TO 6 RELATE TO ETHICAL AND PROFESSIONAL STANDARDS SUN DAVI...

Questions 1 to 6 relate to Ethical and Professional Standards Sun Davidson, CFA, Case Scenario Sun Davidson, CFA, is a sell side energy research analyst. Davidson maintains an equity investment blog which is actively followed by over 5,000 investors spread across numerous countries. The investors are from various financial backgrounds with differing risk appetites. In the current year, Davidson decides to change the layout of the blog. Instead of placing announcements concerning investment recommendations at the bottom of the screen, as has been the case since she started the blog, recommendations can now be accessed by clicking on a highlighted (in bold) ‘Recommendations’ tab located at the top left of the screen. Davidson does not feel it is necessary to make any announcement with respect to the change. For her next entry, Davidson will be preparing an investment recommendation on Energy Fund, a hedge fund which undertakes long and short positions in equity securities from the energy sector. Due to her limited expertise with the alternative asset class, Davidson seeks the advice of Earl Ramos, a leading hedge fund manager at Carlton, a hedge fund management firm. During their initial meeting, Ramos informs Davidson that, with the knowledge of his employer, he is invested in the Energy Fund (EF) and maintains a working relationship with the fund’s manager from whom he has learnt that the fund will be expanding to include highly risky energy stocks issued in less developed countries. Upon Ramos’s advice, Davison issues a buy recommendation but does not disclose Ramos’s holding in EF or his relationship with the fund manager. Pleased with their professional relationship, Davidson invites Ramos to become a regular contributor to the blog which he accepts. Ramos’s compensation will be in the form of commission generated for the recommendations he issues. However, he will not be paid by Davidson. Ramos informs his supervisor of the offer after acceptance and has decided to contribute to the blog during the weekends so as not to disrupt his routine work activities. The same evening, both professionals attend an investment conference at which Ramos collides into Wilson Clark. Clark maintains an investment in the Carlton hedge fund along with his brother, Ridley. Wilson praises Ramos for his exemplary performance results achieved during the current year on both their holdings. Wilson invites Ramos to vacation with him in Morocco. Upon the conclusion of their conversation, Ramos shares the details of the offer with Davidson stating, “I manage the hedge fund investments of the Clark brothers and both are equally pleased with my performance. This calls for a celebration.” 1. By changing the layout of the blog Davidson is in violation of the CFA Institute Standards of Professional Conduct with respect to: A. loyalty to clients. B. diligence and reasonable basis. C. communication with clients and prospects. 2. By issuing the purchase recommendation, Davidson is in violation of the CFA Institute Standards of Professional Conduct because she has failed to: A. conduct a suitability analysis. B. disclose that she has employed the expertise of Ramos. C. disclose her reliance on material nonpublic information. 3. In order to avoid violation of the CFA Institute Standards of Professional Conduct, Davidson is required to disclose to investors: A. Ramos’s investment in the EF only. B. Ramos’s relationship with the manager of the EF only. C. Both Ramos’s investment in and relationship with the manager of the EF. 4. By accepting Davidson’s offer to contribute to the blog, is Ramos in violation? A. No, he will not be disrupting the activities of his employer. B. Yes, he should have sought permission prior to acceptance. C. Yes, he has not disclosed the commission income which he will earn. 5. Ramos’s best course of action with respect to Clark’s offer is to: A. decline the offer. B. disclose the offer to his employer only. C. disclose the offer to his clients and employer. 6. With respect to the statement made to Davidson at the investment conference, is Ramos in violation of the CFA Institute Standards of Professional Conduct? A. No. B. Yes, by mentioning that he manages Ridley’s portfolio only. C. Yes, by mentioning that he manages the investment portfolios of the Clark brothers.