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NEW QUESTION: 1
John Green, CFA, is a sell-side technology analyst at Federal Securities, a large global investment banking and advisory firm. In many of his recent conversations with executives at the firms he researches, Green has heard disturbing news. Most of these firms are lowering sales estimates for the coming year. However, the stock prices have been stable despite management's widely disseminated sales warnings. Green is preparing his quarterly industry analysis and decides to seek further input. He calls Alan Volk, CFA, a close friend who runs the Initial Public Offering section of the investment banking department of Federal Securities.
Volk tells Green he has seen no slowing of demand for technology IPOs. "We've got three new issues due out next week, and two of them are well oversubscribed." Green knows that Volk's department handled over 200 IPOs last year, so he is confident that Volk's opinion is reliable. Green prepares his industry report, which is favorable. Among other conclusions, the report states that "the future is still bright, based on the fact that 67% of technology IPOs are oversubscribed." Privately, Green recommends to Federal portfolio managers that they begin selling all existing technology issues, which have "stagnated," and buy the IPOs in their place.
After carefully evaluating Federal's largest institutional client's portfolio, Green contacts the client and recommends selling all of his existing technology stocks and buying two of the upcoming IPOs, similar to the recommendation given to Federal's portfolio managers. Green's research has allowed him to conclude that only these two IPOs would be appropriate for this particular client's portfolio. Investing in these IPOs and selling the current technology holdings would, according to Green, "double the returns that your portfolio experienced last year." Federal Securities has recently hired Dirks Bentley, a CFA candidate who has passed Level 2 and is currently preparing to take the Level 3 CFA® exam, to reorganize Federal's compliance department.
Bentley tells Green that he may be subject to CFA Institute sanctions due to inappropriate contact between analysts and investment bankers within Federal Securities. Bentley has recommended that Green implement a firewall to rectify the situation and has outlined the key characteristics for such a system.
Bentley's suggestions are as follows:
1. Any communication between the departments of Federal Securities must be channeled through the compliance department for review and eventual delivery. The firm must create and maintain watch, restricted, and rumor lists to be used in the review of employee trading.
2. All beneficial ownership, whether direct or indirect, of recommended securities must be disclosed in writing.
3. The firm must increase the level of review or restriction of proprietary trading activities during periods in which the firm has knowledge of information that is both material and nonpublic.
Bentley has identified two of Green's analysts, neither of whom have non-compete contracts, who are preparing to leave Federal Securities and go into competition. The first employee, James Ybarra, CFA, has agreed to take a position with one of Federal's direct competitors. Ybarra has contacted existing Federal clients using a client list he created with public records. None of the contacted clients have agreed to move their accounts as Ybarra has requested. The second employee, Martha Cliff, CFA, has registered the name Cliff Investment Consulting (CIC), which she plans to use for her independent consulting business.
For the new business venture, Cliff has developed and professionally printed marketing literature that compares the new firm's services to that of Federal Securities and highlights the significant cost savings that will be realized by switching to CIC. After she leaves Federal, Cliff plans to target many of the same prospects that Federal Securities is targeting, using an address list she purchased from a third-party vendor. Bentley decides to call a meeting with Green to discuss his findings.
After discussing the departing analysts. Green asks Bentley how to best handle the disclosure of the following items: (1) although not currently a board member. Green has served in the past on the board of directors of a company he researches and expects that he will do so again in the near future; and (2) Green recently inherited put options on a company for which he has an outstanding buy recommendation.
Bentley is contemplating his response to Green.
Assess whether, in light of CFA Institute Standards of Professional Conduct, Bentley's disclosure recommendations are correct or incorrect with respect to the two items noted by Green. How should Bently respond to Green regarding disclosure requirements on Item I -- Green's prior Board participation, and Item 2 - Green's inherited put options?
A. Both of Green's items must be fully disclosed to his employer, clients and prospects.
B. Since Green is not a current Board member, no disclosure is needed and the put options need not be disclosed, since the buy recommendation has already been completed and is in place.
C. Green's Board position issue need not be disclosed, but the inherited put options must be disclosed to Green's employer, clients and prospects.
Answer: A
Explanation:
Explanation/Reference:
Explanation:
According to Standard VI(A) Disclosure of Conflicts, members and candidates must make full and fair disclosure of any and all matters that interfere with their independence and objectivity. Greens board membership has the potential to influence his research recommendations. Even though he currently does not sit on the board, he expects to return to board membership in the near future. Clients, prospects, and his employer would all need to be notified of such information to assess the level of objectivity in Greens reports on the company in question. Greens inheritance of the put options on a company he covers also presents a situation in which his objectivity may be compromised. Even though it may be remote, the incentive to be pessimistic about the subject company exists since Green would like to benefit from the increase in the value of the put options. He must disclose this conflict to clients, prospects, and his employer as well. Generally, an/ conflict that may impair a members or candidates independence and objectivity will need to be disclosed to clients, prospects, and the employer. (Study Session I, LOS 2.a)

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