Ethics @#@!$!

A CFA Institute member makes a recommendation of a stock in which his firm has a material ownership. He does not know of the material ownership at the time of the recommendation. A day later, he learns of the material ownership and immediately sends out an addendum informing clients of that fact. With respect to Standard VI(A), Disclosure of Conflicts, and Standard V(A), Diligence and Reasonable Basis, this is: A) a violation of Standard VI(A), only. B) a violation of Standard V(A), only. C) not a violation of either Standard. D) a violation of both Standards.

C because he CYA’d after he found out?

I would say D, he should have CYA’d before he sent out his recommendation.

C He sent the addendum out immediately.


I’ll go with the dark horse answer: A My reasoning, he failed to disclose the material ownership, but there is nothing that says he did not do due diligence.

My answer would be C.

My bets on A

I don’t like Schweser’s explanation for this question. The correct answer was D) a violation of both Standards. The member apparently had not exercised due diligence in making the recommendation if he does not know of the material ownership by his own firm. Even if the member did not know of the material ownership, Standard VI(A) was violated with the release of the recommendation. **** I went w/ C too… but I can understand that he might have violated due diligence because he *should* have known about the ownership and should have done some background research. But how exactly did he violate Disclosure of Conflict? I re-read the pertinent portion from the CFAI text again and I don’t see any similar example or explanation that says that if an analyst doesn’t know about the conflict of interest while writing the report, then he’s violated the said standard. I guess I’m talking in circles. If he should have known about the ownership, then it is a violation of disclosure of conflict as well as due diligence. But is it reasonable to assume that he should have known? That’s the question. And a very big assumption while answering the question too. mpro, since you chose D, can you explain your choice to us? Thanks a lot.

woulda gone with A

It makes sense, but whenever these questions are put up I think there is a trick. If he didn’t know that his firm had material ownership he failed in due diligence. It is similar to the question where a new law was enacted, there was a 10 day grace period, the analyst failed to follow the new rule but corrected it. He still violated the standard of knowing the law. Since he failed knowing the conflict, he failed in disclosing it as well. He should have known.

i would’ve answered this question incorrectly by choosing A.

My thought is always err on the side of caution, you know he should have done his due diligence before he sent the report out. In the report, after doing his due diligence he should have included the fact that his company has material ownership. IMO, don’t over think the Ethics questions, go with your first initial reaction, don’t over analyze.

The first ethics question I would have got right!

I think it makes sense…now. I suppose if you are going to issue a report on a stock and you conduct some research, how long do you think it would take before you found out your firm owned a crapload of shares? 30 minutes? 1 day? If you tried even a little you would find out fairly quickly unless your firm was hiding that fact. So it follows that if you did not do adequate research in the first place and issued the report then you did not disclose the conflict.

niblita, mpro, wanderingcfa- thanks. makes sense I guess. If he would have exercised due diligence, then he should have known about the conflict too. So it is a violation of both the standards.