- CFA Exams
- CFA Level I Exam
- Topic 10. Ethical and Professional Standards
- Learning Module 71. Guidance for Standards I-VII
- Subject 7. Standard III (A) Loyalty, Prudence, and Care
CFA Practice Question
John Berg, CFA, is the senior vice president in charge of the investment banking division of a large national brokerage firm. He is doing due diligence on a large company whose secondary offering of stock the brokerage firm is about to underwrite. Through his analysis of the audited financial statements of the company in the preliminary prospectus, which has already been distributed, Berg realizes that selling and general administrative expenses in the company's major division have suddenly increased from 1% of sales to 9% of sales. He finds that there is no explanation in the prospectus of this material change in the company's operating expenses. Which is Berg's best course of action?
A. He should not recommend selling the stock, because he obtained the information as a result of his position of trust and confidence with the company, and the information is material.
B. He should immediately withdraw from the underwriting, because otherwise he will be assisting in a violation of governing laws.
C. He should insist that management discuss in the prospectus the change in operating expenses (full disclosure of material information).
User Contributed Comments 3
| User | Comment |
|---|---|
| rikknom | SEC Requires full disclosure of material information |
| Kashi2010 | But John is in the IB, while the Brokerage is doing the underwriting. As such while he could REQUEST additional information, I dont believe he has any right to INSIST. However if the firms management opt not to provide the disclosure he requires, then his best course would be to refrain from making any recommendation on the firm (assuming info he saw was non-public). |
| ashish100 | i got this one right but definitely didn't consider this an easy question. wish they provided more details on this. |