Standard V(B) – Communication with Clients and Prospective Clients

Members and Candidates must:

1. Immediately disclose to customers and prospective clients the basic format and broad principles of the investing procedures they employ to analyze investments, choose securities and construct portfolios, as well as any modifications that may materially influence those processes.
2. Make significant restrictions and risks connected with the investment process known to clients and prospective clients.
3. Use reasonable judgment in determining which aspects are critical to their investment analysis or recommendations and incorporate those considerations in discussions with clients and prospective clients.
4. Distinguish between fact and opinion when presenting investing analysis and suggestions, 

Application 1: Opinion as Fact

Emmanuel Oluwo works as an oil and gas analyst at GeoField Consultancy Group. He has been working on a report that attempts to assess the crude oil production capacity of Naija Oil Corporation. His assessment will form part of his updated investment recommendation.

Naija Oil Corporation has recently tapped a significant oil resource on the northwest coast of Nigeria. Oluwo’s report includes his estimate (through a series of calculations) of the expanded production capacity of the newly tapped oil field.

In his conclusion, Oluwo states:

“Based on the increase in the production capacity of 500,000 barrels per day, I recommend that Naija Oil Corp is a strong BUY.”

Has Oluwo violated Standard V(B) – Communication with Clients and Prospective Clients?

1. Yes, because he presents his estimate of the increase in capacity of 500,000 barrels per day as a fact and not opinion.
2. No, because he is permitted to include any relevant information in his research report.
3. Yes, because he does not provide a detailed explanation about the methodology applied in estimating the production capacity of the new oil field.

Solution

The correct answer is A.

Oluwo has violated Standard V(B) – Communication with Clients and Prospective Clients. Oluwo’s calculation of the increase in production is a quantitative estimate (an opinion) and not fact. Opinions must clearly be distinguished from facts in research reports. Oluwo should have details about his estimation methodology prepared and available on request.

Application 2: Notification of Fund Mandate Change

Regis Partners is a fund manager that specializes in large-cap European stocks. One of the key screening criteria is selecting stocks with a minimum market capitalization of EUR 5 billion. The Eurozone’s economic outlook and growth prospects have diminished over the past five years, and Regis has altered the growth rate estimates for several of the firms in its ‘Euro large-cap growth’ fund.

In an attempt to broaden the fund’s investment universe, Regis’s CFO changed the permitted market capitalization to EUR 2.5 billion. Regis CFO ensures that the firm’s marketing and promotional material include the change in the market capitalization criteria and informs all prospective clients about the updated investment process.

Are any of Regis’s CFO actions in conflict with Standard V(B) – Communication with Clients and Prospective Clients?

1. None of his actions conflict with Standard V(B).
2. Yes, his failure to inform the firm’s existing clients of the change in the market capitalization.
3. Yes, he is not permitted to change the screening criteria of the fund without notifying the firm’s existing clients.

Solution

The correct answer is B.

To comply with Standard V(B) – Communication with Clients and Prospective Clients, Regis’s CFO must inform all potential and existing clients about the change in the investment process.

Regis’s CFO took appropriate but incomplete measures in communicating the change in the fund’s investment mandate. Communicating the change in the mandate is a necessary step in providing clients the information required to judge the suitability of their investment in Regis’s Euro large-cap growth fund.

LOS 5(a): Evaluate practices, policies, and conduct relative to the CFA Institute Code of Ethics and Standards of Professional Conduct.

LOS 5(b): Explain how the practices, policies, or conduct does or does not violate the CFA Institute Code of Ethics and Standards of Professional Conduct.