicts. Ramon must disclose how the inputs were selected and the potential limitations and risks associated with the investment strategy.

• Lily Smith attended an industry conference and noticed that John Baker, an investment manager with Baker Associates, attracted a great deal of attention from the conference participants. On the basis of her knowledge of Baker’s reputation and the interest he received at the conference, Smith recommends adding Baker Associates to the approved manager platform. Her recommendation to the approval committee included the statement “John Baker is well respected in the industry, and his insights are consistently sought after by investors. Our clients are sure to benefit from investing with Baker Associates.”

• Comment:

  • Smith is not appropriately separating facts from opinions in her recommendation to include the manager within the platform. Her actions conflict with the requirements of Standard V(B).
  • Smith is relying on her opinions about Baker’s reputation and the fact that many attendees were talking with him at the conference. Smith should also review the requirements of Standard V(A) regarding reasonable basis to determine the level of review necessary to recommend Baker Associates.

    V(C) Record Retention

    （1）Record Retention and IPS Objectives and Recommendations

• One of Nikolas Lindstrom’s clients is upset by the negative investment returns of his equity portfolio. The investment policy statement for the client requires that the portfolio manager follow a benchmark-oriented approach. The benchmark for the client includes a 35% investment allocation in the technology sector. The client acknowledges that this allocation was appropriate, but over the past three years, technology stocks have suffered severe losses. The client complains to the investment manager for allocating so much money to this sector.

• Comment:

  • For Lindstrom, having appropriate records is important to show that over the past three years, the portion of technology stocks in the benchmark index was 35%, as called for in the IPS.
  • Lindstrom should also have the client’s IPS stating that the benchmark was appropriate for the client’s investment objectives. He should also have records indicating that the investment has been explained appropriately to the client and that the IPS was updated on a regular basis. Taking these actions, Lindstrom would be in compliance with Standard V(C).

    （2）Record Retention and Research Process

• Malcolm Young is a research analyst who writes numerous reports rating companies in the luxury retail industry. His reports are based on a variety of sources, including interviews with company managers, manufacturers, and economists; on-site（现场的；就地的） company visits; customer surveys; and secondary research from analysts covering related industries.

• Comment:

  • Young must carefully document and keep copies of all the information that goes into his reports, including the secondary or third-party research of other analysts.
  • Failure to maintain such files would violate Standard V(C).

    （3）Records as Firm, Not Employee, Property

• Martin Blank develops an analytical model while he is employed by Green Partners Investment Management, LLP (GPIM). While at the firm, he systematically documents the assumptions that make up the model as well as his reasoning behind the assumptions. As a result of the success of his model, Blank is hired to be the head of the research department of one of GPIM’s competitors. Blank takes copies of the records supporting his model to his new firm.

• Comment:
  • The records created by Blank supporting the research model he developed at GPIM are the records of GPIM. Taking the documents with him to his new employer without GPIM’s permission violates Standard V(C).
  • To use the model in the future, Blank must re-create the records supporting his model at the new firm.