CFA Institute Exam CFA-Level-II Topic 2 Question 3 Discussion

Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firm that employs three investment professionals and currently has approximately $250 million of assets under management. The client base of United Partners is varied, and accounts range in size from small retirement accounts to a $30 million private school endowment. In addition to Burton's administrative responsibilities as the managing partner at United, he also serves as an investment advisor to several clients. Because United Partners is a small firm, the company does not employ any research analysts but instead obtains its investment research products and services from two national brokerage firms, which in turn execute all client trades for United Partners. The arrangement with the two brokers has enabled United to assure its clients that the firm will always seek the best execution for them by having both brokers competitively bid for United's business.

A prospective client, Harold Crossley, has approached Burton about shifting some of his personal assets under management from MoneyCorp to United Partners. Burton provides Crossley with a packet of marketing information that Burton developed himself. The packet contains five years of historical performance data for the private school endowment, Unitcd's largest client. Burton states that the composite's management style and performance results are representative of the management style and returns that United can be expected to achieve for Crossley. Also included in the information packet are brief bios on each of United's three investment professionals. Crossley notices that all three of United's investment professionals are described as "CFA charterholders," but he is not familiar with the designation. In response to Crossley's inquiry. Burton explains the significance of the program by stating that the designation, which is only awarded after passing three rigorous exams and obtaining the requisite years of work experience, represents a commitment to the highest standards of ethical and professional conduct.

As a condition of moving his account to United Partners, Crossley insists that all of his trades be executed through his brother-in-law, a broker for Security Bank. Security Bank is a large, New York-based broker/dealer but is not one of the two brokerage firms with which United currently does business. Burton contacts Crossley's brother-in-law and determines that Security Bank's trade execution is competitive, but Crossley's account alone would not generate enough volume to warrant any soft dollar arrangement for research materials.

However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton for directing any of United's clients to Security Bank's retail banking division. To bring Crossley on as a client, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute all of Crossley's trades but will use research materials provided by the other two brokers to assist in the management of Crossley's account.

Several months later, Burton is invited to a road show for an initial public offering (IPO) for Solution Ware, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO. Burton attends the meeting, which is led by two investment bankers and one software industry research analyst from Security Bank who covers SolutionWare. Burton notes that the bankers from Security Bank have included detailed financial statements for SolutionWare in the offering prospectus and also disclosed that Security Bank provides a warehouse line of credit to SolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWare equity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placing Crossley's order, Burton reads the SolutionWare marketing materials and performs a detailed analysis of expected future earnings and other key factors for the investment decision. Burton determines that the offering would be a suitable investment for his own retirement portfolio in addition to Crossley's portfolio. United Partners, being a small firm, has no formal written policy regarding trade allocation, employee participation in equity offerings, or established blackout periods for employee trading. Burton adds his order to Crossley's order and places a purchase order for the combined number of shares with Security Bank. Burton is later notified that the offering was oversubscribed, and United Partners was only able to obtain roughly 75% of the desired number of shares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and his own retirement account. When Burton notifies Crossley of the situation, Crossley is nonetheless pleased to have a position, though smaller than requested, in such a "hot" offering.

Did the marketing materials presented to Crossley by Burton violate Standard III(D) Performance Presentation or Standard VI 1(B) Reference to CFA Institute, the CFA Designation, and the CFA Program?