Question #57
Reading: Reading 42.5 Standards of Professional Conduct Guidance for Standards V
PDF File: Reading 42.5 Standards of Professional Conduct Guidance for Standards V.pdf
Page: 28
Status: Correct
Correct Answer: A
Question
Todd Gable, CFA, was attending a noon luncheon when he overheard two software executives talking about a common vendor, Datagen, about how wonderful they thought the company was, and about a rumor that a major brokerage firm was preparing to issue a strong buy recommendation on the stock. Gable returned to the office, checked a couple of online sources, and then placed an order to purchase Datagen in all of his discretionary portfolios. The orders were filled within an hour. Three days later, a brokerage house issued a strong buy recommendation and Datagen's share price went up 20%. Gable then obtained the brokerage house's research report on Datagen and quoted parts of it in a report to his clients. Gable has most likely violated the Standards by: Gable has:
Answer Choices:
A. not having a reasonable basis for an investment action
B. using material nonpublic information
C. using the recommendation of another brokerage firm in his report
Explanation
Standard V(A) requires members to have a reasonable and adequate basis for taking
investment actions. Overhearing a conversation does not provide adequate basis.
However, the overheard rumor was not material nonpublic information. Quoting another
firm's research is acceptable as long as the material is properly attributed to its source.
(Module 42.8, LOS 42: V(A))