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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    • Matt_AnalystPrep
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      Ella Lawson is the chief executive at Rome Bank,
      a commercial banking enterprise. On
      behalf of the bank, Rome will be
      providing funding to a manufacturing
      enterprise seeking to expand its operations. During her visit to the manufacturer’s factory, Lawson overhears
      two employees on the production floor discussing
      the likelihood of their employer’s inability to carry out expansion. Lawson
      holds shares of the enterprise and decides to sell her holding and reject providing financial support. Lawson is
      most likely in violation of the CFA Institute Standard of Professional Conduct relating to:

      • A. Loyalty, prudence, and care.
      • B. Diligence and reasonable basis.
      • C. Material, nonpublic information.
    • mincemeat23
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      Shouldn’t it be ‘On behalf of the bank, LAWSON will be providing…’?

    • Matt_AnalystPrep
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      The correct answer is B. 

      Lawson is in violation of the standard relating to diligence and
      reasonable basis. This is because the discussion between the two production
      employees and any information shared is
      not credible enough to base her investment decision on. Given that these
      individuals lack seniority, it is less likely they have access to confidential information. Therefore basing
      her financing and share disposal decisions on information, which is not
      credible will result in a decision, which lacks a reasonable and adequate
      basis. Lawson is not in violation of the standard concerning material nonpublic
      information. The specificity of the information, the extent of its difference
      from public information, its nature, and its reliability are key factors in
      determining whether a particular piece of information is material; the less
      reliable information is, the less likely it is to be material. As discussed
      above, the fact that the production employees are discussing a strategic issue whose
      likelihood of occurrence is uncertain makes the information nonmaterial.

    • Matt_AnalystPrep
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      Shouldn’t it be ‘On behalf of the bank, LAWSON will be providing…’?

      You are right! We could also just delete “On behalf of the bank”. We try to change a few things here and there not to have the same material as in our question bank, but some mistakes might occur. Thank you for pointing out the issue and good luck with the exam!

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