To view full questions and answers, please kindly visit our site: http://cfaexampreparation.com/327/top-18-best-cfa-mock-exam-level-2-questions-answers-ethics/
The Old Rule requires 'caution' which had been interpreted as a duty
to avoid speculation and undue risk and follows from the "risk-averse"
duty of caution (ie avoid all risk)In the New rule, the duty of caution
does not call for the total avoidance of risk by trustees but rather for
its "prudent management," taking account of inflation, volatility,
illiquidity, and the like, in addition to potential loss.
Diversification is fundamental to risk minimization and is therefore ordinarily required of trustees.
Trustees have a duty to avoid fees, transaction costs, excessive
churning/trading, and other expenses that are not justified by the
objectives of the investment program.
The fiduciary's duty of impartiality requires a conscious balancing of current income and growth.
1 Economic conditions.2 Inflation and Deflation effects.3 Tax impact
of investment on the beneficiary.4 How each individual investment
contributes to the risk and return of the overall portfolio.5 The
expected total return (divs and cap gains)6 The other resources the
beneficiary has.7 The beneficiary's liquidity, income, and capital
preservation requirements.8 Whether any assets have a special
relationship to the requirements of the beneficiary or the trust.
Under the old rule, you were not allowed any delegation of duty.
Basically the trustee had to manage all investments himself. The new
rule states that it is a DUTY to delegate, ie the opposite. Unless of
course the trustee is totally qualified and committed to do it
him/herself
In making and implementing investment decisions, the trustee has a
duty to diversify the investments of the trust unless, under the
circumstances, it is prudent not to do so. Emphasis is on the whole
portfolio. A risky derivative on its own may not be prudent, but is
prudent for a portfolio.
No security is off limits. It should be judged in the context of the portfolio
1. Use of Total Return2. Risk Management3. Evaluation of a portfolio
rather than each investment4. Security/investment restrictions5.
Delegation of Duty:
Care includes obtaining relevant information on the circumstances and
requirements of the trust and its beneficiaries, on the contents and
resources of the trust estate, and about the available investment
choices. The duty of care may also require a trustee to seek the advice
of others.
Of the standards to which a trustee must adhere, the most important
are that he must exercise CARE, SKILL, and CAUTION, and must manifest
LOYALTY and IMARTIALITY. His compliance with these duties is judged as
of the time an investment decision is made, and not with the benefit of
hindsight or subsequent developments, nor on the outcome of his
investment decisions. (Think SCCIL ie skill)
Trustees may have a duty (if he/she does not have the skill), as well
as the authority, to delegate as prudent investors would.
Impartiality means that a trustee must recognize the divergent
interests of different beneficiaries. He must resolve these differences
"in a fair and reasonable manner," whatever that may mean.Basicall they
must be balanced between current and future beneficiaries must be
considered. This was the same in the old prudent man rule.
Loyalty means that a trustee must be free of conflicts of interest in
managing a trust's investments, and must act solely in the interests of
the beneficiaries.
Caution must be used to balance the need for income with the need to
protect against inflation. Returns should be viewed as total return.
Principal growth may be a goal in certain circumstances. Compared to the
old rule Caution avoid losing any money so growth was never a
consideration.
The New Rule defines reasonable return as total return: capital growth
as well as income. Furthermore, under the New Rule, capital growth does
not necessarily mean only preservation of the trust's purchasing power
but may extend to growth in the real value of principal in appropriate
cases.
Risk and return are so directly related that trustees have a duty to
analyze and make decisions concerning the levels of risk appropriate to
the purposes of the trust. (ie Consideration should be for the portfolio
as a whole.)
Skill means that although a person of ordinary intelligence, without
financial experience, may serve as a trustee, he should obtain the
guidance of specialists in order to meet the skill criterion. Unlike the
Old Rule, which in general forbade investment delegation, the
Restatement holds that a trustee may in some instances have a duty to
delegate investment authority to others. In delegating, "the trustee
must exercise appropriate care and skill in selecting and supervising
agents and in determining the de
No comments:
Post a Comment