CFA Level II ExamEthical and Professional StandardsHard
A CFA charterholder, Chloe Davis, is a research analyst at a hedge fund. Her fund has a significant short position in 'Horizon Tech Inc.' Chloe discovers a minor accounting discrepancy in Horizon Tech's latest earnings report that, while not material enough to warrant an immediate restatement, could potentially raise concerns among investors if highlighted. Chloe decides to write a highly critical report on Horizon Tech, prominently featuring the accounting discrepancy (while slightly exaggerating its potential impact), hoping to drive down the stock price and benefit her fund's short position. Which CFA Institute Standard is Chloe most likely violating?
- AStandard I(B) Independence and Objectivity
- BStandard III(A) Loyalty, Prudence, and Care
- CStandard VI(A) Disclosure of Conflicts
- DStandard II(B) Market Manipulation
Show answer & explanationAnswer & explanation
Correct answer: D. Standard II(B) Market Manipulation
Chloe's actions, specifically exaggerating a minor discrepancy and publishing a critical report with the intent to drive down the stock price for her fund's benefit, constitute market manipulation. This is a direct violation of Standard II(B) Market Manipulation, which prohibits actions intended to distort prices or artificially inflate/deflate trading volume.
Why the other options are wrong
- A. While independence and objectivity are compromised, the direct intent to influence market price for personal/fund gain points more strongly to market manipulation.
- B. Loyalty, prudence, and care apply to clients, but the action here is against the market itself.
- C. While she should disclose her fund's short position, the primary violation is the manipulative intent and exaggeration, not just non-disclosure.
Standard II(B) Market Manipulation
Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.
- Do not spread false or misleading information.
- Do not engage in transactions designed to deceive.
- Avoid actions that create artificial price movements or trading volume.
Memory trick: Market must be Fair: No Manipulation, No Deception.