Reading 2-VI: Standards of Professional Conduct & Guidanc 2011, investment, research, writing, center

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Session 1: Ethical and Professional Standards
Reading 2-VI: Standards of Professional Conduct & Guidance: Conflicts of Interest

LOS A.: Disclosure of Conflicts.

 

 

Abner Flome, CFA, is writing a research report on Paulsen Group, an investment advisory firm. Flome’s brother-in-law holds shares of Paulsen stock. Flome has recently interviewed for a position with Paulsen and expects a second interview. According to the Standards, Flome’s most appropriate action is to disclose in the research report:

A) his brother-in-law’s holding of Paulsen stock and that he is being considered for a job at Paulsen.

B) that he is being considered for a job at Paulsen.

C) his brother-in-law’s holding of Paulsen stock.

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The possibility of employment with Paulsen creates a potential conflict of interest which Flome must disclose. Standard VI(A) Disclosure of Conflicts does not require disclosure of his brother-in-law’s ownership of Paulsen stock.

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Ryan Brown, CFA, is an analyst with a large insurance company. His personal portfolio includes a significant investment in QRS common stock that his firm does not currently follow. The director of the research department asked Brown to analyze QRS and write a report about its investment potential. Based on CFA Institute Standards of Professional Conduct, Brown should:

A) sell his shares of QRS before completing the report.

B) decline to write the report without specific approval of his supervisor.

C) disclose the ownership of the stock to his employer and in the report.

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Members are required to act on behalf of their clients, placing their clients’ interests ahead of their own. Brown should disclose his personal ownership of QRS to his employer and also in the report.

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An analyst has been covering a particular firm for years. Recently, the analyst’s uncle died and left the analyst a sizable position in the firm’s stock. The analyst needs to:

A) refuse to receive the stock in the first place.

B) do nothing since the analyst did not purchase the stock.

C) disclose the ownership of the stock to his supervisor.

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The only thing the analyst needs to do is to disclose the ownership of the stock to his supervisor in accordance to Standard VI(A), Disclosure of Conflicts. Refusing to receive the stock could be acceptable option, but is not required.

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Phil Trobb, CFA, is preparing a purchase recommendation on Aneas Lumber for his research firm. All of the following are potential conflicts of interest EXCEPT:

A) Trobb's research firm has a large stake of ownership in Aneas Lumber.

B) Aneas hires Trobb as a consultant to analyze Aneas' financial statements.

C) Trobb's cousin repairs machines for Aneas.

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Standard VI(A) defines what constitutes a conflict of interest with regard to clients, prospective clients, and employers. All of these represent potential conflicts of interest with the exception of the cousin working for Aneas Lumber in a job that is unrelated to the Aneas’ financing.

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Will Lambert, CFA, is a financial analyst for Offshore Investments. He is preparing a purchase recommendation on Burch Corporation. According to CFA Institute Standards of Professional Conduct, which of the following statements about disclosure of conflicts is most correct? Lambert would have to disclose that:

A) both of these choices require disclosure.

B) he has a material beneficial ownership of Burch Corporation through a family trust.

C) his wife owns 2,000 shares of Burch Corporation.

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Standard VI(A) requires that Members and Candidates fully disclose all matters which may impair their independence or objectivity or interfere with their duties to their employer, clients and prospects.

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According to Standard VI(A), Disclosures of Conflicts, members must disclose to their clients the member’s (or their firm’s) material ownership of all of the following EXCEPT:

A) corporate finance relationships.

B) beneficial ownership of securities.

C) real estate holdings.

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Unless the firm’s real estate holdings would impair their independence and objectivity, they need not be disclosed.

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When an analyst makes an investment recommendation, which of the following statements must be disclosed to clients?

A) An employee of the firm holds a directorship with the recommended company.

B) Both of these statements must be disclosed to clients.

C) The firm is a market maker in the stock of the recommended company.

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Both of these items are explicitly listed in the discussion of Standard VI(A), Disclosure of Conflicts.

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Bill Valley has been working for Advisors, Inc., for several years, and he just joined CFA Institute. Valley routinely writes research reports on Pharmaceutical firms. Valley has recently been asked to serve on the board of directors of an organization that promotes the search for a cure of a certain cancer. Serving on the board is an unpaid position without any direct benefits other than meeting new people and potential clients. To comply with Standard VI, Disclosure of Conflicts, Valley needs to:

A) do nothing.

B) both disclose the position on the board to his supervisor and describe his responsibilities on the board.

C) only disclose the position on the board to his supervisor.

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Valley could be affected by his position on the board because he may tend to favor investments in firms that do cancer research. To comply with Standard VI(A), Disclosure of Conflicts, Valley must inform his supervisor of this relationship and describe his responsibilities on the board. Even if his supervisor does not find the relationship troublesome, any subsequent action that could lead to a conflict of interest should be discussed with the firm’s compliance officer.

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Jan Hirsh, CFA, is employed as manager of a college endowment fund. The college’s board of directors has recently voted to consider divesting from companies located in a country that has a poor civil rights record. Hirsh has personal investments in several firms in the country. Hirsh needs to:

A) do nothing since the board has not made a decision yet.

B) disclose her ownership in the stocks to both her supervisor and the board.

C) disclose her ownership in the stocks to her supervisor only.

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From the given information, there is no conflict of interest and no violation of Standard VI(A), Disclosure of Conflicts. A conflict could arise if the board were to ask Hirsh what the effect on the college’s endowment would be if they were to divest. At that time she would have to reveal her ownership in the stocks to make known the possible conflict of interest.

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Dwight Dawson, a CFA charterholder and portfolio manager at Ascott Investments, was recently appointed to the investments committee at Brightwood College. He will receive no compensation from Brightwood for serving on this committee. Another person at Ascott manages part of Brightwood’s endowment. Dawson does not inform Ascott’s compliance office of his involvement with Brightwood, because he does not believe doing so is necessary.

Brenda Hamilton, a CFA candidate, also works for Ascott as an investment analyst. Procedures established at Ascott prohibit personal trading in securities analyzed or recommended by Ascott. One of these securities is Horizon, a telecommunications firm. Hamilton buys 10 shares of Horizon for her infant son’s trust account. She believes that reporting this purchase to Ascott’s compliance officer is unnecessary because the amount of the transaction is small and is not for her own personal account.

Did Dawson or Hamilton’s actions violate CFA Institute Standards of Professional Conduct?

A) Dawson: Yes, Hamilton: Yes.

B) Dawson: No, Hamilton: No.

C) Dawson: No, Hamilton: Yes.

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Dawson violated Standard VI(A), Disclosure of Conflicts, by failing to inform Ascott of her involvement with Brightwood College. Dawson could reasonably be expected to be involved with investment policy decisions at Brightwood that could affect Ascott because Ascott manages a portion of Brightwood’s endowment. Hamilton also violated Standard VI(A), because she ignored a directive of her employer. Her purchase of Horizon stock has an appearance of impropriety. Hamilton could discuss the purchase of Horizon stock with her firm’s compliance officer and request an exception to the prohibition against personal trading in securities analyzed or recommended by Ascott.