Reading 1: Code of Ethics and Standards of Professional Condu 2011, investment, including, multiple, required

1215

Session 1: Ethical and Professional Standards
Reading 1: Code of Ethics and Standards of Professional Conduct

LOS c: Explain the ethical responsibilities required by the Code and Standards, including the multiple sub-sections of each Standard.

 

 

Michael Malone, CFA, is an investment analyst for a large brokerage firm in New York who covers the airlines industry. After hours in his personal time, Malone maintains an online blog on which he expresses his personal opinions about various investment opportunities, including, but not limited to, the airlines industry. On his blog, he posts a very negative investment opinion about WestAir stock. Malone knows that WestAir's stock will be downgraded to a “sell” by his firm next week. Malone has:

A) violated Standard II(A) Material Nonpublic Information by releasing material that could negatively impact the price of the security.

B) violated Standard IV(A) Loyalty by divulging confidential information that is the intellectual property of his employer.

C) violated Standard VI(B) Priority of Transactions by releasing material information to the public before releasing to the firm’s clients.

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Malone is in violation of Standard II(A) because the information is both material and nonpublic. He is in violation whether or not he divulges the impending downgrade by his firm on his blog, because he is using nonpublic information. A “sell” opinion on a security issued by a large brokerage firm will almost certainly impact the stock’s price.

1215

Liam McCoy has lunch with a wealthy client whose portfolio he manages. McCoy advises the client to double his current position in the JKM Corporation due to an anticipated increase in sales. In accordance with Standard (V) Investment Analysis, Recommendations and Actions, when McCoy returns to his office he should:

A) identify other clients for whom JKM may be a suitable investment and notify them immediately of his recommendation.

B) verify the suitability of the investment recommendation before placing the client’s order.

C) document the details of the conversation with the client with regard to his investment recommendation.

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Standard V(C) Record Retention requires that Members and Candidates document all recommendation and communications with clients. McCoy should document the details of the conversation, including any resulting investment decisions and/or actions. The suitability of the investment should have already been considered before the recommendation and McCoy should not execute the order until the client instructs him to. Identifying other clients for this investment would fall under Standard III(B) Fair Dealing.

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