Alexis Capital is a full service investment banking and advisory firm. Jason Beech, head of Alexis’ investment banking division, has just received a research report on a national supply-chain management firm which has used Alexis as the underwriter in several public debt offerings. While reading through the report Beech realizes that the sales projections for the firm have been substantially overestimated in the short-term forecast. Beech calls the author of the report, Steve Henderson, a sell-side equity analyst, to inform him of the error. Henderson confirms that there was a slight error in the forecasting model and agrees to change the sales forecast before publishing the report the following day. Do Alexis Capital’s policies violate any CFA Institute Research Objectivity Standards? A) No, since the firm has a clear review procedure that minimizes conflicts of interest. B) No, since the firm is able to objectively ensure the accuracy of investment research. C) No, since the firm provides multiple layers of review before making research publicly available. D) Yes.
I would say D. Alexis Capital should have a firewall in place so the investment banking division does not have access to research reports prior to publication.
so yes, wander, that is the right answer and it’s very clear if you assume that the research analyst works at alexis. but here is where i got tripped up. they just say “sell side analyst”, so i thought they meant another firm’s analyst. if a banker calls another house’s research analyst with a correction, would that be a violation? i think i read too much into it.
I would go with D. However, i do agree with you cfas1, sell side analyst would generally mean someone from outside the firm. at least that’s what I understood. I can’t really pinpoint on the exact reason for violation though. might have to read that chapter again. edit: what’s the answer provided by schweser? can you paste it?
Your answer: B was incorrect. The correct answer was D) Yes. CFA Institute Research Objectivity Standards require firms to institute procedures that prevent investment banking divisions from having direct authority over the research department to review, modify, approve, or reject its research as this poses a threat to the independence and objectivity of a firm’s research. i’m clearly overthinking questions now…
With Ethics, go with your first instinct and move on. I’m learning it the hard way.
You know what, I think I just assumed that the analyst worked for alexis (not reading into it enough). I think even if the analyst works for another firm then it would be a violation. The question says “research report on a national supply-chain management firm which has used Alexis as the underwriter in several public debt offerings.” That makes me think that anyone working for Alexis would be unable to be objective regarding the supply-chain firm. I would put it on a similar level to the sell side analyst sending a copy of the report to the CEO of the supply-chain firm prior to publication and then taking their advice. That would be a violation right?
yes to your ceo example… i agree that is a violation. i’m not sure about our example though. if alexis believes the information to be correct and reaches out to another firm’s analyst, i would think the responsibility falls on the analyst and his firm to do the due diligence. if its clearly an error, i’m not sure why it would be a violation to point it out. i do see the inherent conflict of interest, but not 100% about a violation. i bet schweser didn’t think a wack job like me would create a whole new ethics question out of this!
i too automatically assumed the research analyst was working for the same firm… I dunno if this is the correct way of thinking about it…but I guess the questions and answers sort of imply that, even though it’s not explicitly said. All the answers A - C imply that they want you to assume that the analyst was from the same firm. I know those are the wrong answers, but nevertheless… makes sense?
yep. i should have been able to get to the answer by deduction. i chose b, like, the analyst’s firm could have objectively ensured the accuracy, not alexis.
I had to look in the handbook for clarification after your post cfasf1. Here is a paragraph taken from page 22. Members and candidates are personally responsible for maintaining independence and objectivity when preparing research reports, making investment recommendations, and taking investment action on behalf of clients. Recommendations must convey the member’s or candidate’s true opinions, free of bias from internal or external pressures, and be stated in clear and unambiguous language.
so the guy from alexis would have been in violation if he was biased. and we can assume he was biased because the company was a client… i can accept that. i love how i saw a completely different question from the one schweser intended.
yeah, i first assumed it was investment bank giving to client before publication. from memory, can IBANKING see the report before it goes out for factual matters, see it without the recommendations or not see it at all???.. in this case, even though his advice is that the report is too optimistic and hence it’s the opposite of what you safeguard against, he still shouldn’t be seeing it.
sorry, now i’m completely confused… do author and ibanker work for same firm?? and if not, as i’m thinking, who sent the report to the ibanker at competing firm?.. for sure the analyst can send parts of his report to the supply distribution company cfo or ceo.