CFA Level II ExamEthical and Professional StandardsEasy
An investment advisor, Sarah Chen, manages portfolios for high-net-worth individuals. One of her clients, Mr. Thompson, has explicitly stated in writing that he does not wish to participate in IPOs due to their perceived volatility. Chen’s firm receives an allocation for a highly anticipated IPO that is expected to generate significant first-day returns. Chen believes this IPO would be suitable for Mr. Thompson's aggressive growth objective, despite his stated preference. If Chen allocates shares of the IPO to Mr. Thompson's portfolio without his prior approval, which CFA Institute Standard of Professional Conduct would she most likely violate?
- AStandard VI(A) Disclosure of Conflicts
- BStandard III(A) Loyalty, Prudence, and Care
- CStandard III(C) Suitability
- DStandard III(B) Fair Dealing
Show answer & explanationAnswer & explanation
Correct answer: C. Standard III(C) Suitability
By allocating IPO shares to Mr. Thompson's account against his explicit written instructions, Sarah Chen is acting contrary to his investment objectives and constraints, which is a direct violation of Standard III(C) Suitability.
Why the other options are wrong
- A. This standard concerns disclosing conflicts of interest, which is not the core problem in this scenario.
- B. While loyalty is involved, suitability is the more direct violation related to acting against client instructions.
- D. Fair dealing relates to treating clients impartially, which isn't the primary issue here.
Standard III(C) Suitability
Members and Candidates must make a reasonable inquiry into a client's financial situation, investment experience, and investment objectives and must determine that an investment is suitable for the client's financial situation and consistent with the client's written objectives and constraints.
- Understand client's financial situation, experience, and objectives.
- Ensure investments are suitable for the client.
- Consider client's written objectives and constraints.
Memory trick: Clients Prefer Loyal Suitability, Fairly Disclosed.