"morality" exercise:Diligence and Reasonable Basis
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Questions 1:
Raymond Ortiz, CFA, provides investment advice to high-net-worth investors. Ortiz has just completed an analysis of Continental Wheat, a manufacturer of wheat-based food products. He rated the company a long-term hold for investors seeking growth and income. Ortiz’s analysis included a review of the company’s management team, financial data, pro forma financial positions, dividends and dividend policy, and a comparison of Continental with its competitors. Although he does not tell anyone, five years ago, Ortiz worked for and managed the commodities derivatives trading unit of Continental. As part of his compensation at Continental, he received stock, which he still owns. Based upon his research, Ortiz recommends Continental to clients who have a moderate risk tolerance. Two weeks later Continental announces its quarterly earnings are 30% less than a year ago. Consequently, shares of Continental drop by 50%. Ortiz most likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct related to his stock:
A 、research.
B 、ownership.
C 、recommendation.
Questions 2:
Belen Zapata, CFA, is the owner of Kawah Investments. Kawah promises investors returns of up to 12% per year and claims to achieve this by investing in non-investment-grade bonds and other fixed-income instruments. Over the next 12 months, bond market yields reach unprecedented lows, and Zapata finds it impossible to achieve the returns she expected. No investments are ever made by Kawah, and clients are completely paid back all of their original investment. Zapata most likely violated the CFA Institute Standards of Professional Conduct because of the:
A、 return of capital.
B 、promised returns.
C 、investment mandate.
B is correct because there is a violation of Standard VI(A)–Disclosure of Conflicts; the analyst worked for Continental and still has ties to the company in the form of his stock ownership.
A is incorrect because the analyst’s actions were consistent with Standard (V)–Diligence and Reasonable Basis as he did complete a well-informed investment recommendation. Analysis of an investment that results in a reasonable basis for recommendation does not guarantee the investment will have no downside risk.
C is incorrect because the analyst’s actions were consistent with Standard (V)–Diligence and Reasonable Basis as he did complete a well-informed investment recommendation. Analysis of an investment that results in a reasonable basis for recommendation does not guarantee the investment will have no downside risk.
B is correct because the member has misrepresented the returns she could realistically achieve for her clients, violating Standard I(C), which prohibits members and candidates from guaranteeing clients any specific return on volatile investments.
A is incorrect because the member has returned investor capital, which is not a violation of the Code and Standards. However, the member has violated Standard I(C), which prohibits members and candidates from guaranteeing clients any specific return on volatile investments. With the return of their capital, investors did not lose their original investment, but they did suffer an economic opportunity loss.
C is incorrect because the investment mandate is not a violation of the Code and Standards. The mandate is very broadly defined and while it may or may not be appropriate, there is not enough information in the vignette to make this determination. The promised, but unachieved, yield is the violation that can be clearly identified
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