1215

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 both his relationship with the president of Miracle and his ownership of shares in Wonder.

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

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.

1215

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

B) Stone's ownership of Amity securities.

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

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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.

1215

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) violated the Standards by not disclosing her performance bonus.

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

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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.

1215

An analyst is serving on the Board of Directors of a local publicly traded company. To avoid violating the CFA Institute Code and Standards, the analyst must disclose this to:

A) only his employer.

B) no one since it should not cause a conflict of interest for the analyst.

C) both his employer and his clients and prospective clients.

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Serving on a Board of Directors should be disclosed to both the employer and clients and prospective clients.

1215

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

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

C) Offshore is an OTC market maker for Burch Corporation'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.

1215

 

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

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

C) Both 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.

1215

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

A) both their employer and their clients.

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

C) only their employer.

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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.

1215

Lee Hurst, CFA, is an equity research analyst for a long-term investment fund. His annual bonus is linked to quarterly trading profits. Under a new policy, the quarterly assessment period is switched to a monthly assessment period. According to the Code and Standards, best practices dictate:

A) requiring Hurst to obtain permission from each client prior to implementation of the new policy.

B) keeping the policy change private as a trade secret.

C) updating disclosures when the policy change is implemented.

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Standard VI(A) "Disclosures of Conflicts" recognizes this policy as a potential conflict of interest as members and candidates could be incentivized to favor short-term trading gains over long-term value creation. Best practices dictate updating disclosures when the policy change is implemented. The long-term investors should know how members and candidates are compensated, especially when there is the potential for conflicts of interest.

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