MCQ Quiz

Maalouf's firm changes its fee calculation from 'average daily balance' to 'month-end market value' and begins including cash equivalents in the fee base. This results in lower fees for most clients. The firm does not notify clients of the change. Has Maalouf violated Standard V(B)?

• No, because the change resulted in lower fees, benefiting the clients.
• Yes, because any change in fee methodology must be disclosed, regardless of the impact.
• No, because the method of calculation is an administrative detail, not a material investment process.

ABC Capital's private equity fund charges fees to portfolio companies for structuring advice. The firm remits these fees to the fund if the investment value falls, but retains them if the value rises. This arrangement is not disclosed in the private placement memorandum because the CEO considers it common industry practice and beneficial to investors. Has the CEO violated Standard V(B)?

• No, because the arrangement provides a net benefit to investors by aligning incentives.
• Yes, because all compensation arrangements and costs must be disclosed to clients, regardless of industry norms.
• No, because sophisticated private equity investors are presumed to understand standard fee structures.

Dox, a mining analyst, calculates that a company has 500,000 ounces of gold based on core samples. He writes in his report: 'Based on the fact that the company has 500,000 ounces of gold to be mined, I recommend a strong buy.' Has Dox violated Standard V(B)?

• No, because his calculation is based on physical core samples, making it objective data.
• Yes, because he presented a quantitative estimate as a fact.
• No, provided he includes the drill results in the appendix.

Quantitative analyst Yakovlev develops a small-cap strategy that works well but has a capacity limit of $3 billion, after which returns will degrade. The marketing director tells him to omit this limitation from offering materials because the fund currently has only $100 million. Yakovlev agrees. Has Yakovlev violated Standard V(B)?

• No, because the capacity limit is not a material risk at the current asset level.
• Yes, because the liquidity/capacity constraint is a significant limitation of the investment process.
• No, because marketing materials should focus on track record, while the prospectus handles risks.

RJZ Capital replaces its simple price-to-earnings model with a new complex dividend discount model based on projected inflation and earnings growth. The new model backtests well. The president decides not to notify clients because the firm remains a 'value' manager. Has the president violated Standard V(B)?

• Yes, because the shift from hard data to forecasting represents a material change in the investment process.
• No, because the underlying philosophy (value investing) remains unchanged.
• No, because the new model is an internal proprietary tool and does not change the mandate.

Ramon tells clients that his firm's Value at Risk (VaR) model is 'extremely effective' and that the firm has never suffered losses exceeding the model's predictions. He does not explain the inputs or the limitations of the Monte Carlo simulation used. Has Ramon violated Standard V(B)?

• Yes, because he failed to disclose the limitations and assumptions inherent in the VaR model.
• No, because the historical track record supports his claim of effectiveness.
• No, because explaining Monte Carlo simulations would be too technical for most clients.

Thomas writes a report on a complex structured product designed to profit from falling interest rates. He mentions 'high returns' are possible but, citing proprietary reasons, does not explain the specific scenarios, the implied risks, or what happens if interest rates rise. Has Thomas violated Standard V(B)?

• No, because proprietary trading strategies are protected intellectual property.
• Yes, because he failed to adequately describe the basic characteristics and risks of the investment.
• No, provided the product is only sold to institutional clients.

May Associates, a small-cap manager, raises its market-cap ceiling from $2 billion to $8 billion to accommodate asset growth. The CIO updates marketing literature for <em>prospective</em> clients but does not notify <em>existing</em> clients. Has the CIO violated Standard V(B)?

• No, because existing clients will see the change in their next quarterly report holdings.
• Yes, because this is a material change in the investment process that affects existing client allocations.
• No, because the change was necessary to maintain liquidity, which benefits all clients.