A financial analyst, Sarah Kim, CFA, works for a large investment bank. She is assigned to cover a new biotechnology company, 'BioGen Pharma.' During her research, she frequently speaks with BioGen's management and attends industry conferences where BioGen executives present. She compiles her research, which includes publicly available information, expert network calls (with non-insiders), and her own financial modeling. Her final report includes a 'Buy' recommendation based on her thorough analysis. Before publication, she shares a draft of her report with her equity sales team to help them prepare for client discussions. Has Sarah violated any CFA Institute Standards of Professional Conduct?
- AYes, by frequently speaking with BioGen's management.
- BYes, by using information from expert network calls.
- CNo, provided she has a reasonable and adequate basis for her recommendation.
- DYes, by sharing a draft report with the sales team before public dissemination.
Show answer & explanationAnswer & explanation
Correct answer: C. No, provided she has a reasonable and adequate basis for her recommendation.
Sarah's actions appear consistent with the CFA Institute Standards. Sharing a draft report internally with the sales team is permissible for internal coordination, provided the sales team does not act on it before public dissemination and it does not violate any firm policies. Using expert network calls and speaking with management are legitimate research activities, as long as no material nonpublic information is obtained and acted upon. Her recommendation is based on thorough analysis, which is consistent with Standard V(A) Diligence and Reasonable Basis.
Why the other options are wrong
- A. Interacting with company management is a common and legitimate part of financial analysis, as long as it doesn't lead to receiving or acting on material nonpublic information.
- B. Expert network calls are a legitimate source of information as long as the experts are not providing material nonpublic information.
- D. Internal sharing of drafts is generally allowed for coordination, as long as it doesn't lead to selective disclosure or trading before public release.
Standard V(A) Diligence and Reasonable Basis
Members and Candidates must exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.
- Have a reasonable and adequate basis for all recommendations.
- Conduct thorough analysis and research.
- Use sound judgment in forming conclusions.
Memory trick: Research: Diligent, Independent, Factual.