SS1 Ethics question

[CFAZod]

Felix Asterix is a shrewd industry analyst working for Obelix, Inc., a brokerage firm of some repute. Asterix had invested about $50,000 in a few stocks trading on the Australian exchange a year ago. Obelix itself is not active outside the U.S. and Asterix's transactions do not represent any violations of the company policies.

One of the Australian firms whose shares Asterix holds recently applied for a dual listing on the NYSE and will begin trading in the U.S. in a month. Asterix has advised in his recent research reports that investors would be well-off investing in this dual-listed stock. He does not reveal his holdings in the Australian stock. Felix has:

I. not violated CFA Institute standard since his transactions took place long before the dual-listing, and he is not obligated to reveal his personal holdings.

II. violated Disclosure of Conflicts.

III. violated Independence and Objectivity.

 

[CFAZod]

Correct answer: II and III only

Rationale:
This is a classic case of potential conflict and appearance of conflict of interest. Indeed, this kind of situation is so common that it is covered by multiple CFA Institute Standards of Ethics. Asterix, as an investment advisor and analyst, should be extremely careful about any potential conflicts of interest that might be perceived as affecting the objectivity of his judgment. Clearly, his substantial Australian holdings, while not in violation of company policies when purchased, are a source of bias now that the stock is trading in the United States. Felix must discuss the situation with the Compliance Department at Obelix, Inc. and if he receives the permission to continue holding the stock, should reveal his vested interests to all his potential clients. This ensures that there is no perception of unfair bias and lack of objectivity in his investment recommendations.

 

[bchadwick]

I agree and disagree:

II is correct, analyst needs to disclose that he/she holds securities that could benefit from additional investors taking the analyst's opinion (though the statement only needs to disclose that these securities are held). The investors then decide if this is sufficient reason to make a biased report.

III is not definitively correct. The text does not indicate that the analysis is biased because of the holding. The analyst could have a justifiable reason for recommending the security, which is fine, as long as the analyst has a reasonable basis for his opinion.


Anyway, when Julius Ceasar arrives, Asterix and Obelix are toast!

 

[jamespucyk]

I and II are mutually exclusive and there is definatly a lack of disclosure, so II was violated. I agree with Chad on III, the point of disclosure of conflicts is for the client or employer to evaluate potential conflicts. Also there is nothing inherently wrong with owning a stock and recomending it on the merits of comprehensive analysis, as long as it's disclosed to client. The point I think is that "Independence and Objectivity" appear to be violated (according to the question's authors). This, however, doesn't mean that it has been. I really don't think there is enough info to conclude that III is true as the reason for his recomendation isn't even touched upon and assuming that he had simply based his decision upon his holding would be incomplete.

 

[CFAZod]

This is taken straight from the CFAI material from 1(B) Independence and Objectivity (page 21, 1st paragraph):

"Firms should also regularly review their policies and procedures to determine whether analysts are adequately safeguarded and to improve the transparency of disclosures relating to conflicts of interest. The highest level of transparency is achieved when disclosures are prominent and specific, rather than marginalized and generic."

And further:

"Standard I(B) states the responsibility of CFA Institute members and candidates
in the CFA Program to maintain independence and objectivity so that their clients
will have the benefit of their work and opinions unaffected by any potential conflict
of interest or other circumstance adversely affecting their judgment."

 

[csar]

Chad and james, dont forget that as a member you are compelled to act in a manner does not in any way make investors and employers doubt your objectivity and independence in the actions you take. If you have pecuniary or a non pecuniary benefit in any stock, investors are likely to doubt your objectivity and indepence in giving an opinion irrespective of how well researched this opinion is. So in order to remain in compliance with the code of conduct; declare your interests to the employer and the investors and where possible assign that particular stock or portfolio to another analyst

 

[jbnjc]

Thank God for James, will you please stick around in this forum until December?

Your in depth analysis of many of our questions is greatly appreciated!

Respectfully,

jbnjc