According to CFA Institute Standards of Professional Conduct, which of the following statements related to Green’s investment recommendation to the large institutional client 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 related to Green’s investment recommendation to the large institutional client is TRUE?
A . Green has misrepresented the expected performance of the IPOs, but has dealt fairly with clients.
B . Green has misrepresented the expected performance of the IPOs and has not dealt fairly with clients.
C . Green has not misrepresented the expected performance of the IPOs, but he has not dealt fairly with clients.

View Answer

Answer: B

Explanation:

By telling the institutional client that the IPO shares will double the performance that he experienced last year, Green has essentially guaranteed the performance of the IPO shares in violation of Standard 1(C) Misrepresentation. Green has also given the client a recommendation in advance of all other institutional and, presumably, many individual clients. This is a violation of Standard 111(B) Fair Dealing. (Study Session 1, LOS 2.a)