Title LM03 Application of the Code and Standards Level II IFT Notes.pdf ✅

LM03 Application of the Code and Standards 2023 Level II Notes © IFT. All rights reserved 1 LM03 Application of the Code and Standards Introduction ............................................................................................................................................................... 2 Serengeti Advisory Services ................................................................................................................................. 2 Banco Libertad .......................................................................................................................................................... 7 QuantHouse .............................................................................................................................................................10 JR and Associates ...................................................................................................................................................13 Magadi Asset Management ................................................................................................................................16 Edvard Stark ............................................................................................................................................................19 Subath Agarway .....................................................................................................................................................21 This document should be read in conjunction with the corresponding reading in the 2023 Level II CFA® Program curriculum. Some of the graphs, charts, tables, examples, and figures are copyright 2022, CFA Institute. Reproduced and republished with permission from CFA Institute. All rights reserved. Required disclaimer: CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by IFT. CFA Institute, CFA®, and Chartered Financial Analyst® are trademarks owned by CFA Institute. Version 1.0
LM03 Application of the Code and Standards 2023 Level II Notes © IFT. All rights reserved 2 Introduction This reading has seven cases that demonstrate how to apply the Code and Standards in situations where professional and ethical judgment is required. While going through the cases we need to take two perspectives: At an individual level –  Are the actions consistent with the code and standards?  Which standards are being violated and why?  What must be done to comply with the standards? At the firm level –  What are the policy gaps?  How can these gaps be addressed? We have covered the most important points of each case. We suggest that you also go through the curriculum to get a complete understanding of these cases. Serengeti Advisory Services Serengeti Advisory Services (Serengeti) is a Tanzania-based equity research firm. It was founded five years ago by three CFA charterholders: Fatima Bashar, Hasini Shah, and Amara Kariuki. The firm conducts investment research on listed African companies and sells the research to institutional asset managers on an annual subscription basis. Each month, subscribers receive two or three research reports. Bashar, as CEO and head of research, has recently launched a premium subscription service. Clients can receive six additional research reports of their choice per year for an additional fee. Because of the cost of the premium service, Bashar offers it only to clients that she believes can afford it. (Question 1) Serengeti’s research analysts cover small-to mid-cap African companies. For companies not covered by Serengeti, Bashar has created an “approved list” of broker/dealers from across the continent whose research she believes meets Serengeti’s standards. Bashar informs her client that she has put in place the following procedures to ensure that third-party research is used properly:  Procedure 1: When a research report, ours or theirs, cites specific quotations as attributable to “leading analysts” and “leading experts,” I require the analyst who wrote the report to name the specific references.  Procedure 2: When a research report contains statistical estimates of forecasts prepared by others (such as economists) and identifies the source, I require the analyst who wrote the report to remove any qualifying statements or caveats that may have been used.  Procedure 3: When a research report contains charts and graphs prepared by others, I require the analyst who wrote the report to cite their sources. (Question 2)
