Unit study guide · NISM Series XXI-B
Regulatory, Governance and Ethical Aspects of Portfolio Managers
8 questions in this unit
What this unit covers
- Which practice best supports research objectivity when a manager evaluates an investment?
- Why does client due diligence seek to identify a beneficial owner behind a legal entity?
- Which statement about an investor charter is most appropriate for portfolio-management clients?
- An analyst receives confidential, price-sensitive information about an unannounced acquisition. The information is not generally available and no permitted exception applies. What is the appropriate immediate response before dealing in the affected security?
- The same firm receives a large confidential client buy order. A dealer first buys the security personally to benefit from the client order’s expected price impact. Which misconduct does this most directly illustrate?
- A review finds that a manager repeatedly trades a stable client portfolio without an investment reason. The trades mainly generate transaction-linked compensation for the manager. What is the main concern?
- A broker offers the firm research in return for additional client-funded dealing commissions. The research may be useful, but the arrangement would also pay for a personal benefit to the manager. Which response best protects research objectivity and client interests?
- Two eligible client accounts order 600 and 400 shares in the same batch, but only 500 shares are filled. The documented pre-trade policy requires proportionate allocation by order quantity. What allocation follows that policy?
Key ideas
From the practice bank · 1
Which practice best supports research objectivity when a manager evaluates an investment?
Separating research from pressure to favour a relationship supports an evidence-based conclusion. Relevant contrary evidence should be considered rather than concealed. Remember: Research should follow evidence rather than a desired commercial outcome.
Hint Ask whether the evidence or a commercial interest drives the conclusion. Common mistake: Treating disclosure alone as a substitute for genuinely independent analysis.
XXI-B-063From the practice bank · 2
Why does client due diligence seek to identify a beneficial owner behind a legal entity?
Beneficial-owner identification seeks the natural person who ultimately owns or controls the entity under applicable rules. A signatory or document handler is not automatically that person. Remember: An entity’s representative and its beneficial owner can be different people.
Hint Look beyond the entity’s name and its administrative representatives. Common mistake: Stopping due diligence at the authorised signatory without considering ultimate control.
XXI-B-064From the practice bank · 3
Which statement about an investor charter is most appropriate for portfolio-management clients?
An investor charter explains service expectations and investor rights and responsibilities. It should not be presented as capital protection or assured outperformance. Remember: Investor protection and investment-return guarantees are different concepts.
Hint Distinguish a service and rights framework from an investment promise. Common mistake: Treating a published charter as insurance against market risk.
XXI-B-065From the practice bank · 4
An analyst receives confidential, price-sensitive information about an unannounced acquisition. The information is not generally available and no permitted exception applies. What is the appropriate immediate response before dealing in the affected security?
The analyst should avoid dealing and escalate through compliance controls because the information is unpublished and price-sensitive. The stated facts provide no applicable exception for trading. Remember: Handle confidential price-sensitive information before any affected dealing takes place.
Hint Consider both the information’s public availability and its possible price effect. Common mistake: Believing a small trade or another person’s account avoids the issue.
XXI-B-066From the practice bank · 5
The same firm receives a large confidential client buy order. A dealer first buys the security personally to benefit from the client order’s expected price impact. Which misconduct does this most directly illustrate?
The dealer is front running because the personal trade seeks to profit from advance knowledge of a client’s pending order. This creates a serious conflict with fair treatment of the client. Remember: Confidential client-order information must not be used for personal trading advantage.
Hint Identify who uses advance knowledge of whose pending transaction. Common mistake: Assuming order information is harmless because it is not an issuer’s earnings announcement.
XXI-B-067From the practice bank · 6
A review finds that a manager repeatedly trades a stable client portfolio without an investment reason. The trades mainly generate transaction-linked compensation for the manager. What is the main concern?
The concern is excessive trading driven by the manager’s compensation rather than the client’s investment needs. Activity alone is not evidence of useful portfolio management. Remember: Trading should have a defensible client-investment purpose.
Hint Compare the economic purpose of the trades with who benefits from them. Common mistake: Judging manager effort by trade count without considering purpose and costs.
XXI-B-068From the practice bank · 7
A broker offers the firm research in return for additional client-funded dealing commissions. The research may be useful, but the arrangement would also pay for a personal benefit to the manager. Which response best protects research objectivity and client interests?
The personal benefit should be rejected, and any research arrangement separately assessed under applicable controls. A useful research component does not justify an unrelated personal benefit at clients’ expense. Remember: Client-funded arrangements require scrutiny of actual purpose, benefits and conflicts.
Hint Assess the purpose of each benefit rather than accepting a single package label. Common mistake: Assuming every broker-provided benefit becomes acceptable when bundled with research.
XXI-B-069From the practice bank · 8
Two eligible client accounts order 600 and 400 shares in the same batch, but only 500 shares are filled. The documented pre-trade policy requires proportionate allocation by order quantity. What allocation follows that policy?
The accounts should receive 300 and 200 shares because their orders are in a 60:40 ratio. Total orders = 600 + 400 = 1,000 shares. Allocations = 500 × 600 ÷ 1,000 = 300 and 500 × 400 ÷ 1,000 = 200. The allocation rule is a stated case policy. Remember: Pre-established allocation policies help prevent after-the-event favouritism.
Hint Apply the established allocation basis consistently rather than choosing after seeing the fill. Common mistake: Using account size, commercial importance or equal shares when the policy specifies order proportions.
XXI-B-070