Christopher Kim, CFA, is a research analyst for Batts Brothers, an investment banking firm in New York. Kim follows the energy industry and has frequent contact with industry executives. A CEO ofa large oil and gas corporation that has previously employed Batts Brothers to underwrite a stock issue has invited Kim to his office to discuss a secondary offering of the company’s stock. The CEO wants Batts Brothers to underwrite the stock issue. As an incentive to place the issue quickly with institutional investors, the CEO offers Kim the opportunity to fly on his private jet to his ranch in Texas for an exotic game hunting expedition if Kim’s firm can complete the underwriting within one month. According to CFA Institute Standards of Conduct, Kim: A. must not accept such lavish benefits in order to maintain his objectivity. B. must obtain written consent from Batts Brothers before accepting the invitation. C. may accept the invitation without consent ifhe submits a statement disclosing the value of the trip to Batts Brothers when he returns. D. may accept the invitation without consent only ifhe discloses the trip to Batts Brothers before accepting.
I initially put A because it does seem kinda lavish but it states that the firm wants them to do the underwriting so I guess it doesn’t matter. But, the answer is B. Schweser Ethics sections are really really tricky.
It is lavish but it becomes up to the investors who actually read the report what to make of it. If it states, an exotic hunt then I would be hesitant but if it just said “paid for dinner at XYZ restaurant” I would understand. Just operate under the assumption that as long as there’s written disclosure it should be acceptable.
beingthatguy Wrote: ------------------------------------------------------- > I initially put A because it does seem kinda > lavish but it states that the firm wants them to > do the underwriting so I guess it doesn’t matter. > > But, the answer is B. > > Schweser Ethics sections are really really tricky. Wait until you see the ones from the exam…
So you should Only decline when you are doing say an analysis of a company or stock and it could change your opinion?
Yes, if the analyst feels a strong tie to the company after they provide them with something or have a prior relationship, the analyst should decline b/c his independence & objectivity is compromised.
This is really tricky. I chose A because it seems this would influence objectivity and independence. But schweser’s explanation is that it’s extra compensation for performance. I guess the iBank’s job is to talk up the stock anyways, so independent won’t be compromised?
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- Another for you guys Brian Farley, CFA, is an independent portfolio manager. Currently, Farley’s only client is a $75 million university endowment fund. A representative of the endowment fund calls Farley and places a “Sell” order on a portfolio holding whose management has just issued a negative earnings forecast. Farley also owns the security in his retirement account and immediately decides to sell his position. He places simultaneous “Sell” orders for both the client and for his personal account. According to the CFA Institute Standards ofProfessional Conduct, is Farley in violation of Standard III(B) Fair Dealing or Standard VI(B) Priority of Transactions? Standard III(B) Standard VI(B) A. Yes Yes B. Yes No C. No Yes D. No No
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C- He only has 1 client, no need to deal with other clients or even plan beneficiaries. General rule of thumb-CLIENT BEFORE PERSONAL!
Oh thanks Fair dealings only refers to when there is more than one client
is that the schweser says?
it’s not a violation of fair dealing because I think the question is trying to trick you into thinking that the firm issued a BUY recommendation and you didn’t tell your client about the change in recommendation before making the trade, but because the firm issued a sell and he is selling there is no need to reiterate the change to the client, hence no violation of fair dealing. At least I think that’s why there is no violation in fair dealing lol
So what exactly is the answer and explanation on the Christopher Kim question?
BrokenSocialScene the answer is C for that one. It’s ok as long as he gets written consent from his employer
But is it okay just because they’re underwriting the issue? What if he was writing a research report?
I’m not sure but if he was writing the research report then I would think that this trip could be seen as a potential conflict of interest but again I’m not sure if that would change the answer to the question
sfagan Wrote: ------------------------------------------------------- > Christopher Kim, CFA, is a research analyst for > Batts Brothers, an > investment banking firm in New York. Kim follows > the energy industry > and has frequent contact with industry executives. > A CEO ofa large oil and > gas corporation that has previously employed Batts > Brothers to underwrite > a stock issue has invited Kim to his office to > discuss a secondary offering > of the company’s stock. The CEO wants Batts > Brothers to underwrite the > stock issue. As an incentive to place the issue > quickly with institutional > investors, the CEO offers Kim the opportunity to > fly on his private jet to his > ranch in Texas for an exotic game hunting > expedition if Kim’s firm can > complete the underwriting within one month. > According to CFA Institute > Standards of Conduct, Kim: > > A. must not accept such lavish benefits in order > to maintain his objectivity. > > B. must obtain written consent from Batts Brothers > before accepting the > invitation. > > C. may accept the invitation without consent ifhe > submits a statement > disclosing the value of the trip to Batts Brothers > when he returns. > > D. may accept the invitation without consent only > ifhe discloses the trip to > Batts Brothers before accepting. I pretty much hate this question because it requires that you know what an underwriter does. If Kim is a securities analyst writing a report on this company, there is no way he can ethically go on an exotic game hunt. It’s a serious threat to his objectivity and no amount of disclosure can take away the problem. By underwriting the offering, Kim is getting his company to take on the risk of selling the securities. The conflict that Kim might have here is that an exotic hunting trip may look like a bribe to get Kim to circumvent his due diligence and drop the risk on his company for a payment. He can get around that by informing his company of the arrangement and getting them to accede to this risk. If Kim went to his company and said “$10M” instead of “Hunting trip” they would almost surely not do it. However, I do not think that it’s fair for ethics questions to expect you to know what an underwriter does as opposed to an equity research analyst. Should you also know what a “transfer payment analyst” does? How about a “phlebotimist”? Edit: That makes the answer B, not C as above.
Great points Joey…
while we are on the subject, what does a phlebotimist do? I’m glad you brought this up, it’s been on my mind all night lol only kidding. but you are def right, I hope the real test isn’t out to mess w/ u this bad.
sfagan Wrote: ------------------------------------------------------- > 14. > 15. > 16. > Another for you guys > > > Brian Farley, CFA, is an independent portfolio > manager. Currently, Farley’s > only client is a $75 million university endowment > fund. A representative of > the endowment fund calls Farley and places a > “Sell” order on a portfolio > holding whose management has just issued a > negative earnings forecast. > Farley also owns the security in his retirement > account and immediately > decides to sell his position. He places > simultaneous “Sell” orders for both > the client and for his personal account. According > to the CFA Institute > Standards ofProfessional Conduct, is Farley in > violation of Standard III(B) > Fair Dealing or Standard VI(B) Priority of > Transactions? > Standard III(B) Standard VI(B) > > A. Yes Yes > B. Yes No > C. No Yes > D. No No OK, I pretty much hate this question too. The answer to the fair question is “No, it’s not ethical because Farley needs to sell his client’s stuff before his own”