LM03 Application of the Code and Standards 2023 Level II Notes © IFT. All rights reserved 3 To be on Serengeti’s approved list, broker/dealers must undergo a rigorous due diligence process carried out by Bashar’s team and comply with Procedures 1–3. Bashar has established the following referral arrangement with the firms on the approved list: Whenever Serengeti’s analysts prepare a research report using information sourced from an approved broker/dealer, Bashar encourages the firm’s clients to trade through that broker/dealer. Bashar believes this referral arrangement, which she discloses to clients and prospective clients, provides additional incentive for broker/dealers to share insights and information with her analysts at no cost. Broker/dealers seek to be added to Serengeti's "approved list" because of the firm's large client base. (Question 3) Bashar has the following phone conversation with Jon Grant, CFA, of Grant Asset Management, one of Serengeti’s largest clients. Grant: I have found the research partnerships that Serengeti has established with broker/dealers to be very beneficial. The due diligence that you conduct on the broker/dealers on your approved list saves me from investigating these firms on my own. As a result, I always follow the analysts’ investment recommendations and execute my clients’ trades through the broker/dealer that produced the research report or whose information was used in your research. I noticed that Olatunji Financial, one of the largest broker/dealers in Nigeria, is not on your approved list. Why is that? Bashar: Thank you so much for the compliment and your support. I am glad that Serengeti can provide this service, and I know the broker/dealers also appreciate your business. I have heard that Olatunji Financial conducts outstanding research on Nigerian-listed companies, but we have not had an opportunity to work with them. (Question 4) A few days later, Bashar receives an email from Amope Olatunji, CFA, president and CEO of Olatunji Financial Services (OFS). In the email, Olatunji states, “Jon Grant has told me about the great equity research that your firm produces. I would like OFS to be added to Serengeti’s approved list. To this end, OFS would like to invite you and two of your colleagues to our upcoming West Africa Investment Forum that we host at our headquarters in Lagos, Nigeria. We will pay all of your expenses related to attending the forum, including air travel and overnight hotel accommodations.” Bashar selects Kariuki, the head of business development and Shah, the chief compliance officer for the event. During a meeting to discuss how to proceed with Olatunji’s invitation, Bashar states, “As I see it, there are three possible options we have: Option 1 We allow OFS to pay for all of our expenses. Option 2 We allow OFS to pay for our air travel and hotel accommodations, and we pay for our meals and entertainment. Option 3 We allow OFS to pay for the forum’s meals and entertainment, and we pay for our air travel and hotel accommodations.” (Question 5)
LM03 Application of the Code and Standards 2023 Level II Notes © IFT. All rights reserved 4 At the forum, Bashar, Shah, and Kariuki separate to talk with the attendees. When Kariuki walks over to the recycling bin to dispose of her water bottle, she notices a document on top of the bin. When she picks up the document, she realizes it is a list of OFS clients, complete with contact information, email addresses, and average trading volumes over the previous three years. After taking a photo of the document with her phone, she places it back in the bin and proceeds to seek out those clients with the highest trading volumes. (Question 6) The next morning, Bashar, Shah, and Olatunji meet to discuss the possibility of OFS being added to Serengeti’s approved list. The following are excerpts from their meeting: Olatunji: Bashar, I propose you open a discretionary personal account with OFS. I will use the cash that you deposit into the account to purchase a “model portfolio” based on the Nigerian equities our analysts are recommending. Any time our analysts change their recommendations or issue new ones, I will execute trades in your account when we do it for our other discretionary clients. I will also send you an instant message before I make the trade just to let you know, and then I will call you afterward to discuss the trade in more detail. With this arrangement, I can prove to you how well our analysts’ recommendations perform, and you will be able to participate directly. Bashar: That’s a good idea. Could you send me portfolio performance data monthly as you do with your other clients? Please be aware that I will not disclose this model portfolio to Serengeti’s clients until I see how well your analysts’ recommendations perform. In the meantime, Shah will continue to conduct due diligence on OFS to determine whether it should be added to our approved list of broker/dealers. (Question 7). Bashar opens a discretionary personal account with OFS the next day. Despite market liquidity issues, Olatunji is able to build the model portfolio in Bashar's account within a few days. Soon after, Olatunji calls Bashar. Olatunji: I have good news for you. At the end of next week, our team of analysts will be issuing a strong buy recommendation on Swann Bank (SWNB), a commercial bank that is headquartered in Lagos. Because its stock is thinly traded, I have already started building a position in SWNB in your portfolio. Three days before the research report is issued, I have instructed our traders to simultaneously buy and sell shares of SWNB to increase its liquidity in the market so it will be easier for our clients to purchase it for their portfolios. (Questions 8, 9, 10) Bashar: Thank you for the information and update. Later that day, after Olatunji has established a position in SWNB in Bashar's portfolio, Bashar contacts Grant to inform him of Olatunji's upcoming recommendation. (Question 11) Case Questions 1. Does Bashar violate the CFA Institute Code and Standards with regard to the premium subscription service?