Study Session Two in the level II curriculum is a continuation of the ethics material with six readings on cases, trade allocation, changing objectives and prudence.
The cases are basically just practice for the Code and Standards. Working through them will help you start to see how the Institute formulates questions on the exam. You will not see questions in the CFA exam specific to the cases, so use them as additional practice but do not spend too much time with the details of the case.
The material on trade allocation is important. You may see questions on the exams about allocation procedures and fair dealing. Members must draft and follow allocation procedures that ensure investments are allocated to all clients in a fair and appropriate manner.
1. Suitability is a big issue. Investments should only be allocated to clients if their risk tolerance is high enough for the specific opportunity
2. Trades and new issues should be allocated on a pro rata basis and investor interest should be gauged before new issues
3. Keep records and treat clients equally in execution and price
Changing investment objectives must be disclosed to clients when they occur or before proposed changes if possible. Members must provide the basic format and general principles of the investment process used in analysis.
A reasonable inquiry into the client’s objectives should be made and updated at least annually.
The material on Prudent Investor Rule and how it differs from the old Prudent Man Rule seems like unnecessary semantics cloaked in a history lesson.
Read through it and understand the basic differences between the two rules. Know that you have a fiduciary obligation to the client which entails loyalty, prudence (care, skill and caution), and impartiality. Most of the material is included in the Standards and a strong understanding there will help you get the points here as well.
1. Risk must be determined and minimized with diversification according to the trust’s (investor’s) needs.
2. Fees and expenses must be reasonable
3. There must be a fair compromise between current income beneficiaries and remainder beneficiaries (growth versus income)
4. Trustees can delegate responsibilities to experts (a key difference from the old rule)
Study session three in CFA Level 2 is new material on quant methods and some of the time series material can get complicated. Be sure to check in next week and we’ll try to cover some of the most important concepts.
‘til next time, happy studyin’
Joseph Hogue, CFA