Kazuya Kato,CFA,is a widely followed economist at a global investment bank.
When Kato opines on economic trends,markets react by moving stock valuations considerably.When Kato receives information of a temporary oversupply of rare earth metals,he issues a forecast that price trends for rare earth metals will be down significantly on a long-term basis.Kato also secretly sells his report to a widely followed Internet site.Prior to issuing this forecast,Kato emailed all portfolio managers at his bank with a copy of his report indicating that his opinion would be reversed shortly so there will be trading opportunities.Kato most likely violated which of the following CFA Institute Code of Ethics and Standards of Professional Conduct?
A、Market Manipulation.
B、Priority of Transactions.
C、Additional Compensation Arrangements.
【Answer to question 1】B
【analysis】
B is correct because Kato exaggerated the potential for negative price movement with rare earth metals and violated Standard II(B)–Market Manipulation by aiming to profit on the volatility created by his actions.Standard II(B)requires that members and candidates uphold market integrity by prohibiting market manipulation.Market manipulation includes the dissemination of false or misleading information and transactions that deceive or would be likely to mislead market participants by distorting the price-setting mechanism of financial instruments.Standard IV(B)–Additional Compensation Arrangements was violated when he sold his report to the internet site.Standard VI(B)–Priority of Transactions has not been violated as it relates to investment transactions for clients and employers having priority over Member or Candidate transactions.
A is incorrect because Kato exaggerated the potential for negative price movement with rare earth metals and violated Standard II(B)–Market Manipulation by aiming to profit on the volatility created by his actions.Standard II(B)requires that members and candidates uphold market integrity by prohibiting market manipulation.Market manipulation includes the dissemination of false or misleading information and transactions that deceive or would be likely to mislead market participants by distorting the price-setting mechanism of financial instruments.
C is incorrect because Standard IV(B)–Additional Compensation Arrangements was violated when he sold his report to the internet site
Questions 2:
Mailaka Securities(MS)advertises the use of a“bottom up”investment style in its marketing material.Recently,MS senior management decided to switch to a“top down”approach,citing the fact that it is less labor intensive.All other aspects of the research process are to remain the same.The head of research at MS,Mara Cherogony,CFA,is instructed to supervise the implementation of the new procedures,notify clients of the changes,and revise the text of marketing materials when new material is produced.Which of the following CFA Standards pertaining to Investment Analysis,Recommendations,and Actions is Cherogony least likely in danger of violating?
A、Supervisory Responsibility
B、Communication with Clients
C、Diligence and Reasonable Basis
【Answer to question 2】C
【analysis】
C is correct because research can still be considered diligent and having a reasonable basis if done using a“top down”research methodology as opposed to a“bottom up”methodology.By not communicating to prospective clients the change in the investment process through the delay in the creation of new marketing material,however,Cherogony violates Standard V(B)–Communication with Clients,which requires members and candidates to disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments,select securities,and construct portfolios and must promptly disclose any changes that might materially affect those processes.As a supervisor,Cherogony is responsible for ensuring compliance with the Code and Standards.
A is incorrect because by delaying the change in the marketing material until the inventory is depleted,there is a possibility that the new investment process policy will not be clearly communicated to prospective clients.As a supervisor,Cherogony is responsible to ensure the compliance with the Code and Standards.
B is incorrect because Cherogony violates Standard V,which requires members and candidates to disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments,select securities,and construct portfolios and must promptly disclose any changes that might materially affect those processes.By delaying the change in the marketing material until the inventory is depleted,there is a possibility that the new investment process policy will not be clearly communicated to prospective clients.
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