My question is under what circumstance an analyst or a firm should place a stock on a restricted list? VS, Under what circumstance a stock can NOT be placed on a restricted list? I found these questions regarding restricted list. the last two were copied from previous post to make a comparison with my question. The first is the one I am having trouble with. 01 Dan Campo, CFA, is a stock analyst covering the telecommunications industry for DP, a large diversified investment firm. Campo’s recommendations are used for both internally managed accounts and widespread distribution to DP’s sales force of retail brokers, Campo has just completed a thorough review of 1Sphere,one of the fastest growing companies he follows. 1Sphere stock has risen dramatically over the last several months, but Campo sees several signs of operating problems that are not reflected in the current stock price. Campo is hesitant to issue a sell recommendation, however, for a number of reasons. 1Sphere is widely held in DP clients’ porfolio, largely due to previous favorable reports written by Campo himself over the past 18 months. porfolio mangers have been adding to their positions even in the last week or tow. Secondly, Campo has a good relationship with 1Sphere management. He believes he gets a more honest assessment of operations than other analysts, and is afraid a negative recommendation would damage his access to this critical information. According to CFA Institute Standard of Professional Conduct, Campo should: A. issue a sell recommendation B. issue a hold recommendation to allow 1Sphere management an opportunity to address his concern. C. Issue a hold recommendation until DP’s porfolio managers have a reasonable opportunity to sell the stock, after which Campo may issue a sell recommendation D. place 1Sphere on a restricted list, issuing only factual information about the company. 02 You are a sell side analyst at a major investment bank. You strongly believe that a current full service client of the bank, Company X will announce a profits warning in the next few weeks. You wish to issue a sell note but your senior advises you to talk to the corporate finance MD responsible for managing the relationship with that client before you do. The relationship manager warns you that release of a sell note will result in the loss of $10m of fees for the bank this year and that you will almost certainly be fired. What is your best course of action? A: Release the sell note so as to affirm your professional integrity B: Review your opinion and change your outlook to neutral C: Resign, and recommend to your colleagues that they resign too in the face of unconscionable pressure D: Remove Company X from the research universe and place on a restricted list, providing only factual information about the company 03 Fred Dumbo, CFA, has recently started working for LPC, a trading company. One of his first duties in the new position has been to execute the purchase of a block of East Last Industries, a firm that is a major client of his former employer. During his prior employment, Dumbo was informed directly by East Last’s CEO that the company’s sales have experienced a sudden drop and are about 40% below current analyst estimates. The information has not yet been announced. When reviewing his current employer’s research report on East Last Industries, Dumbo realizes that the buy recommendation is based on sales forecasts that he knows are wrong. Which of the following actions would be the most appropriate for Dumbo to take according to CFA Institute Standards of Professional Conduct? A) Annonymously post the drop in sales information on a public internet forum to achieve public dissemination of the information and inform his supervisor of his posting. B) Contact the CEO and urge him to make the information public and make the trade if he refuses. C) Share the information only with his immediate supervisor and compliance officer. D) Request that the firm place East Last’s stocks on a restricted list and refuse to make any buy or sell trades for the company’s stock.
- A. He definitely does not have the option of allowing 1shphere mgmt to sell off or address his concerns. Restricted list is only used to ensure that there is no conflict of interest between departments. 2) D. This is probably the more appropriate “theoretical” approach to restricted list. 3) B. Non-public info shoul not be used to benefit the ocmpnay or himself. If the CEO refuses to make public, then Fred shld go ahead with the trade. But he shld prob just keep his mouth shut… =p
Amazing how all these questions involve ethical problems because our hero did something stupid. in 1) Campo was so sure about the company over the last 18 months that he built large positions for his clients even in the previous week. Then apparently without any inside information he goes from “Strong Buy” to “Sell” in a week? in 2) You are analyzing a company that you can’t give a sell rating to. Why the heck wouldn’t you put it on the restricted list way before you get to the point where you have to choose between your job and being honest? in 3) Dumbo (aptly named) sits there and listens to the CEO tell him material, non-public information and then goes back to the office and has a crisis about it. An interruption like “Whoa, I don’t want any insider information that neither of us can trade on…” would go a long way in relieving his ethical issues. Just goes to show that all ethical conversations ultimately end up in lifeboats.