An analyst thinks that a major change in the tax law will benefit holders of utility company stocks. She immediately begins calling all her clients and telling them of the upside potential of investing in such assets now. Based upon this information, this is most likely:
A) congruent with Standard V(A), Diligence and Reasonable Basis.
B) a violation of Standard III(C), Suitability.
C) a violation of Standard V(A), Diligence and Reasonable Basis.
My question— Why Diligence and Reasonable Basis is not violated. Agreed- Suitability is violated because he called all clients without identifying risk tolerance, return objectives and constraints. Here is explanation of the questions:
Explanation
According to Standard III(C), the analyst needs to determine the suitability of an investment for each client. It is doubtful that all her clients are identical in their needs. According to the information, the analyst mentions the upside potential but does not mention the downside risk. Although the information says that she thinks that the change in the tax law will benefit holders of utility company stocks and says nothing of how she arrived at this conclusion, we do not know if she has or has not made her decision on a reasonable basis.
The answer to your doubt is in the explanation of the solution you mentioned:
Although the information says that she thinks that the change in the tax law will benefit holders of utility company stocks and says nothing of how she arrived at this conclusion, we do not know if she has or has not made her decision on a reasonable basis.
We are told that she believes these stocks to have upside potential but we are not told how she arrived at this conclusion. She may have conducted reasonable research or she may be just stating it without appropriate research. We do not know so we cannot comment on it.