Erik Brecksen, CFA, a portfolio manager at Apfelbaum Kapital, recently recruited Hans Grohl, a CFA candidate and recent MBA graduate from a top university with excellent quantitative analysis skills. Apfelbaum Kapital stresses “top-down” fundamental analysis and uses a team approach to investment management. The firm’s investment professionals, all of whom are CFA charterholders or candidates, attend weekly investment committee meetings. At the meetings, analysts responsible for different industrial sectors present their research and recommendations. Following each presentation, the investment committee, consisting of senior portfolio managers, questions the analyst about the recommendation. If the majority of the committee agrees with the recommendation, the recommendation is approved and the stock is placed on a restricted list while the firm executes the necessary trades.
Apfelbaum considers its research proprietary. It is intended for the sole use of its investment professionals and is not distributed outside the firm. The names of all the investment personnel associated with the sector or investment class are listed on each research report regardless of their actual level of contribution to the report.
When removing the multi-factor analysis from his research report, does Grohl violate any CFA Standards?
- No.
- Yes, because he no longer has a reasonable basis for his recommendation.
- Yes, because he is required to make full and fair disclosure of all relevant information.
Solution
A is correct. Removing the multi-factor analysis from the research report does not constitute a violation. Grohl diligently prepared the internal document according to the firm’s traditional format with a complete fundamental analysis and recommendation—indicating diligence and a reasonable basis for his recommendation. It would be wise for Grohl to retain records of the multi-factor analysis but he need not retain the analysis in the research report to comply with Standards V(A)–Diligence and Reasonable Basis or V(C)–Record Retention.
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Incomplete write-up. Please provide the full item set.
The following information relates to Questions
46–50
Erik Brecksen, CFA, a portfolio manager at Apfelbaum Kapital, recently recruited
Hans Grohl, a CFA candidate and recent MBA graduate from a top university with
excellent quantitative analysis skills. Apfelbaum Kapital stresses “top-down” fundamental analysis and uses a team approach to investment management. The firm’s
investment professionals, all of whom are CFA charterholders or candidates, attend
weekly investment committee meetings. At the meetings, analysts responsible for
different industrial sectors present their research and recommendations. Following
each presentation, the investment committee, consisting of senior portfolio managers,
questions the analyst about the recommendation. If the majority of the committee
agrees with the recommendation, the recommendation is approved and the stock is
placed on a restricted list while the firm executes the necessary trades.
Apfelbaum considers its research proprietary. It is intended for the sole use of
its investment professionals and is not distributed outside the firm. The names of all
the investment personnel associated with the sector or investment class are listed
on each research report regardless of their actual level of contribution to the report.
On Grohl’s first day of work, Brecksen assigns him responsibility for a company
that Brecksen covered previously. He provides Grohl with his past research including all of his files and reports. Brecksen instructs Grohl to report back when he has
finished his research and is ready to submit his own research report on the company.
Grohl reads Brecksen’s old reports before studying the financial statements of
the company and its competitors. Taking advantage of his quantitative analysis skills,
Grohl then conducts a detailed multi-factor analysis. Afterward, he produces a written
buy recommendation using Brecksen’s old research reports as a guide for format and
submits a draft to Brecksen for review.
Brecksen reviews the work and indicates that he is not familiar with multi-factor
analysis. He tells Grohl that he agrees with the buy recommendation, but instructs
Grohl to omit the multi-factor analysis from the report. Grohl attempts to defend his
research methodology, but is interrupted when Brecksen accepts a phone call. Grohl
follows Brecksen’s instructions and removes all mention of the multi-factor analysis
from the final report. Brecksen presents the completed report at the weekly meeting
with both his and Grohl’s names listed on the document. After Brecksen’s initial
presentation, the committee turns to Grohl and asks about his research. Grohl takes
the opportunity to mention the multi-factor analysis. Satisfied, the committee votes
in favor of the recommendation and congratulates Grohl on his work.
Ottie Zardt, CFA, has worked as a real estate analyst for Apfelbaum for the past 18
months. A new independent rating service has determined that Zardt’s recommendations have resulted in an excess return of 12% versus the industry’s return of 2.7% for
the past twelve months. After learning about the rating service, Zardt immediately
updates the promotional material he is preparing for distribution at an upcoming
industry conference. He includes a reference to the rating service and quotes its returns
results and other information. Before distributing the material at the conference, he
adds a footnote stating “Past performance is no guarantee of future success.
48 When removing the multi-factor analysis from his research report, does Grohl
violate any CFA Standards?
A No.
B Yes, because he no longer has a reasonable basis for his recommendation.
C Yes, because he is required to make full and fair disclosure of all relevant
information.
Reasonable basis has not been violated. Apfelbaum Kapital stresses “top-down” fundamental analysis. Using the quantitative multifactor model was a complement over the already researched analysis. Removing it would not remove the reasonable basis that Grohl had.
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