CFA Practice Question

CFA Practice Question

Chicago Option Strategies (COS) advertises the huge profits that can be made by trading foreign currency options, on the morning radio show. It cites examples of traders who have turned a few thousand dollars into huge sums overnight. The advertisement highlights the gains and low downside risk. Clint O'Meara manages COS' advertising program with which they want to attract brokerage clients among the average radio listners. O'Meara has
A. not violated any standards because mass media advertisements are exempt from the purview of the Code and Standards since they are short and only certain aspects can be highlighted and everyone understands that they are meant to push product or a service and people discount them anyway.
B. violated Standard I (C) - Misrepresentation only.
C. violated both Standard I (C) - Misrepresentation and Standard III (C) - Suitability.
Explanation: By only emphasizing the upside potential of options and not educating the prospective clients about the fact that the expected return on an option is zero, they have misrepresented the investment. They have not looked into the suitability of such investments for the clients they are trying to reach, an average street person who does not understand the complexities of derivatives and options - the fact that they are wasting assets, i.e., as time progresses, they lose value even if the underlying does not change. O'Meara has violated both these standards.

User Contributed Comments 7

User Comment
steved333 Careful. I saw "downside risk" and not the "low" part. Don't read too quickly...
StanleyMo i remember there is a question asking the company distribute the analysis report on high risk counter to all clients but it is against the suitability as it mentioned they should be able to decide themselve..
arudkov doubt about B. it means its impossible to make promotion on massmedia - u will promote deposit with no risk ("almost") and it will not be suitable for some speculator. strange(
tommyguard3 Makes no sense that this violates suitability. He has not placed a trade for anyone so suitability is not an issue. If I write a report about an investment and conclude it is good buying upportunity doesn't mean it's good for everyone I still have a duty after meeting with the client or receiving instructions to make sure it is suitable at that time.
harley yes it is a violation. you don't need to buy/sell stocks to violate. if you write report then you need to be compliant.
mrpman can't analyst recommend securities without paying attention to the suitability-b/c the investment manager will be the one who determines proper suitability for the client.
GBolt93 Yeah, this makes it seem impossible to market any investment without violating suitability. No investment is suitable to the entire general public...
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