Ethics doubts

CFA Level I Ethics
#1

Hi Guys, Could any of you please explain me the answers for following questions?

Sue Seros, CFA, is reviewing the performance of Arithmatics, Inc., which she has placed in several client accounts. She believes a recent decrease in its price may present a buying opportunity and that industry condition suggest Arithmatics may be an attractive acquistion for a larger company. She has occasion to talk to her podiatrist, who mentions Arithmatics and tells her that he believes that Arithmatics is a take over target and she should buy more. Seros subsequently increasesher clients holding in Arithmatics and tells her client that it is an attractive takeover prospect at current price. Seros has:

  1. not violated the standards of practise.

  2. violated the Standard on material non-public information.

  3. violated the standard on diligence and reasonable basis.

The Code and Standards prohibit a member or candidate who has left one employer and joined another firm

  1. Soliciting the old employer’s clients

  2. Misappropriating client’s list

  3. Transferring files from the old employer to the new employer

Juan Perez, CFA, is an airline industry analyst. Prez does not currently cover New Jet, a relatively new airline. New Jet believes its new service is unique and has offered two first class tickets to research analysts in the jopes of receiving increased coverage. Perez believes he can more fully understand the airline’s new concept if he is a passenger, so he accepts the tickets and takes his girlfrieng on a weekend trip. Perez does not see any difference between New Jet and other airlines. According to the code of standards Perez:

  1. was required to reject the offer of sirline tickets from New Jet

  2. Should have obtained a written permission from his employer before accepting the airline tickets

  3. did not need a written permission from the employer before accepting the tickets because the offer did not confict with his employer’s interest.

Judy Nicely, CFA, works for a large brokerage firm managing portflios for individuals. In a meeting with Patty Owen, a client, Nicely suggests moving a portion of Owen;s portfolio to US bank certificates of deposit. Nicely states that the principal is gurantees up to Federal Deposit Insurance Corporation limits. Nicely has:

  1. compiled with CFA Institute Standards.

  2. violated the standards by making inappropriate assurance or gurantee.

  3. violated the standards by misrepresenting the terms and character of the investment.

Riley and Smith, a broker/dealer, is bringing to market a secondary offering for All Pro Company. One of the reasons All Pro selected the firm to lead the offering is because RIley and Smith has been a market maker for All Pro’s stock for past 5 years. The firm is in posession of material nonpublic information relevant to All Pro’s offering. To be in compliance with code and standards, Riley and Smith:

  1. may not serve as underwriter for same stock in which it acts as a market maker.

  2. should continue to serve as market maker but take only the contra side of unsolicitated customer trades.

  3. should abstain from making a market in All pro stock during the offering period but may resume the market making activities after the offering.

#2

* This is best to my knowledge and understanding.

Question one.

Not sure on this . Should be 2 or 3

Explanation - 2) Doesn’t seem to be reasonable basis for her recomendation in my opinion 3) sharing that info with her podiatrist can be interpreated as “material” as it can affect the price if the podiatrist acts on it. Non-public as she hasn’t advised her clients yet. Please give better explanation if someone can.

Question two.

  1. Misappropriating client’s list

Explanation-

  1. Soliciting the old employer’s clients - This is violation only while the member is still with the firm he /she is leaving not after. (standar 4 a) guidance- leaving an employer). Not a violation here as the member has already left.

  2. Misappropriating client’s list - Violation per standard.

  3. Transferring files from the old employer to the new employe - not a violation. File could be anything not nescessarily material.

Question three -

  1. Should have obtained a written permission from his employer before accepting the airline tickets

This is a requiremnt as per guidance in standard 6 a)

Question four-

  1. Not violated as she stated facts.

Question five-

  1. should abstain from making a market in All pro stock during the offering period but may resume the market making activities after the offering.

Explanation - should abstain from making a market during the offering as they have material non -public info about the offerring which they could potentially act on. This info would not be applicable after the offering.

Hope this helps.

#3

I wanto say the The answer is 1. She holds a position in the stock that she believes is realtively cheap and expects industry consolidation with this company potentially being a take over target

It is not material nor non-public information that the stock price has fallen and might be taken over. If she KNEW the stock was about to be taken over then she would be taking action with material non-public information. She is not sharing information that other’s do not already know, i.e the market.

Advising her client’s doesn’t matter. The question isn’t about priority of transactions but rather making investment deicions on behalf of her client (not in place of her clients is the difference)

#4

Thanks Galli for clafiying! I agree. 1 should be the right answer.