According to CFA Institute Standards of Professional Conduct, which of the following statements regarding Green’s recommendation to Federal Securities’ clients is TRUE?

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.

According to CFA Institute Standards of Professional Conduct, which of the following statements regarding Green’s recommendation to Federal Securities’ clients is TRUE?
A . Green violated the Standards by making a material misrepresentation in his report to Federal Securities’ clients.
B . Green violated the Standards by failing to preserve the confidentiality of Federal Securities’ investment banking clients.
C . Green did not violate the Standards since he made a suitable recommendation in the best interest of Federal Securities’ clients.

View Answer

Answer: A

Explanation:

Green has taken a small number of oversubscribed IPOs to represent the entire market for technology IPOs. This is clearly a misrepresentation of the true market situation. Thus, Green has violated Standard 1 (C) Misrepresentations which prohibits such misstatements of fact. Also, IPOs may not be suitable for all accounts, but Green has recommended that all of Federal Securities’ portfolio managers add the IPO shares to their portfolios. Green did not violate the confidentiality of the investment banking clients since he was unaware of, and did not disclose, any details of the upcoming IPOs, Also, Green was not in possession of any material nonpublic information. (Study Session I, LOS2.a)