Susan Smart is about to change her “buy” recommendation on RollinsCo to “sell.” RollinsCo had been growing rapdily over the past year, but smart believes the growth potential is now gone. Smart sells the shares held in her discretionary client accounts and in her own personal account before issuing the report. According to the Standards that concern fair dealing and priority of transactions, Smart violated:
A. both of these Standards.
B. neither of these Standards.
C. only one of these Standards.
Answer: A.
An answer from another question (below) mentions that an analyst is free to issue recommendations only to his clients… - How can the above be a violation of fair dealing then?
Scott, CFA, a widely known equity analyst who recommendations often influence share prices. Scott changes his recommendation to “Sell” on Drywall Company and distributes this recommendation only to his clients, many of whom act on the recommendation before it becomes known to the public. Has Scott violated the Code and Standards?
The key in the first one is that Smart didn’t disseminate the change in her recommendation to her nondiscretionary client accounts, only to her discretionary accounts. Thus, shs didn’t deal fairly with her clients – some got the information while others didn’t – and she sold shares in her personal account before her nondiscretionary clients had an opportunity to sell their shares.
It isn’t certain that Smart has nondiscretionary clients – i.e., they don’t say that explicitly – but if she didn’t, there would be no reason to refer to her discretionary clients (as they would be all of her clients), so it’s reasonable to infer that she has. On the real exam, you won’t be expected to infer things like that; they’ll be explicit.
