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Basic Question 4 of 6
Phillips, a CFA candidate, works for an investment banking firm. The firm acts as an adviser for Ace Broadcasting, which has made a tender offer for Clark Communications' common stock. Ace is now thinking about raising the price offered for the Clark Communications' stock. As Ace's investment banker, Phillips is aware of this likely increase and subsequently buys the Clark stock for her firm before the increased offer is made public, with the intention of tendering the stock. She does not inform Ace of this action. Based on CFA Institute's Standards of Professional Conduct, Phillips has ______.
B. violated the Standards by not dealing fairly with her client
C. violated the Standards by not disclosing the transaction to all other clients of the firm
A. not violated the Standards, because an increase in the stock price is uncertain
B. violated the Standards by not dealing fairly with her client
C. violated the Standards by not disclosing the transaction to all other clients of the firm
User Contributed Comments 11
| User | Comment |
|---|---|
| surob | What about "disclosing the transaction ..."? Why is it incorrect? |
| bokica | "disclosing the transaction" is wrong because of confidentiality. The answer refers to "treating clients fairly in light of their investments objectives and circusmtances". It's fair dealing btw banking firm and ACE not other clients. In this case, Ace would be worst-off since they could've purchased stocks for their own account at lower price than tender offer price, and than announce higher offer price. Always placing clients interest before your own. |
| rufi | bokica is right, good job |
| Khadria | It might be a case for "material non-public information" II.A |
| sjag | I feel CFA rules have lots of flaws. Even though Philips is aware of this liekly increase it is only 'likely'. One should consider with what probability is this likely to be true. No one can predict the future. So there is no point in using words like 'likely' and say he has violated the charter. Today i know that the price of stock is going to go up tomorrow but how guaranteed is this and on what basis. If there is a material fact available then its all right else no can predict the future. |
| studyprep | sjag, for guys like you and me, everything is likely, that could happen tomorrow or not. Here we are talking about rising prices because of big order. Market reaction to such news, is to pay more (or buy more stocks in an anticipation) if higher price offered from a big investor or a firm order, I suppose. |
| dblueroom | The most prominent problem with this case is that Ace is Philip's client, and what Philip did was to benefit his firm to the detriment of his client (Ace has to pay a higher price). Client interest should always come first. |
| alester83 | You are not allowed to disclose tender offers |
| johntan1979 | This question is not testing our understanding of the word "likely". Client's interest comes first. Trading for yourself first is always a violation. |
| mahendra | C is wrong because tender offers should not be disclosed. |
| tyjz | I think in this problem, conflict of interest will be more appropriate! |
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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® 2024 Level I Curriculum, Volume 6, Module 3.