- CFA Exams
- CFA Level I Exam
- Topic 10. Ethical and Professional Standards
- Learning Module 71. Guidance for Standards I-VII
- Subject 15. Standard V (A) Diligence and Reasonable Basis
CFA Practice Question
There are 356 practice questions for this topic.
CFA Practice Question
Daniel Fratczak, CFA, is an analyst at a small investment advisory firm. His firm routinely purchases third-party research that Fratczak has found to be sound and reliable. Fratczak drafts a research report recommending the purchase of Keaton Corporation common stock to clients for whom the investment is suitable. The report contains financial projections from third-party research providers referenced by Fratczak. Fratczak writes, "This recommendation is based on expectations for continued strong demand for Keaton's products." Finally, Fratczak notes at the end of the report that he owns Keaton Corporation convertible bonds. Has Fratczak violated the standards relating to ______.
A. Reasonable Basis: Yes; Independence and Objectivity: No
B. Reasonable Basis: No; Independence and Objectivity: Yes
C. Reasonable Basis: No; Independence and Objectivity: No
Explanation: Fratczak may rely on and issue reports based on third-party research providers if he has no reason to question the soundness or reliability of their research and he appropriately references his sources. He has also appropriately disclosed his interest in the company.
User Contributed Comments 10
|jj122||I understand why he is violating reaonable basis portion but why is he violating independence and objectivity if he has already declared it in the report?|
|stochterma||I am a step behind you. Can you tell me at least why he is violating the reasonable basis portion?|
|ankurwa10||Independence and Objectivity could be because it gives a perception of lack of independence.|
|6004895||jj122 and stochterma where are you getting that?|
|mpeterson||"This recommendation is based on expectations for continued strong demand for Keaton's products." ------ Let me rephrase this----- "This recommendation is based on expectations for continued strong demand for Mr. Madoff's Products."|
|Inaganti6||@mpeterson, tell the CFAI what it wants to hear.|
|tapasp||I'd think the only problem would be misrepresentation by not quoting the source for the expectations|
|Swoods2||No indication he independently verified their projections. Projections aren't historical data or facts.|
|joester25||"firm routinely purchases (...) research that Fratcak has found to be sound and reliable."
Sounds to me that he is not checking every report. So Reasonable Basis is violated for me.
I see A as the correct answer. Any opinions?
|ocionesw||The report was sound and reliable, therefore due diligence is not necessary in this case, which prevents him from violating the "Reasonable Basis''. On the other hand, he mention his shares on the said asset which avoids him from violating the independent and objectivity.|