1、Theresa Lecompte Case Scenario

Theresa Lecompte, CFA, is an equity analyst for Topaz Group, a large financial firm that offers investment banking, brokerage, and investment management services. Topaz has adopted the CFA Institute Research Objectivity Standards to demonstrate their commitment to managing and fully disclosing conflicts of interest to all investors that have access to the firm's research.

Lecompte's primary responsibility is to follow the information technology sector for the firm's research department. She is working on two follow-up reports for NanoMem (NM) and UniFlash (UF). Topaz makes markets in both companies' securities and Lecompte owns a small position in NM only.

Lecompte has an excellent relationship with company officials at NanoMem. In appreciation for Lecompte's favorable recommendations in the past, she was invited to attend a company-sponsored event last December that was held at an exclusive ski resort overseas. NanoMem paid all expenses relating to the trip and provided some excellent entertainment activities for the attendees. Lecompte disclosed this benefit to her supervisor at Topaz. Shortly thereafter, Topaz issued a secondary offering for NM. Lecompte believes that her excellent relationship with the firm played a large part in securing this business.

Lecompte considers her relationship with UniFlash, however, to be contentious, as company officials seem reluctant to share as much information with her as they have in the past. She believes the change in their behavior is a direct result of recent reports she has written on the company, which have been less than favorable. Prior to publication of her follow-up reports, Lecompte shares her report on NM in its entirety with top management at NanoMem. She shares only the part of her report on UF that provides factual information with UniFlash management.

Lecompte's compensation at Topaz includes an annual salary plus a bonus based on both the accuracy of her recommendations over time and the overall profitability of the company. Topaz makes public disclosure of the extent to which research analyst compensation in general is dependent upon the firm's investment banking revenues.

Following the release of her reports in early March, Lecompte is invited to appear on a television program to discuss her recommendations. During her appearance, she makes the following statements:

1.      "My firm makes markets in the securities of both NanoMem and UniFlash and I currently own a position in NanoMem."

2.       "Although I just issued a report on UniFlash that reflected a neutral rating, I really believe a sell rating is more appropriate."

When she returns to her office the following day, Lecompte is informed by her supervisor that a company official at UniFlash called to express his disappointment and anger in hearing the negative remarks she had made about UF during her television appearance. Lecompte states that she believes her deteriorating relationship with UniFlash will make it difficult to effectively cover the company in the future and recommends that Topaz discontinue coverage of UF immediately.

Question 1

In sharing her research material with the subject companies, has Lecompte violated any CFA Institute Research Objectivity Standards with respect to her report on:

A. Answer A

B. Answer B

C. Answer C

D. Answer D

Question 2

With respect to the company-sponsored event that Lecompte attended, did she violate any CFA Institute Standards?

A. Yes.

B. No, because she disclosed it to her employer.

C. No, because the Standards do not prohibit ordinary, business-related entertainment.

D. No, because maintaining appropriate working relationships with subject-company personnel is an important part of her responsibilities.

Question 3

Regarding Lecompte's compensation structure, is Topaz in violation of the CFA Institute Research Objectivity Standards with respect to the:

A. Answer A

B. Answer B

C. Answer C

D. Answer D

Question 4

According to the CFA Institute Research Objectivity Standards, does the first statement Lecompte makes in her television appearance provide all the recommended disclosures relating to potential conflicts of interest with respect to:

A. Answer A

B. Answer B

C. Answer C

D. Answer D

Question 5

According to the recommended procedures for compliance with the CFA Institute Research Objectivity Standards, Lecompte's second statement during her TV appearance:

A. complies, because she communicated her most current opinion.

B. complies, because she disclosed all conflicts of interest with respect to the company.

C. does not comply, because she failed to identify the relevant benchmark for the rating category.

D. does not comply, because she communicated a rating that is different from her current published rating. 

Question 6

With respect to Lecompte's recommendation on the coverage of UniFlash, according to the CFA Institute Research Objectivity Standards, the most appropriate course of action for Topaz to take would be to:

A. issue a final report on UniFlash.

B. quietly and unobtrusively discontinue coverage of UniFlash.

C. immediately disclose on their website the company's intention to discontinue coverage of UniFlash.

D. encourage another analyst to develop an appropriate relationship with UniFlash by issuing a more favorable recommendation.

Question 1

In sharing her research material with the subject companies, has Lecompte violated any CFA Institute Research Objectivity Standards with respect to her report on:

A. Answer A

B. Answer B

C. Answer C

D. Answer D

 
Correct answer = C

"CFA Institute Research Objectivity Standards" (AIMR, 2003; adapted 2005)
2008 Modular Level II, Vol. 1, Reading 4, pp. 146, 150-151
Study Session 1-4-b
critique company policies and practices related to research objectivity and distinguish between changes required and changes recommended for compliance with the Research Objectivity Standards
Lecompte violated the Standards in sharing the full report with NanoMem. Sharing any section of a research report that might communicate the analyst's proposed recommendation, rating, or price target is prohibited by the Standards. She did not violate the Standards in sharing only those portions of the report containing facts that could be reasonably checked or verified by UniFlash prior to publication. 

