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As to the process by which Brown's report in Exhibit B came into being, which of the
following is least likely a procedural error in violation of CFA Institute Standards of
Professional Conduct?
A) Brown has violated the Standard relating to the prohibition against plagiarism.
B) Brown has violated the Standard relating to disclosure of basic characteristics.
C) Brown has violated the Standard relating to independence and objectivity.
Rajiv Singh, a CFA charterholder, works as an equity analyst with Horizon Investments, a
large broker/dealer. After ski-resort developer HighLife misses a quarterly earnings target,
Singh changes his recommendation on HighLife from buy to hold. Singh has been following
HighLife for years. In several previous research reports on HighLife, Singh told clients that,
based on his detailed analysis of the financial statements and market position, he believed
HighLife had stopped picking up market share. He had mentioned concerns about HighLife
several times in his reports and said in the most recent report that he would downgrade the
stock if it missed quarterly earnings.
Singh had produced his monthly report on HighLife just a week before the earnings
announcement, and because he had just written about his intention to downgrade the stock,
he felt he did not need to inform clients of his recommendation change until the next
monthly report.
On the same day that the HighLife report was released, Singh initiated coverage on another
company with a buy rating, the convenience store operator QuickStop. His research report is
distributed that afternoon. A client sends Singh a sell order for QuickStop via e-mail the
same day the new recommendation is being disseminated to all Singh's clients and
prospects.
John Womack, a Level II CFA candidate, is a trader at Horizon. Womack, walking past the
conference room during an investment meeting, learns of the initiation of the buy rating on
QuickStop. Prior to the dissemination of the buy rating to Horizon's clients, he buys up a
large block of QuickStop shares for Horizon's account in anticipation of clients' interest in
the stock. When the rating is released to the firm's customers, he fills the incoming customer
orders out of Horizon's inventory, generating a modest profit for the company.
Horizon is drafting trade-allocation guidelines for companywide use. Five regulations the
company is considering are listed below:
1. Regular orders are processed and executed on a pro-rata basis.
2. Shares in initial public offerings will be allocated on a pro-rata basis to the firm's
portfolio managers according to advance indications of interest from the managers.
3. When the full amount of a block order is not executed, partially executed orders are
allocated on a first-in, first-out basis.
4. Orders must be recorded in writing and stamped with the time of the order and the
execution.
5. All clients participating in block trades are given the same execution price, and all
clients are charged the same commission.