1. John Smith is a portfolio manager at ABC Investment

Management, a firm that follows the CFA Institute Code of

Ethics and Standards of Professional Conduct. He is

responsible for managing the portfolios of several high-networth clients, including his brother-in-law, Peter Jones.

Smith has a discretionary authority over Jones' portfolio

and does not charge him any fees for his services. Smith

also does not disclose this arrangement to his employer or

his other clients. Which of the following statements is most

accurate regarding Smith's actions?

A) Smith is violating the Standard of Loyalty, Prudence,

and Care by not charging Jones any fees.

B) Smith is violating the Standard of Fair Dealing by

giving preferential treatment to Jones.

C) Smith is violating the Standard of Disclosure of

Conflicts to Employer by not informing his employer of his

relationship with Jones.

D) *Smith is violating the Standard of Disclosure of

Conflicts to Clients by not informing his other clients of his

relationship with Jones.*

Rationale: Smith is violating the Standard of Disclosure of

Conflicts to Clients by not disclosing his relationship with

Jones to his other clients, who may perceive this as a

potential conflict of interest that could compromise Smith's

objectivity and fairness. Smith should either terminate his

relationship with Jones or obtain written consent from his

other clients after disclosing the nature and scope of his

arrangement with Jones.