Financial Risk Manager Part 1
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Chris Jefferson, FRM, is the manager of a hedge fund. Over the last 3 days, he has been investing the hedge fund by purchasing significant quantities of ABC's stock while simultaneously selling the three-month futures contract (i.e. initiating a short position in it). Although his clients are aware of the fund's general investment strategy to generate earnings, Jefferson did not inform them of the trades. One of the following statements is most likely correct. Which one?
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TTanishq
A
Jefferson violated the GARP Code of Conduct.
B
Jefferson did not violate the GARP Code of Conduct.
C
Manipulated the price of a publicly traded security hence violated the Code of Conduct.
Explanation:
Explanation
Jefferson violated the GARP Code of Conduct because he failed to disclose specific trades to his clients, even though they were aware of the fund's general investment strategy.
Key Points:
- Full disclosure requirement: The GARP Code of Conduct requires members to disclose any potential conflicts of interest that could impair their professional judgment
- Specific vs. general disclosure: While clients knew the general strategy, they were not informed about the specific trades involving significant quantities of ABC's stock and simultaneous short positions in futures contracts
- Transparency obligation: Financial professionals must maintain transparency in their trading activities to avoid any perception of impropriety
- Conflict of interest prevention: Failure to disclose specific trades creates a potential conflict of interest and undermines trust with clients
This situation represents a violation because the lack of specific disclosure could impair objectivity and create a perception of impropriety, even if the general strategy was known.
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