CFA Practice Question

CFA Practice Question

Smithers is a financial analyst with XYZ Brokerage Company. She is preparing a purchase recommendation on JNI Corporation. Which of the following situations would represent a conflict of interest for Smithers and, therefore, would have to be disclosed?

I. Smithers is on a retainer as a consultant to JNI.
II. XYZ holds for its own account a substantial common stock position in JNI.
III. Smithers has material beneficial owners of JNI through a family trust.
IV. Smithers' brother-in-law is a supplier to JNI.
A. I, II III and IV.
B. I, II and III only.
C. II and III only.
Explanation: This question pertains to Standard VI (A) - Disclosure of Conflicts. Statements I, II and III describe conflicts of interest for Smithers or for her firm that would have to be disclosed. Statement I describes an employment relationship between the analyst and the company subject to recommendation. Statement II describes the beneficial interest of the analyst's employer in the company's stock. Statement III describes the analyst's own beneficial interest in the company stock. In Statement IV, the relationship between the analyst and the company through a relative is so tangential that it does not create a conflict of interest necessitating disclosure.

User Contributed Comments 7

User Comment
Rguerra what if Smither´s brother-in-law is JNI´s largest supplier and will considerably profit from JNI´s expansion?
jayjunk I agree with Rguerra, IV also seems to be a confilct.
jjohnson no. The ethics book clearly indicates that's not a conflict of interest.
wollogo A buy reccomendation has nothing to do with 'expansion' it just means that the security is undervalued relative to the market. A company can be in decline and still be undervalued.
dlukas This question is similar to a question in the curriculum. However, one major difference: the textbook question asks which is LEAST LIKELY to cause a conflict of interest. The answer is then IV, since there are scenarios in which in would not be a conflict, unlike the other 3 possiblilities. But to then ask which unequivocally does not cause a conflict is a different question, since there are clearly scenarios where this would be a conflict. If JNI were Southwest Airlines and her brother in law was the head of sales for Boeing, that's a conflict.
srhyland "A buy reccomendation has nothing to do with 'expansion'"

It puts the company in a position where they can either resell Treasury Stock or Issue more shares at a higher price. So technically it can help with expansion.

I agree with Rguerra that it could be a conflict, but the textbook makes this example clear.
Polagaro It´s say that the brother-in-law is a supplier, but there´s nothing about being the largest supplier.
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