1215

Susan Plumb is the supervisor of her firm’s research department. Her firm has been seeking the mandate to underwrite Wings Industries’ proposed secondary stock offering. Without mentioning that the firm is seeking the mandate, she asks Jack Dawson to analyze Wings common stock and prepare a research report. After reasonable effort, Dawson produces a favorable report on Wings stock. Plumb then adds a footnote describing the underwriting relationship with Wings and disseminates the report to the firm’s clients. According to CFA Institute Standards of Professional Conduct, these actions are:

A) not a violation of any Standard.

B) a violation of Standard V(A), Diligence and Reasonable Basis.

C) a violation of Standard VI(A), Disclosure of Conflicts.

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The fact that the firm is seeking the mandate does not preclude the research department from performing analytical work on the security. As long as the final recommendation is based upon reasonable facts, not the desire to obtain the mandate, there is no violation.

1215

An analyst receives a research report from a colleague. The colleague’s report has an elaborate table with performance data on publicly traded stocks. The colleague says the data in the table consists of measures provided by Standard & Poor’s. The analyst finds the table a useful reference for a report she is writing. She uses several pieces of data from the table. The analyst is potentially in violation of:

A) Standard V(A), Diligence and Reasonable Basis, if she does not first verify the data in the table is accurate.

B) Standard I(C), Misrepresentation, concerning the use of the work of others.

C) no particular standard because this is appropriate activity.

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Since the data in the table supposedly comes from Standard & Poor’s, a recognized data source, the analyst does not have to cite the source of the data. However, the analyst needs to use reasonable care and verify that the data is accurate by going back to the source. Had the analyst printed the table prepared by her colleague without acknowledgement, the analyst would have violated Standard I(C), Misrepresentation.

1215

An analyst writes a report and includes the forecasts of an econometric model developed by the firm’s research department. The analyst identifies the source of the forecast and includes all the relevant statistics concerning the model and his opinion of the model’s accuracy. With respect to Standard V(A), Diligence and Reasonable Basis, the analyst has:

A) complied with the Standard.

B) violated the Standard by including quantitative details in a report.

C) violated the Standard by not testing the model himself.

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Including quantitative details in a report is not a violation of the Standard. The analyst has more of an obligation to give an opinion on the accuracy of the model than withhold such an opinion. Although the analyst should use reasonable care to verify information included in a report, retesting models developed by the research department of a firm is not explicitly required.

1215

An analyst notices that for most years that a given class of assets has an abnormally high rate of return, the asset class often has an abnormally low rate of return the next year. Based upon this information, according to Standard V(A), Diligence and Reasonable Basis, the analyst can recommend:

A) short selling assets that have had a good previous year to all clients.

B) neither of these choices.

C) an increased allocation of Treasury bills (T-bills) for all portfolios of assets that have increased dramatically in the previous year.

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An analyst should not make a recommendation based only upon a statistical anomaly. Furthermore, none of the other choices would be appropriate. Clients with low risk tolerance should not short sell assets. The analyst cannot make a recommendation to all clients because each client has different characteristics and portfolios. The one answer that may have some merit is to increase the allocation of T-bills in portfolios that have had recent, dramatic increases. This would be for the purposes of maintaining a balanced portfolio. But the decision to rebalance must be made on a case-by-case basis and not for all portfolios.

1215

Several years ago, Hilton and Ross, a full service investment firm, managed the initial public offering of eCom, Inc. Now, eCom wants Hilton and Ross to underwrite its secondary public offering. A senior manager at Hilton and Ross asks Brent Whitman, CFA, one of its equity analysts, to write a favorable research report on eCom to help make the underwriting a success. Whitman conducts a thorough analysis of eCom and concludes that the company has serious problems that do not suggest a favorable financial outlook. Nevertheless, Whitman writes a favorable report because he is fearful of losing his job. Hilton and Ross publicly distribute a report that only contains a buy recommendation and a brief description of the basic characteristics of eCom. Whitman has violated:

A) Standard V(A) Diligence and Reasonable Basis only.

B) Both Standard I(B) Independence and Objectivity and Standard V(A) Diligence and Reasonable Basis.

C) Standard I(B) Independence and Objectivity, only.

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Whitman violated Standard V(A) Diligence and Reasonable Basis because he did not have a reasonable and adequate basis for issuing a favorable recommendation. Whitman violated Standard I(B) Independence and Objectivity because he did not act independently in issuing his recommendation but instead was influenced by senior management at Hilton and Ross.

1215

Wes Smith, CFA, works for Advisors, Inc. In order to remain in compliance with Standard V(A), Diligence and Reasonable Basis, Smith may recommend a security in which of the following situations?

A) Smith reads a favorable review of the security in a widely read periodical.

B) Advisors' research department recommends a stock.

C) For either of the reasons listed here.

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Smith will be in violation if he acts solely on the basis of what he read in the periodical. Use of information within the firm can be relied upon unless the Smith has reason to believe the source lacks a sound basis.

1215

Susan Tigra, CFA, is a portfolio co-manager for the Sandia Energy pension fund. Sandra Bulow, a research analyst under Tigra’s supervision, creates a new trading model and immediately begins to trade. Susan stops Bulow from trading, but notes that the firm has no guidelines for testing new models. Tigra should most likely:

A) encourage her firm to develop detailed, written guidance that establishes minimum levels of testing for all computer-based models as required by Standard III(C) "Suitability."

B) report Bulow to the firm’s compliance department for violation of Standard V(A) "Diligence and Reasonable Basis."

C) encourage her firm to develop detailed, written guidance that establishes minimum levels of testing for all computer-based models as recommended by Standard V(A) "Diligence and Reasonable Basis."

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Tigra should encourage her firm to develop detailed, written guidance that establishes minimum levels of testing for all computer-based models as recommended by Standard V(A) "Diligence and Reasonable Basis." Reporting Bulow to the Compliance Department would be of limited usefulness as she has already established that the firm does not have rules discouraging this behavior.

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