George has taken charge of an underwriting of securities at a brokerage firm. He gets some information from a company official indicating that the financial statements filed with the registration statement may be incorrect and be overstating the issuer’s earnings. Which is the best course of action for George? A. Seek legal advice from the firm’s general counsel. B. Notify the supervisor for the issue and continue working. C. Immediately terminate all dealings with the client. D. Ignore such information and proceed with his work. The Correct answer is A Why B is incorrect?
Notifying the anomalies in the financial statements to your supervisors and subordinates (and continuining to work) doesn’t waive you off the responsibilities… A looks appropriate in this case. - Dinesh S
B would be incorrect due to potential insider trading activity… I think it would be A… If you have a question like this on the exam, how could you not choose A… In almost any case/question option A “Seek legal advice from the firm’s GC” can not be wrong…
There’s just no substitute for going directly to the source. See p.12 of your Handbook. It looks like the “continue working” portion of Answer B is what prevents it from being the best course of action. Standard I: Professionalism (A) Knowledge of the Law Application of the Standard “Example 1. Michael Allen works for a brokerage firm and is responsible for an underwriting of securities. A company official gives Allen information indicating that the financial statements Allen filed with the regulator overstate the issuer’s earnings. Allen seeks the advice of the brokerage firm’s general counsel, who states that it would be difficult for the regulator to prove that Allen has been involved in any wrongdoing. Comment: Although it is recommended that members and candidates seek the advice of legal counsel, the reliance on such advice does not absolve a member or candidate from the requirement to comply with the law or regulation. Allen should report this situation to his supervisor, seek an independent legal opinion, and determine whether the regulator should be notified of the error. Example 2. Lawrence Brown’s employer, an investment-banking firm, is the principal underwriter for an issue of convertible debentures by the Courtney Company. Brown discovers that Courtney Company has concealed severe thirdquarter losses in its foreign operations. The preliminary prospectus has already been distributed. Comment: Knowing that the preliminary prospectus is misleading, Brown should report his findings to the appropriate supervisory persons in his firm. If the matter is not remedied and Brown’s employer does not dissociate from the underwriting, Brown should sever all his connections with the underwriting. Brown should also seek legal advice to determine whether additional reporting or other action should be taken.”