CFA CFA Level 1 Ethics – Practice exam doubt/disagreement

Ethics – Practice exam doubt/disagreement

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  • Snippy
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    The question being:

    Q. Sue Seros, CFA, is reviewing the performance of Arithamatics, Inc., which she has placed in several client accounts. She believes a recent purchase in its price may present a buying opportunity and that industry conditions suggest Arithmatics may be an attractive acquisition for a larger company. She has occasion to talk to her podiatrist, who mentions Arithmatics and tells her that he believes Arithmatics is a takeover target and that she should buy more. Seros subsequently increases her clients’ holdings in Arithmatics and tells her clients that it is an attractive takeover prospect at current prices. Seros has:

    A. not violated the Standards of Practice
    B. violated the Standard on material nonpublic information
    C. violated the Standard on diligence and reasonable basis

    Schweser’s answer was A because: While actual knowledge of an upcoming takeover offer is considered material and nonpublic information, the source here, her podiatrist, is not a reliable source so there is no violation of Standard II(A). The information given indicates that Seros has researched the stock and knows it well, so there is no apparent violation of Standard V(A).

    I disagree with this because i think C was the answer. Seros may have conducted research and believed the company to be a good acquisition. But the fact that she “subsequently” increased her client holdings after her conversation with the podiatrist clearly implies that it wasn’t on a diligent and reasonable basis. And I don’t see sufficient information that would imply that Seros researched the stock well.

    Will be more than happy to hear everyone’s side on this and prove me wrong.

    Sophie Macon
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    Agree with A @Sidmenon actually.

    I do take your point about your interpretation of the question that it seems that Sue decided to take action after speaking to her podiatrist.

    She believes a recent purchase in its price may present a buying opportunity and that industry conditions suggest Arithmatics may be an attractive acquisition for a larger company.

    This statement indicates that she did her research properly/objectively and arrived at that conclusion herself.

    But the subsequent statements did not say something along the lines of “as a result of this discussion with podiatrist” – then I think your answer C is right.

    B was out of the question unless the podiatrist somehow is related to Arithamatics and may have insider info.

    Snippy
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    @Sophie The statement that you say indicates she did her research properly wasn’t enough for me I guess. The only thing that led me to the answer A, was the word subsequently.

    lulu123
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    @sidmenon

    @sophie

    my first guess was also C but yeah I get the trickiness of the wording, thanks @sophie

    really have to be WIDE AWAKE when reading the questions haha

    Snippy
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    @lulu123 Wide awake indeed!

    Zee Tan
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    Agree that it’s A. To be able to identify a violation it should be a clear action on Sue’s part. E.g. if they said based on Sue’s research she decided NOT to act on it, but then visited her psychic (or podiatrist) and he tells her to buy, then she acts – that’s a violation because it is clear that she isn’t acting on the research but rumours.

    Hope that helps.

    Sarah
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    @SidMenon I think when you are tackling an ethic question it helps to have an “outsider” perspective. If you would have to prove that she violated the standard how would you prove it? She has the research and supporting evidence that she believed it was a good stock and believes that it is an attractive company for acquisition. Your charge against her would be thrown out of court.

    Zee Tan
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    @SidMenon I think when you are tackling an ethic question it helps to have an “outsider” perspective. If you would have to prove that she violated the standard how would you prove it? She has the research and supporting evidence that she believed it was a good stock and believes that it is an attractive company for acquisition. Your charge against her would be thrown out of court.

    Interesting way to look at it @diya!

    Snippy
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    Ah, good point @Diya and @Zee!

    Also @Zee, podiatrist is a foot therapist/doctor 😛

    Sarah
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    @Zee ethics is dreadfully boring. I have to make it bearable somehow.
    I have yet to actually read the ethics material in its entirety.
    So far I have only read what Elan’s 11th hour has to say about it.

    Sophie Macon
    Keymaster
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    * virtual poke* @lulu123, @sidmenon!

    lulu123
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    @sophie

    :O what where why how ?! lol

    Snippy
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    Haha @Sophie! @Diya, I actually enjoy solving Ethics questions.

    Sophie Macon
    Keymaster
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    @lulu123 – when you’re nodding off in front of the books, the poke will come 😉

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