CFA Practice Question on Ethics Case

CFA Level I Ethics
#1

Andrew Smith, CFA, works for Granite, a commercial bank that also has a sizeable sell side research division. Smith is presenting financing solutions to a potential business client, Dynamic Materials Corp. As part of his presentation, Smith mentions that Granite will initiate research coverage on Dynamic. Is Smith’s arrangement most likely appropriate with regards to the CFA Standards?

A) Yes.

B) No, because Smith cannot offer to provide research coverage on a company if they become a corporate finance client.

C) No, because Granite cannot provide research coverage on a corporate finance client as this constitutes a violation of research independence.

The answer is A. The conclusion to answer A stated " Agreeing to provide objective research coverage of a company does not constitute a violation of this standard provided the analyst writing the report is free to come up with their own independent conclusion".

My first attempt was B because I thought providing consulting advice and research advice is not allowed.

If someone can elaborate on whether its a violation to be a consulting and research provider for the same client?

#2

Greetings friend! Many large banks have research divisions, and those divisions can cover the bank’s corporate finance clients. There are guidelines about how employees within each division may or may not interact with one another for potential material nonpublic information etc. and to enforce independence and objectivity of the research reports, there are rules for what must be disclosed in research reports for transparency, and there are guidelines about how to ensure loyalty to buy-side/research clients as well as priority of transactions and fair dealing when it comes to report information… but the fact remains that the research department “can” and often “does” offer coverage for large public companies that also happen to be clients of the bank. Whenever this happens, however, it must be undertaken in an ethical and appropriate manner consistent with the Code & Standards. Does this help sir?

Cheers - good luck - you got this :+1:

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