Question 2

With respect to the company-sponsored event that Lecompte attended, did she violate any CFA Institute Standards?

A. Yes.

B. No, because she disclosed it to her employer.

C. No, because the Standards do not prohibit ordinary, business-related entertainment.

D. No, because maintaining appropriate working relationships with subject-company personnel is an important part of her responsibilities.

 
Correct answer = A

Standards of Practice Handbook, 9^th edition (CFA Institute, 2005), pp. 19-21
Standards I-VII
2008 Modular Level II, Vol. 1, Reading 2, pp. 21, 23-24
"CFA Institute Research Objectivity Standards" (AIMR, 2003; adapted 2005)
2008 Modular Level II, Vol. 1, Reading 4, p. 150
Study Session 1-2-a, 1-4-b
demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations;
critique company policies and practices related to research objectivity and distinguish between changes required and changes recommended for compliance with the Research Objectivity Standards
Lecompte violated both the CFA Institute Standard relating to independence and objectivity and the CFA Institute Research Objectivity Standards by allowing a corporate issuer to pay for her travel expenses. 

Question 3

Regarding Lecompte's compensation structure, is Topaz in violation of the CFA Institute Research Objectivity Standards with respect to the:

A. Answer A

B. Answer B

C. Answer C

D. Answer D

 
Correct answer = A

"CFA Institute Research Objectivity Standards" (AIMR, 2003; adapted 2005)
2008 Modular Level II, Vol. 1, Reading 4, pp. 146, 149
Study Session 1-4-b
critique company policies and practices related to research objectivity and distinguish between changes required and changes recommended for compliance with the Research Objectivity Standards
The Research Objectivity Standards recommend that analyst compensation be based on the accuracy of recommendations over time. Although direct linking of an analyst's compensation with investment banking is prohibited, firms should disclose the extent to which research analyst compensation in general is dependent upon the firm's investment banking revenues, which they do. 

Question 4

According to the CFA Institute Research Objectivity Standards, does the first statement Lecompte makes in her television appearance provide all the recommended disclosures relating to potential conflicts of interest with respect to:

A. Answer A

B. Answer B

C. Answer C

D. Answer D

 
Correct answer = B

"CFA Institute Research Objectivity Standards" (AIMR, 2003; adapted 2005)
2008 Modular Level II, Vol. 1, Reading 4, pp. 145, 148
Study Session 1-4-b
critique company policies and practices related to research objectivity and distinguish between changes required and changes recommended for compliance with the Research Objectivity Standards
Because she failed to disclose the investment banking relationship that Topaz had with NanoMem, Lecompte did not provide all the recommended disclosures relating to potential conflicts of interest with respect to NanoMem. Lecompte did provide all the recommended disclosures relating to potential conflicts of interest with respect to UniFlash. 

Question 5

According to the recommended procedures for compliance with the CFA Institute Research Objectivity Standards, Lecompte's second statement during her TV appearance:

A. complies, because she communicated her most current opinion.

B. complies, because she disclosed all conflicts of interest with respect to the company.

C. does not comply, because she failed to identify the relevant benchmark for the rating category.

D. does not comply, because she communicated a rating that is different from her current published rating.

 
Correct answer = D

"CFA Institute Research Objectivity Standards" (AIMR, 2003; adapted 2005)
2008 Modular Level II, Vol. 1, Reading 4, p. 153
Study Session 1-4-b
critique company policies and practices related to research objectivity and distinguish between changes required and changes recommended for compliance with the Research Objectivity Standards
The recommended procedures for compliance with the CFA Institute Research Objectivity Standards states that firms should prohibit covered employees from communicating a rating or recommendation that is different from the current published rating or recommendation. 

Question 6

With respect to Lecompte's recommendation on the coverage of UniFlash, according to the CFA Institute Research Objectivity Standards, the most appropriate course of action for Topaz to take would be to:

A. issue a final report on UniFlash.

B. quietly and unobtrusively discontinue coverage of UniFlash.

C. immediately disclose on their website the company's intention to discontinue coverage of UniFlash.

D. encourage another analyst to develop an appropriate relationship with UniFlash by issuing a more favorable recommendation.

 
Correct answer = A

"CFA Institute Research Objectivity Standards" (AIMR, 2003; adapted 2005)
2008 Modular Level II, Vol. 1, Reading 4, p. 151
Study Session 1-4-b
critique company policies and practices related to research objectivity and distinguish between changes required and changes recommended for compliance with the Research Objectivity Standards
According to the CFA Institute Research Objectivity Standards, when coverage of a subject company is being discontinued, firms should require the research analyst to issue a "final" research report that includes a recommendation. 

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