CFA Level 1 Exam: Violation of Standards by Michelieu?

Michelieu's Violation of Standards

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Question

Michelieu tells a prospective client, "I may not have a long-term track record yet, but I'm sure that you'll be very pleased with my recommendations and service. In the three years that I've been in the business, my equity-oriented clients have averaged a total return of more than 26 percent a year." The statement is true, but

Michelieu only has a few clients and one of his clients took a large position in a penny stock (against Michelieu's advice) and realized a huge gain. This large return caused the average of all of Michelieu's clients to exceed 26 percent a year. Without this one investment, the average gain would have been 8 percent a year. Has Michelieu violated the Standards?

Answers

A. Yes, because the statement misrepresents Michelieu's track record.

B. Yes, because the statement about return ignores the risk preferences of his clients.

C. No, because the statement is a true and accurate description of Michelieu's track record.

D. No, because Michelieu is not promising that he can earn a 26 percent return in the future.

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Explanations

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A. B. C. D.

Standard IV (B.6), Prohibition against Misrepresentation. Although Micheliu's statement regarding the total return of his client's accounts on average may be technically true, it is misleading because the majority of the gain resulted from one client's large position taken against Micheliu's advice. He has not taken steps to present a fair, accurate and complete presentation of performance. Even though he is not guaranteeing future results, his words are still a misrepresentation of performance. Not disclosing the risk preferences of clients does not make a statement misleading and is not a violation of the Standards in this context.

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