CFA CFA Level 1 CFA Level 1 Question of the Week – Ethical and Professional Standards

CFA Level 1 Question of the Week – Ethical and Professional Standards

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      Tiara Corporation (TCorp) is one of the largest corporate clients of Al & Co., a U.S. based investment management firm. Recently, Al & Co. discovered significantly adverse news about TCorp. Unwilling to disseminate adverse opinions about their client, the firm put it on a restricted list and removed it from the research universe. 

      Are Al & Co.’s actions most likely in compliance with the CFA Institute Standards of Professional Conduct?

      • A. Yes.
      • B. No, because TCorp should disseminate the information to its clients.
      • C. No, because TCorp should disseminate the information to clients and
        prospective clients.
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      I will quote a passage from the CFA Program Curriculum:

      “Recommended Procedures for Compliance: 

      Create a restricted list: If the firm is unwilling to permit dissemination of adverse opinions about a corporate client, members and candidates should encourage the firm to remove the controversial company from the research universe and put it on a restricted list so that the firm disseminates only factual information about the company.”

      Now, we’ll use an example that could happen in real life. Let’s say you’re a big investment firm based in N.Y.C. and a long-time corporate client approaches you to raise money because they are having liquidity problems. The worst thing you can do is probably to warn all your clients and prospective clients about their liquidity problems. The best course of action would be put it on a restricted list and only disseminate factual information about the company. The information will be disseminated to all shareholders at the same time when the company releases a statement about their liquidity position. Only at this point in time will you be able to disseminate the information to your clients.

      I know this is a trick question, but you will probably have questions like this in you CFA level 1 exam. Let me know if you have any further questions or comments.

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      The correct answer is A.

      If a firm is unwilling to permit dissemination of adverse opinions about a corporate client, members and candidates should encourage the firm to remove the controversial company from the research universe and put it on a restricted list.

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      @Matt_AnalystPrep My issue with A being the right answer is that the adverse news was discovered BEFORE TCorp was put on the restricted list. 

      My understanding is that you are allowed to keep quiet about news AFTER being on the restricted list. If it’s before, you have a duty of loyalty to their clients.

      So B should be the most accurate answer.

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