CFA Level II ExamEthical and Professional StandardsEasy
An analyst, Sophia Rodriguez, CFA, is evaluating a small-cap energy company for her firm's growth fund. She conducts extensive due diligence, including reviewing financial statements, industry reports, and management interviews. Her research leads her to conclude that the company is significantly undervalued. However, her firm's policy prohibits investing in companies with market capitalizations below $500 million, and this company's market cap is $300 million. Sophia believes her research is thorough and robust. What should Sophia do according to the CFA Institute Standards of Professional Conduct?
- APresent her research to the investment committee and advocate for an exception to the firm's policy, citing her strong conviction.
- BUpdate the firm's investment policy statement to allow for smaller market capitalization companies based on her findings.
- CRefrain from recommending the stock for the growth fund, as it violates the firm's investment policy statement.
- DRecommend the stock to her personal clients who may not have such restrictions, without informing her firm.
Show answer & explanationAnswer & explanation
Correct answer: C. Refrain from recommending the stock for the growth fund, as it violates the firm's investment policy statement.
Sophia must adhere to her firm's investment policy statement (IPS) and internal guidelines, even if her independent research suggests a different course of action. Standard III(A) Loyalty, Prudence, and Care, and Standard I(A) Knowledge of the Law (which includes firm policies) require compliance with established mandates. The firm's IPS is a binding constraint for the growth fund.
Why the other options are wrong
- A. While advocating for policy changes is possible, the immediate action must be to adhere to the current IPS. Advocating for an exception to invest in this specific stock would violate the IPS.
- B. An individual analyst does not have the authority to unilaterally update the firm's investment policy statement.
- D. Recommending the stock to personal clients without informing the firm and potentially circumventing firm policy raises serious ethical concerns regarding conflicts of interest and loyalty to employer.
Adherence to IPS
Members and Candidates must adhere to the firm's investment policy statement and client mandates, even if personal research suggests otherwise.
- IPS is a binding document for managing client assets.
- Compliance with IPS is central to Standard III(A) and I(A).
- Recommendations must align with client/fund objectives and constraints.
Memory trick: IPS Rules: Follow Them, Don't Flee Them.