An analyst thinks that a major change in the tax law will benefit holders of utility company stocks. She immediately begins calling all her clients and telling them of the upside potential of investing in such assets now. Based upon this information, this is most likely: A) a violation of Standard V(A), Diligence and Reasonable Basis. B) a violation of Standard III©, Suitability. C) congruent with Standard V(A), Diligence and Reasonable Basis. Your answer: A was incorrect. The correct answer was B) a violation of Standard III©, Suitability. According to Standard III©, the analyst needs to determine the suitability of an investment for each client. It is doubtful that all her clients are identical in their needs. According to the information, the analyst mentions the upside potential but does not mention the downside risk. Although the information says that she thinks that the change in the tax law will benefit holders of utility company stocks and says nothing of how she arrived at this conclusion, we do not know if she has or has not made her decision on a reasonable basis. Both standards are violated why emphasize is on suitability. the process starts from the (thinking) and the answer should be diligence and reasonable basis… isnt it?
As that from an EOC, CFAI Mock/sample, or is it swheser/stalla? Your answer probably lies there.
schweser PRO…
I guess they assume she checked and is certain that the tax implications are beneficial, however this may be more or less relevant for different investors, which is why telling all her clients is a suitability issue.
I’ll only ever use CFAI texts for ethics. Yeah quant, FI, Economics are all set in stone. There are grey areas in ethics why would you use anything other than the source that is writing the test?
“Although the information says that she thinks that the change in the tax law will benefit holders of utility company stocks and says nothing of how she arrived at this conclusion, we do not know if she has or has not made her decision on a reasonable basis.” They answer it in the last statement of the answer. It is possible that she has also fully analyzed the utility, and therefore fulfills the requirements of diligent and reasonable basis. Because of this, we don’t know whether she is in violation or not, because it doesn’t say. However we know for sure that she has violated suitability, so we can pick B. Tricky, I know, but that’s why ethics sucks.
We are only lucky this question want us to confirm a “violation”. The analyst did not BUY this stock for any of these clients yet! she only marketed the stock. No investment action has been taken to warrant any issue of suitability, the question is about investment presentation whether all the facts (risk and return) have been adequately disclosed and well differentiated from opinion. Non of the options appear correct in my opinion! I can’t see any violation. CP, Damil?
She is recommending action for clients whom she has not found to be a suitable investment based on their IPS. Im not sure though that it states that the tax benefit is for the company or for the clients, it says “for the holders of utility stocks” not necessarily for the companies. If it is a tax benefit for the investors, then this would require that they are interested in minimizing taxes TTLLR. But maybe that is just my interpretation.
sbmarti2, it is also possible that all of her clients are suitable to for this of investment, it doesn’t specify otherwise. Who wouldn’t want a tax break? Stick to CFA ethics.
I don’t see how it can be A. We do not know whether or not she has a reasonable basis for those who already own utility stocks.
I’ve found some big WTFs in schweser ethics questions too.