Fred Stroh is an international equity analyst for EmerWorld Capital Management (ECM). Stroh has been studying the opportunities associated with the rumors of proposed joint ventures involving U.S. firms and firms partially owned by the government in a recently democratized country. Clients of Stroh have called him to ask about the investment possibilities. This concerns Stroh somewhat as he has had great difficulty in finding and acquiring reliable information about the quality and accessibility of the inputs and labor in local markets. Furthermore, there is still considerable uncertainty about which U.S. firms will be offered partnerships, what the conditions of those partnerships will entail, and the accounting rules that will govern the new ventures. However, Stroh is confident that there will be demand for the output in local and international markets. Stroh begins his investigation and e-mails an old friend who was an entrepreneur in the U.S. and moved to the recently democratized country when he went into partial retirement. Although Stroh had not been in contact with the friend for several years, the friend writes back and says that this is a great time to invest in the country. He says that there will be national elections soon, and it seems that a pro-business chief executive for the country will be elected. The friend includes website URL addresses which link to reports from reputable news sources concerning the election. Stroh goes to those sites and sees that recent opinion polls in the country show that the pro-business candidate has a majority in the polls taken and is believed to be able to easily win the election. Stroh calls his friend, and asks if the labor costs and input availability in the country gave the country a comparative advantage in some areas. The friend says yes, and that APX Corp. is planning to partner with the countrys government to expand a plant for making car parts. APX is also in talks to make a tender offer for a French glass manufacturing firm, which was one of the few non-nationalized and foreign owned firms in the country. None of APXs intentions were known to outsiders of the firm. Stroh asks his friend how sure he is of the information, and the friend says that he has been hired as a consultant for APX and has been a negotiator in the tender offer dealings, which are going well. Stroh warns his friend that he may be saying too much, and his friend says that there are no rules in the country associated with trading on this type of information. The friend says he has some other useful information, but first asks if Stroh thought investing in APX was a good idea. Stroh responds by saying that based on the information just provided, and his training as an analyst and a CFA charterholder, the analysis would indicate that his friend should buy APX. The friend then says that IMI Corp. has decided not to enter into any partnerships in the country. Stroh then asks about how sure his friend was of IMI withdrawing from partnering in the country, and the friend says that although he has no contacts in IMI, it was his own research that lead to that conclusion. Stroh continues his investigation. In his research he finds through public documents that APX has purchased the land next to the car parts plant. Some of APXs managers are already working in the parts plant itself. He also finds that APX representatives have been visiting the headquarters of the French glass manufacturer. In public documents, APX is projecting a big increase in its production of engine parts and windshields. Stroh calls the CFO of IMI and during the conversation learns that IMI has decided to withdraw its bid to be a joint venture partner, but that the formal announcement of the withdrawal will not occur for another week. The CFO declines to give a reason. Stroh also finds that official statistics verify the friends assertion that the countrys labor and raw material supplies do give it a comparative advantage in the types of activities APX is seeking to engage in. Not wanting to miss an opportunity, Stroh completes his industry analysis and concludes that EmerWorld will issue a buy recommendation on APX. In the recommendation he says that APX is planning on expanding its production of car parts and windshields by acquiring new manufacturing plants in a country that offers great cost advantages, but does not mention his gathering the information concerning the land acquisition and the APX managers working in the existing plant because he wants to conceal his research methods. Stroh also says the advantages to APX are exceptionally good because a new pro-business chief executive will soon be elected. Upon the announcement of IMI to not partner in the country, Stroh issues a sell recommendation on IMI. Stroh says in the sell recommendation that IMIs management does not seem competent because it will not be capitalizing on the opportunities in the country and apparently cannot recognize a good opportunity when it sees one. Which of the following pieces of information would Stroh have been able to use to trade upon? | A) | IMI withdrawing from partnering in the country. |
| | B) | The plan by APX to purchase a company in the country. |
| | C) | The plan by APX to partner in the car parts production in the country. |
| D) | The labor and materials comparative advantage of the country. |
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Answer and Explanation
All of the pieces of information related to APX purchasing the other company, APX partnering in the car parts industry, and IMI withdrawing from partnering in the country are all insider information and therefore cannot be used to trade upon. The only information that can be used is the information pertaining to the labor and materials comparative advantage since this was public information that Stroh could verify based on publicly available statistics.
