clearlycanadian

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.

clearlycanadian

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

B) do nothing.

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.

clearlycanadian

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

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

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

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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.

clearlycanadian

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.

clearlycanadian

Arthur Harrow, CFA, is a pharmaceuticals analyst at Dominion Asset Management. His supervisor directs him to prepare separate research reports on Miracle Drug Company and Wonder Drug Company. Harrow's former college roommate and close friend is the president of Miracle. Harrow owns 2000 shares of Wonder, which currently sells for $25 a share. Harrow's supervisor is unaware of these facts. According to CFA Institute Standards of Professional Conduct, which of the following action, if any, is Harrow required to take if he writes the research reports?

A) Harrow must disclose to Dominion his ownership of shares in Wonder but not his relationship with the president of Miracle.

B) Harrow must disclose to Dominion both his relationship with the president of Miracle and his ownership of shares in Wonder.

C) Harrow must disclose to Dominion his relationship with the president of Miracle but not his ownership of shares in Wonder.

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Standard VI(A) requires that Harrow disclose to Dominion conflicts that reasonably could be expected to interfere with his independence and objectivity. Both Harrow's relationship with the president of Miracle and his ownership of a substantial dollar amount of Wonder's shares represent a potential conflict requiring prompt disclosure to Dominion.

clearlycanadian

Ray Stone, CFA, follows the Amity Paving Company for his employer. Which of the following scenarios is Stone least likely to have to disclose to his employer.

A) Stone's ownership of Amity securities.

B) Stone's personal relationship with the CEO of Amity.

C) The fact that Stone's son worked at Amity as a laborer during the summer while in school.

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Members are required to disclose to their employer all matters that reasonably could interfere with their objectivity. Personal friendships with corporate executives and personal ownership of securities could reasonably interfere with objectivity, but it is unlikely that a child’s employment in a labor function would reasonably interfere with a parent’s objectivity.

clearlycanadian

Fern Baldwin, CFA, as a representative for Fernholz Investment Management, is compensated by a base salary plus a percentage of fees generated. In addition, she receives a quarterly performance bonus on a particular client’s fee if the client’s account increases in value by more than 2 points over a benchmark index. Baldwin had a meeting with a prospect in which she described the firm’s investment approach but did not disclose her base salary, percentage fee, or bonus.Baldwin has:

A) violated the Standards by not disclosing her salary, fee percentage, and performance bonus.

B) not violated the Standards because there is no conflict of interest with a potential prospect in the employment arrangements.

C) violated the Standards by not disclosing her performance bonus.

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Standard VI(A) requires members to disclose all matters that could reasonably be expected to impair the member’s ability to make unbiased and objective recommendations. Compensation based on a percentage of fees generated does not create an inherent bias. If, however, a performance bonus is paid for investment results, it may unduly encourage the manager to take more risk than is proper and prudent, and so the existence of the bonus opportunity must be disclosed to the client.

optiix

Will Lambert, CFA, is a financial analyst for Offshore Investments. He is preparing a purchase recommendation on Burch Corporation for internal use. According to the CFA Institute Standards of Professional Conduct, which of the following statements about disclosure of conflicts is not required? Lambert would NOT need to disclose to his employer that:

A) Offshore is an OTC market maker for Burch Corporation's stock.

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

C) he is a beneficiary of a pension plan of his former employer that owns a large number of shares of Burch's stock.

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Standard VI(A), Disclosure of Conflicts, requires members to disclose to their employer all matters, including beneficial ownership of securities, that reasonably could be expected to interfere with their duty to their employer or ability to make unbiased and objective recommendations. Disclosure of an employer's own involvement with the security is not necessary in this instance. If the report had been for external use, it would have been necessary to make all of the disclosures given as choices.

optiix

The following scenarios refer to two analysts who are employed at Global Securities, a large brokerage firm.

• Paula Linstrom, CFA, is instructed by her supervisor to write a research report on Delta Enterprises. Delta's stock is widely held by institutional and individual investors. Although Linstrom does not own any of Delta's stocks, she believes that one of her friends may own 10 shares of Delta. The stock currently sells for $25 per share. Linstrom does not believe that informing her employer about her friend's possible ownership of Delta shares is necessary.
• Hershel Wadel, a member of CFA Institute, is asked by his supervisor to write a research report on Gamma Company. Wadel's wife inherited 500 shares of Gamma Company from her father when he died five years ago. Gamma stock currently sells for $35 per share. Wadel does not believe that informing his employer about his wife's ownership of Gamma shares is necessary.

According to CFA Institute Standards of Professional Conduct, which the following statements about Linstrom and Wadel's conduct is most accurate?

A) Neither of these analysts must disclose a potential conflict of interest.

B) Both of these analysts must disclose a potential conflict of interest.

C) Only one of these analysts must disclose a potential conflict of interest.

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The possibility that Linstrom’s friend may own a few shares of Delta's stock, worth a low dollar amount, does not create a conflict of interest such potential ownership could not reasonably be expected to interfere with her duty to employer or ability to make unbiased and objective recommendations. On the other hand, Wadel has a beneficial interest in his wife's ownership of Gamma shares. Standard VI(A) Disclosure of Conflicts requires that Wadel disclose this information so that his employer can make the proper determination.

optiix

To comply with the CFA Institute Standards, employees have a duty to disclose possible conflicts of interest to:

A) neither employers nor clients, but the member must use "prudent judgment."

B) only their employer.

C) both their employer and their clients.

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According to Standard VI(A), Disclosure of Conflicts, employees have a duty to disclose to both their employer and their clients all matters which may impair their independence and objectivity or interfere with their duties to employer, clients, and prospects.