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Ethical and Professional Standards
1. Stewart is an analyst at Axel Capital, a small investment firm. While meeting with a former colleague named Andre, Stewart discovers that GYTEX will report quarter-end earnings by the end of the week. Andrei expects GYTEX’s quarter-end earnings to beat current market expectations by nearly 8%. Stewart had always valued Andre’s opinion in the past.
The next day, Stewart checks the firm’s recommendation on the stock and learns that the stock is a “hold.” Axel’s portfolio managers had not placed any buy orders on GYTEX. Stewart believed that he had no valid reason to suggest to the firm’s portfolio managers that the recommendation be changed. The next day, Stewart bought a substantial amount of GYTEX stock for his personal portfolio and completed the transaction the day before the earnings announcement. Prior to trading the GYTEX stock, Stewart complied with his firm’s compliance procedures, obtained pre-approval for the transaction, and met all of Axel’s reporting requirements.
Did Stewart violate the Code and Standards?
A. Yes, relating to priority of transactions.
B. No.
C. Yes, relating to material nonpublic information.
2. Which of the following actions is least likely to ensure fair treatment of clients when an asset management firm changes its investment recommendations?
A. Distributing recommendation to high net worth and institutional clients prior to individual accounts.
B. Minimizing the time between decision and dissemination of the investment recommendation.
C. Limiting the number of people involved who are privy to the information that the recommendation is going to be disseminated.
3. Which of the following is not correct about verification?
A. Verification must be conducted by an independent third party.
B. A company cannot perform its own verification.
C. Verification ensures compliance for specific composites and sectors.
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