All of the pieces of information related to APX purchasing the other company, APX partnering in the car parts industry, and IMI withdrawing from partnering in the country are all insider information and therefore cannot be used to trade upon. The only information that can be used is the information pertaining to the labor and materials comparative advantage since this was public information that Stroh could verify based on publicly available statistics.
The statement Stroh made in his recommendation of APX concerning the election of a pro-business chief executive was: | A) | appropriate because it did not relate directly to the firms themselves. |
| B) | not appropriate because of the way it was mentioned in the recommendation. |
| | C) | not appropriate because the Standards prohibit politically-oriented information being used in recommendations. |
| | D) | appropriate because it was based on information from the public websites of reliable news agencies. |
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Answer and Explanation
According to Standard V(B), Communication with Clients and Prospective Clients, investment analysis and recommendations should clearly differentiate facts from opinions. Although it is a widely held opinion that the pro-business candidate would win, no one can predict the future. None of the other reasons are valid.
With respect to the given information and the sell recommendation of IMI, which of the following statements would NOT be allowable in the sell recommendation under the Standards? A) | IMIs executives cannot recognize a good opportunity when they see it. |
| | B) | IMI is now abandoning its plan to partner in the country. |
| | C) | IMI was once considering partnering in the country. |
| | D) | IMIs withdrawal was widely believed imminent by the business community of the country. |
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Answer and ExplanationStroh has no reasonable basis for saying that IMIs executives cannot recognize a good opportunity when they see it. The CFO of IMI did not give a reason for their not partnering in the country. IMI may have better opportunities elsewhere. Had the CFO said that the statistics concerning comparative advantages were not valid, for example, Stroh might have more of a basis to be critical of the management. The other statements are facts that Stroh can provide adequate support for.
When Stroh answered his friends question concerning whether the friend should invest in APX, Stroh was in violation of all of the following Standards EXCEPT: A) | Standards VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program. |
| | B) | Standard III(B) Fair Dealing. |
| | C) | Standard V(A) Diligence and Reasonable Basis. |
| | D) | Standard III(C) Suitability. |
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Answer and Explanation
The Standard III(B) indicates that members shall deal fairly and objectively with all clients when disseminating recommendations and material changes. Fair dealing requires that members make every effort to treat all clients, whether they are individuals or institutions, in a fair and impartial manner. By essentially making a recommendation to his friend first, Stroh breached the standard because he disadvantaged his clients in favor of his friend. Also, Stroh still had to verify what the friend said about the comparative advantage was true. Standard V(A), Diligence and Reasonable Basis, and that the investment would be appropriate for his friend Standard III(C), Suitability. Mentioning his training, which included the CFA designation, was not inappropriate.
Stroh attempted to maintain the confidence of his research methods by not revealing them in his report. By doing so, Stroh: A) | may have violated the standards related to known limitations of his analysis and material misrepresentation by omitting the source of his information and other facts that led to his conclusions. |
| | B) | is exercising discretion in order to maintain a competitive edge. |
| | C) | is neither helping nor harming the consumers of his report, as long as he reaches logical conclusions from the information the sources provide. |
| | D) | is acting like most other analysts would act in his situation. |
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Answer and ExplanationStandard V(A), Diligence and Reasonable Basis, and Standard V(B), Communication with Clients and Prospective Clients. Known limitations of the analysis and conclusions should be documented in research reports. Material misrepresentations should also be avoided by including all pertinent information and by distinguishing between opinion and fact in the analysis and conclusions of a report. Stroh may have violated the standards related to known limitations in his analysis by rushing to provide a recommendation. Stroh felt somewhat unable to perform an analysis given the lack of essential data, but completed a report where the conclusions are largely driven by information derived from conversations that were not included or referenced in the report. These missing facts may also be construed as material misrepresentation. However, at no time should material nonpublic information be used for, or reported in, recommendations that are produced by Stroh or ECM.
With respect to Strohs recommendations, the mosaic principle could play a role with respect to the use of which piece of information? | A) | The partnering of APX with the governments car parts operations. |
| | B) | IMIs withdrawal from considering partnerships. |
| | C) | The purchase of the glass manufacturing company in the country. |
| D) | The comparative advantage of the country in manufacturing. |
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Answer and Explanation
Stroh could not use the information concerning the car parts partnering, the purchase of the glass manufacturing company, or IMI's withdrawal from partnering because some or all of this information was passed on to him via insiders with the information being material nonpublic information and therefore cannot be traded upon. The Mosaic principle could only play a role in the material public information regarding the comparative advantage of the country. | 
发表于 2008-9-16 11:16
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