Carl Fargmon, a research analyst who follows firms producing office equipment, has been recommending purchase of Kincaid Printing because of its innovative new line of copiers. After his initial report on the company, Fargmon’s wife inherits from a distant relative $3 million of Kincaid stock. He has been asked to write a follow-up report on Kincaid. Comment: Fargmon must disclose his wife’s ownership of the Kincaid stock to his employer and in his follow-up report. Best practice would be to avoid the conflict by asking his employer to assign another analyst to draft the follow-up report. My comment: Sure, he should report this to his employer, and have someone else write future reports, but what about his original report recommending Kincaid Printing? What a coincidence! You recommend a stock, and soon after your wife inherits tons of this stock! Even if the death of the (distant) relative happened after the recommendation, still the fact that a relative of the analyst who owns that much stock should raise some eyebrows. It’s a difficult problem, granted, and I think clients have every right to believe something inappropriate was going on.
Thats the problem with ethics. It’s never the RIGHT answer, it’s always the best/least incorrect answer.
The problem would be less severe if the stock was IBM or GM, but not when it’s Kincaid Printing!
Gadzooks. Something inappropriate going on because your wife inherited stock from a relative? My wife has a mother, brother, sister, assorted cousins, a niece, a nephew, an ex and hs family, and probably all sorts of other relatives I don’t know about. I can honestly say that I can’t name one investment that any of them have except the houses they live in.
> Gadzooks. Something inappropriate going on because your wife inherited stock from a relative? …and you’ve been touting (i.e. recommending) the stock for some time, and the stock is not a well known stock… oh what a coincidence! You mean my wife eventually inherited this stock? Sure, it can happen once in a million, but it should raise eyebrows.
Like Joey, I have a cousin who works at a firm as an analyst and we never have talked about our holdings. Would it be wrong if he were to write a buy recommendation on a stock that is held in one of my ETF’s?
Philosophically speaking, nothing is “wrong” when it comes to ethics. Stop thinking about it as right/wrong for this exam. Think about it as “CFA says”. If CFAI says it’s ok, then it’s ok. If they say it’s not, then it’s not. There is no right/wrong for the exam; there is only CFAI.
Sure, but it’s fun to second guess them.
The problem exists if the analyst is a beneficiary of that inheritance. If the analyst knew that information about the inheritance, the he should not cover that stock. The simple fact that the aunt/uncle may possesses the stock an analyst is covering, is not under the control of the analyst and he obviously cannot track such ownerships. Analyst will not know what is the Will of Aunts and Uncles either. So we cannot supect his prior recomendations. The stated recommended procedure seems to be appropriate (it may not be perfectly 100% foolproof)