Amanda Brad, CFA, is a security analyst at UpTrend, Inc. During a routine visit to a beauty salon, she learns that a major cosmetic company, Lorean, is expected to present a revolutionary formula for facial cream. Brad buys Lorean stock for her portfolio and prepares a special report on the company. Brad also makes a call to Hillary Lang, another security analyst at UpTrend, to inform her about the news. Lang starts trading on her clients’ portfolios. Brad’s report states that given the on-going research activity at Lorean within the last months, investors can expect some successful new products and a sharp increase in the price of the stock. Lang’s actions: A) do not violate any Standards because she does not participate in the report preparation and does not know about the source of the info. B) violate the Standard of Fair Dealing. C) violate the Standards because she trades on inside information. D) violate the Standard of Objectivity and Independence.
I haven’t covered Ethics properly, so this is a wild guess. If Brad’s report is available to the public and all trading occurred AFTER the report was released, then I’d go with A. If, however, Lang traded before the report was released, then I’d say C?
You are close. The answer is B. Lang violates Standard III(B), Fair Dealing, which imposes the requirement to start trading on the clients’ portfolios only after the information is disseminated to all clients.
Two things: I personally don’t get what the difference between B and C is. Care to indulge further? C sounds like a more general way of saying B, to me anyway. You can argue that the question implies that Lang traded before the report became available, but this is really subtle. I wish they were more explicit with the timeline of events. I don’t like having to *assume* things. BTW is this a Qbank question, marat?
Answer should be C, but then I have not yet covered Ethics thoruoghly!!
It is not C because it isn’t inside information. If people in a salon know that Lorean is going to come out with the new product, it is public information. B isn’t referring to inside information. B is stating that the analyst should communicate the information warranting the trade to the investor before trading on his account.
thanks, apcarlso. That helps.
Inside information refers to material nonpublic information. This information is not nonpublic. She learned about it from “the word on the street.” However, she traded on the information before she released the report to her clients, thereby violating the Standard of Fair Dealing.
Thanks apcarlso and gangrel, It perfectly makes sense now!!
Lang’s actions: A) do not violate any Standards because she does not participate in the report preparation and does not know about the source of the info. ==> I think she violates the choice in D. B) violate the Standard of Fair Dealing. --How is she violating Standard of Fair dealing - Lang is trading on her CLIENTS portfolios not her own. C) violate the Standards because she trades on inside information. ==> As discussed above, it is not an inside information. So Incorrect. D) violate the Standard of Objectivity and Independence. ==> I think it should be this one, as Lang being an analyst didn’t do any research on her own & relies completely on Brad’s report to making investment decisions for her clients. She didn’t bother to verify the truth in Brad’s repot.
I like goel_ar’s reasoning and was originally going to post that myself. But like many ethics questions you can think of ways that almost any line of reasoning has a problem. What I thought might work against choice D: if Lang’s at the same firm and her colleague Brad, who covers Lorean, says on the phone “buy Lorean”, then I assume Lang doesn’t need to do her own from-scratch research on the name. It’d be no different from sharing regular Equity Research reports at any large brokerage – coverage responsibilities are partitioned. (Of course if Brad said "New face cream – buy Lorean. " then D is a more defensible option.) Of course the question doesn’t give us enough detail to determine what exactly their working relationship is, or what transpired in the conversation. So, irritatingly, this question is a stinker. Again, get used to this in ethics – this won’t be the last one like this.
Like Goel and Darien, I was originally thinking D was the answer as Lang didn’t do her own reserach. But, since she is in the same firm as Brad… I think this is okay. I am sticking with B. I believe the analyst should communicate the information warranting the trade to the investor before trading on his account.
The answer must be b) here. Honestly, trying to reason these things out presumes that there is some logic behind them. There isn’t. You just have to do enough of them to understand the template or something. Anyway, what goel_ar is calling “independence and objectivity” is what CFAI calls “reasonable basis”. The independence and objectivity violations are the ones about accepting golf vacations and what-not. Now if they threw in choice E) Violation of the Standard of Reasonable Basis, you’ve got a problem answering this question.