Ethics Pop Quiz

#1. An analyst has a large personal holding of a security, and he has just determined that market conditions warrant selling this security. The analyst contacts clients who own the stock and advises them to sell some or all of the security. After waiting 24 hours, he sells the security from his personal accounts. This is: A) a violation of Standard VI(B), Priority of Transactions. B) a violation of with Standard V(A), Diligence and Reasonable Basis. C) congruent with Standard VI(B), Priority of Transactions. D) a violation of Standard III(B), Fair Dealing. #2. Ron Taylor, a CFA Level I candidate, trades cotton contracts for a small commodity broker. Taylor convinces a government cotton inspector to issue a warning that the Texas cotton crop is in danger from insect infestation. The price of cotton soars. Taylor immediately shorts cotton futures. Once the position is created, the government inspector issues a second report reversing his original opinion and cotton prices plummet. Cedric Sims, a CFA Level III candidate, would like to generate a tax loss on a security held in his personal portfolio; however, he believes the security has significant upside potential. To avoid the wash sale provisions of the income tax code, Sims sells the security and simultaneously creates a synthetic long position using derivatives. Which of the following statements concerning Taylors and Simss conduct is TRUE? A) Both Taylor and Sims are in violation of Standard II(B). B) Taylor is in violation of Standard II(B), but Sims is not in violation. C) Neither Taylor nor Sims is in violation of Standard II(B). D) Sims is in violation of Standard II(B), but Taylor is not in violation.

D B missing the writeup leading to the question.

1 D 2 B

C & B, for the first one, why did you guys choose D?

I choose D because he shouldn’t just contact those that own the stock, he should contact (i.e. distribute a note or something) to all clients, and give them a chance to act, before he trades himself

For first one - I assumed since he has reason to believe stock should be sold - it should be disseminated publcily via note versus just calling select clients and asking them to sell their holdings…

I’ll put you guys out of your misery… the answers are: C B The reason the first one is C is because this isn’t a new research report that needs to be disseminated to the entire public containing material information. This is buy/sell recommendation and as such, they should contact their existing clients to notify them of the change in recommendation. Contacting all clients who don’t even the stock is not necessary. In addition, if a client calls inquiring about this stock and currently do not own it, they are obligated to notify the potential investor of the change in recommendation but that’s not part of the available answers. My debate on this question is whether 24 hours was sufficient for the clients to act on the information. According to Schweser, it is.

I say B and B. In the first one, it says he calls clients who own the stock and tell them to sell, but he is disregarding whether or not it is appropriate for these clients to sell. Had it said “after he reviewed the IPS of each client who owns the stock…”, I would say that there is no violation. [I see I am already too late. 50%, baby!]

Thats reading too much into the question. it states that analyst has determined it is time to sell - we assume that statement is right. Good to know just calling clients who own stock is sufficient when changing reccomendation on stock. But not how it works in the real world…

I still think D because what about clients that are able to short the stock? They might not own it now, but perhaps they want to sell it anyways? If this was a Schweser question i will continue to disagree…if its a CFAI, i bow gracefully out of this thread…

I have to disagree with you strikershank. If a company had to call every client they had whenever they made a new buy/sell recommendation, there would be no end in sight as far as the # of calls made to clients. I work for a large brokerage house in Canada and there’s just no way that would ever happen. Nor should it be required. PJStyles

i worked in equity research for two years. there’s no way in hell we changed our recommendation and then walked out to the desk and said to the institutional sales guys and traders, “hey, we’re chaning stock x to a sell, call your clients that care”. Instead, we published a note (dissemination) for all clients. Making a call to all, you’re right, doesn’t make sense, but publishing a note does. By the way, the question states ‘contacts’ all clients, not calls. The wording of the question you posted implies calls, but i am making a case that all clients shoudl be informed, and a note is likely the best bet. i am still sticking with D, haha. stubborn until proven completly wrong i am.

After waiting 24 hours, he sells the security from his personal accounts isn’t 24 hours too short a time acc to cfai… i remember reading just one more ques like this and that time the analyst waited for 1 week

that’s what I thought… 24 hours would be too short.

PJ, What’s the source of these questions?

FlamesFan Wrote: ------------------------------------------------------- > PJ, > > What’s the source of these questions? Yes, please, this is the key. If it comes from schweser, I would just forget about it… thx

Schweser says “1 week is good” in one of the examples. The problem for this one (agree with striker) is BAD WORDING. I guess it comes from schweser. Actually, they say “he holds a stock”, but they don´t even say if he is also covering the stock for his firm, or if he is going to issue a research report, or anything. If we face this s*t in the exam, sure that they will tell you that he called some clients in advance of a new report, or that he did not mention this in the report, or that not all clients received whatever… if this is bad wording from schweser… forget about it pd: cfa examples in their ethics book + sample exams are much better than schweser

PJStyles Wrote: ------------------------------------------------------- > I’ll put you guys out of your misery… the > answers are: > > C > B > > My debate on this question is whether 24 hours was > sufficient for the clients to act on the > information. According to Schweser, it is. Again, I think I have seen something about 1 week and 24 hours is defintely NOT long enough for clients to react. On the other hand, why is the second B? I don’t see any material nonpublic information being traded here. - sticky

Source was Schweser…