CFA Practice Question
CFA Practice Question
Jorgenson is a senior bond analyst with Morgan Co., a large investment banking firm. Over the past quarter, Morgan's corporate bond department has been betting on the credit spreads in the market narrowing and in anticipation, has invested a large amount of capital in the bonds of two firms, High Tech and Amerizone.com. Unfortunately, the credit spreads have not displayed much activity and as the quarter end is approaching, the department wants to unload the bonds. For this, it puts pressure on Jorgenson to push the bonds on some of his larger clients. Jorgenson believes that both the bonds are good investments since High tech and Amerizone have been doing very well and their prospects look rosy. So he goes ahead and convinces his clients to purchase as much as a third of Morgan's bond holdings in these companies. Morgan has
A. violated Standard V (A) Diligence and Reasonable Basis.
B. violated Standard VI (A) Disclosure of Conflicts.
C. violated Standard I (B) Independence and Objectivity.
Explanation: There is no evidence that Jorgenson has bowed to any external pressure in recommending the bonds to his clients. If his analysis indicates, in his judgment, that a security is a good investment and suits the needs of a client, then he should recommend it, regardless of whether there is any external pressure for or against that course of action. However, he should at least disclose to his clients of his firm's holdings of the bonds.
User Contributed Comments 8
|robkaz||The analyst should at least disclose the fact that his firm has held the bonds. That way, investors can evaluate the situation better. The analyst might believe this is good investment, but not disclosing the fact that his employer is trying to unload the position certainly create the perception of conflict of interest.|
|sireklove||I agree with the comment by robkaz. At first glance I thought the answer was C but the wording "as much as a third" seemed to imply to me that he was pressuring his clients for the benefit of his firm.|
|KD101||I agree with others - there is a clear conflict and it should be mentioned. The words "large amount of capital" indicate significant investment|
|Will1868||In the this question Morgan is presuring the broker to use his influence with large clients to "push" Morgan's bonds onto them. This is clearly a conflict, as Jorgenson is not selling the bonds because of their merits as a sound investment, but rather to benefit the internal investment strategy of the firm.|
|tommyguard3||The question didn't ask what Jorgenson did it asks what Morgan did. Morgan violated Independence and Objectivity, I agree Jorgenson violated disclosure of conflicts but that wasn't the question.|
|Andy552||The question doesn't mention that he judged suitability for his clients. I would argue A is a more significant issue.|
|Friso||I agree with Andy552, suitability is not mentioned, so it is reasonable to assume Jorgenson only looked if the investments were good, not if they were also suitable (in light of existing pressure).|
|SKIA||I agree with tommyguard3 - The question asks about what MORGAN did, not Jorgenson! Read the last stem before the answer choices.|