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Basic Question 5 of 15
Tim Gains, a CFA candidate, works for a regional brokerage firm. He estimates that Walkton Industries will increase its dividend by $1.50 per share during the next year. This increase is contingent upon pending legislation that would, if enacted, give Walkton a substantial tax break. The congressman in Walkton's home district has told Gains that, although he is lobbying hard for the bill and prospects for passage look good, concern over the federal deficit could cause the tax break bill to be voted down. The company has not made any statement regarding a change in dividend policy. Gains writes in his research report, "We expect Walkton's stock price to rise by at least $8.00 per share by the end of the year. Because the dividend will increase by $1.50 per share, the stock price gain will be fueled, in large part, by the increase in the dividend. Investors buying the stock at the current time should expect to realize a total return of at least 15% on the stock." Which of the following is (are) true?
B. Gains violated CFA Institute's Standards of Professional Conduct because he has a material misrepresentation in his report.
C. Gains violated CFA Institute's Standards of Professional Conduct because he failed to separate opinion from fact.
A. Gains violated CFA Institute's Standards of Professional Conduct because he used material inside information.
B. Gains violated CFA Institute's Standards of Professional Conduct because he has a material misrepresentation in his report.
C. Gains violated CFA Institute's Standards of Professional Conduct because he failed to separate opinion from fact.
User Contributed Comments 19
| User | Comment |
|---|---|
| araggl | Gains should have shown the contigency of the pending legislation. |
| cbb1 | I think both B & C are correct (the dividend at $1.50 is an opinion not a fact). He expects stock prices to increase; he doesn't indicate that he expects dividend to increase. As written, it appears dividend increase is a fact. |
| Slothrop | Wouldn't the Congressman's statements be considered material non-public information? |
| JVAC | it's only his opinion, not a fact that the bill will be voted down |
| Analizer | Even though answer C is stated as correct, I don't see where Gains expressed any factual statement in his research report. His first two words, "we expect" is an opinion not a fact. He continued by saying "Because the dividend will increase by $1.50" is also an opinion, because he does know for sure if dividend will be increase by that amount. Therefore, I feel he expressed opinions in his resaerch paper and not factual statements |
| ribi | he mistreated the congressman's opinion as fact in his report. |
| Challs | the key here lies in the 1st sentence...Gains "estimates" that the dividend will increase... This is an unfounded statement based on his "opinion" and not fact. He has not misrepresented he simply presented his assumptions as fact when they ought not be considered as such. |
| sanyukta | he estimated the price not the dividend difficult question for me it was b and c, well c seems right on reflection. |
| TammTamm | A or B would seem correct at first glance but after further deliberation, C is correct because Gaines didn't separate the fact of the legislation being voted down, to it affecting the price of the dividend or the shares. |
| AUAU | "expect" is important. Since it refers the analysis of the stock. If it is conditionally said under which circumstances the price / dividend will go up / down then it may not violate the std. (eg if said the legilation enactment) |
| tschorsch | "the dividend will increase by $1.50 per share" is a factual statement, but it is really based on an estimate. Thus it is stated as fact but is really opinion. From the report readers perspective, the only way to interpret the phrase is that the dividend has been declared, but this has not happened. |
| sh21 | i think the key is that HE estimated that the divident will increase by $1.50 |
| shash0678 | Why isn't B correct - since he misrepresents the point related to the tax break |
| Gooner7 | agree w/ tschorsch |
| geofin | Here is how this answer is explained in the official CFA Level I Volume I: "This question relates to Standard V(B)?Communication with Clients and Prospective Clients. Scott has issued a research report stating that he expects the price of Walkton Industries stock to rise by US$8 a share ?because the dividend will increase? by US$1.50 per share. He has made this statement knowing that the dividend will increase only if Congress enacts certain legislation, an uncertain prospect. By stating that the dividend will increase, Scott failed to separate fact from opinion. The information regarding passage of legislation is not material nonpublic information because it is conjecture, and the question does not state whether the U.S. Representative gave Scott her opinion on the passage of the legislation in confidence. She could have been offering this opinion to anyone who asked. Therefore, statement A is incorrect. It may be acceptable to base a recommendation, in part, on an expectation of future events, even though they may be uncertain. Therefore, answer B is incorrect." CFA Institute. Level I Volume 1 Ethical and Professional Standards and Quantitative Methods, 7th Edition. Pearson Learning Solutions.Page 165. |
| johntan1979 | I seriously think the answer should be B. First of all, the nonpublic info that he heard is negative. But he issued a positive recommendation. This is a blatant misrepresentation. IF he issued a negative recommendation, then he is failing to separate fact from opinion, since the info he heard has not taken place yet. B should be the right answer. |
| johntan1979 | But after reading it over and over again, I have to agree that C is correct, because of the keywords "We expect..." No matter correct representation or misrepresentation... as long as you fail to separate fact from opinion, that is the violation, not misrepresentation violation. |
| johntan1979 | Misrepresentation violation should be over something that has already happened... i.e. FACT. |
| DavidMo31 | When he says "we expect" he is referring to the stock price not the dividen... how is the implied certainty about this dividen not considered a material misrepresentation? |
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Learning Outcome Statements
demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity
recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct
identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards
CFA® 2025 Level I Curriculum, Volume 6, Module 3.