CFA Level II ExamEthical and Professional StandardsMedium
Jonathan Reed, CFA, works for an investment management firm. He is responsible for creating marketing materials for a new global equity fund. The fund has a short track record of three months but has generated exceptionally strong returns in this period due to a concentrated bet on a few rapidly growing technology stocks. In the marketing brochure, Reed prominently displays the three-month annualized return without explicitly stating that the returns are annualized or mentioning the short duration of the track record. He also includes a disclaimer, in small print at the bottom, that 'past performance is not indicative of future results.' Which CFA Institute Standard is Reed most likely violating?
- AStandard V(A) Diligence and Reasonable Basis
- BStandard VI(C) Referral Fees
- CStandard III(D) Performance Presentation
- DStandard I(C) Misrepresentation
Show answer & explanationAnswer & explanation
Correct answer: C. Standard III(D) Performance Presentation
By presenting a three-month annualized return without clearly stating the short period or the fact that it is annualized, and making it appear as a long-term achievement, Reed is misleading potential investors. This violates Standard III(D) Performance Presentation, which requires fair, accurate, and complete performance information.
Why the other options are wrong
- A. Diligence and Reasonable Basis applies to research and recommendations, not primarily to marketing performance.
- B. Referral fees are unrelated to the presentation of investment performance.
- D. While misrepresentation is related, Performance Presentation is the more specific and direct standard governing how performance data is communicated.
Standard III(D) Performance Presentation
Members and Candidates must make reasonable efforts to ensure that performance information is fair, accurate, and complete.
- Do not misrepresent performance.
- Include all relevant disclosures, including calculation methodology and investment objectives.
- Present performance fairly, accurately, and completely.
Memory trick: Communicate Clearly: Integrity, Objectivity, Performance.