Question #40

Recommendations can be made in various contexts. For example, an analyst's firm may issue a list of buy recommendations or a brief recommendation that does not contain all the relevant details of the analysis, but clients must be informed that a full analysis supporting the recommendation is available. The other actions are required by the Standards. (Module 42.8, LOS 42: V(C)) Vera Sandro recently joined Seamark Securities as a portfolio manager. Sandro also recently took the Level III examination in the Chartered Financial Analyst program, but has not yet received her results. Seamark is a medium-sized firm that employs many CFA Institute members. Sandro has been asked by her supervisor, Ledia Ferrazzo, CFA, to write a brief biography to be included in the promotional brochure Sandro hands out to prospective clients. Sandro included the following sentences in her biography: "Vera Sandro, a Chartered Financial Analyst Level III candidate, has focused educational and investment experience in the small- cap stock market. She has consistently achieved better-than-average market returns and expects to do so in the future as well." The brochure was printed and is being used by Sandro as a marketing tool. Soon after joining Seamark, Sandro attended a conference at which Liam Wright presented several computerized spreadsheets that he had developed to value high-tech stocks. During the presentation, Sandro copied the spreadsheets on her laptop computer. Later, Sandro made major changes to Wright's initial model. After testing the new model, Sandro was impressed with the results. Wright used Standard & Poor's data as inputs for the model, but Sandro used data supplied by Moody's Investors Service. Sandro wrote a research report describing the revised model and its results in detail and sent the report to her biggest client, along with some stock picks selected by the model. Ferrazzo, the head portfolio manager for Seamark, often meets corporate executives in the course of her evaluation of potential investments. A week ago, Ferrazzo had lunch with Ralph Henderson, a senior vice president of Kellogg Industries, a maker of luxury linens. Ferrazzo told Henderson that she was looking for an appropriate investment in the fabric industry for her large client, Parker Jones. Henderson responded that he thought his company was well-positioned in the market, though he admitted to underestimating the demand for silk sheets in the region. After lunch, Ferrazzo read a research report that said all of Kellogg's silk plants were running at capacity, and the company might have trouble meeting the long-term demand. Two days later, Ferrazzo observed another senior vice president of Kellogg at a restaurant having dinner with the chief financial officer of Bradley Textiles, a maker of various kinds of silk fabrics. It is widely known in the market that Bradley is seeking a potential merger partner, as the founder and CEO is ready to retire. Ferrazzo did additional research and concluded that Kellogg Industries and Bradley Textiles had complementary product lines in several areas and similar management cultures. She also remembered reading in Forbes a story in which Kellogg's CFO was quoted as saying the company had the financial wherewithal for a merger and an interest in expansion. Ferrazzo's research indicated that Bradley's market value exceeded its intrinsic value, suggesting that Kellogg was unlikely to pay a high merger premium. Nonetheless, Ferrazzo proceeded to purchase stock in Bradley on behalf of her clients. Six months later, Kellogg acquired Bradley and paid a 40 percent premium over market price. Sandro shares a workspace with Don Wilson, a CFA charterholder. Wilson recommends that one of his clients buy Alpha Co. shares based upon detailed research conducted by a Seamark analyst. Sandro recommends that one of her clients sell Alpha Co. shares based upon comprehensive research conducted by another brokerage firm. Seamark has evaluated prospective brokers to execute trades on behalf of its investment- management clients. The findings are as follows: White Brokerage Co. offers best price and execution, charges an average of $99 for a typical trade, and provides generous soft dollars. Green Brokers Inc., offers good price and execution, charges an average of $59 for a typical trade, and provides moderate soft dollars. Blue Brokerage Services Inc., offers best price and execution, charges an average of $79 for a typical trade, and provides moderate soft dollars.