Omega Prime Securities is a sizable investment bank that undertakes security issuances on behalf of small and medium-size businesses. Treffil Ellis is the senior vice president of corporate finance at Omega. Treffil, on one of his golf junkets, made acquaintance with Tralth Trevor, owner of a growing chain of resort hotels.
Tralth invites Treffil to his estate mansion the next day and over drinks, asks him how fast Omega could issue equity-linked callable notes to finance the $200 million construction of new hotel businesses in Cairo and Bali. He forthrightly tells him that Omega could receive as much as 150 basis points above the normal fee if the issuance could be completed within the month. Treffil knows that this is not enough time to complete a research on Tralth's business and determine the issue price. However, he does know that his research wing could quickly do a comparison with one of the other hotel chains and determine an approximate issue price. He instructs his department to do so. In a month, the public offering is ready for issuance and Omega ends up making almost $15 million more than on other similar business deals. Treffil receives commendation from the CEO for "going beyond the call of duty for his employer." Treffil has
I. violated Standard IV (B.3) - Fair Dealing.
II. not violated any code of ethics.
III. violated Standard IV (A.1) - Reasonable Basis & Representations.
IV. violated Standard IV (B.1) - Fiduciary Duties.
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A. B. C. D.C
If adequate research is not put into determining the fair price of a security issue, investors could end up paying a price that has no relevance to the intrinsic value of the security. This is in direct violation of Standard IV (A.1) - Reasonable Basis & Representations.
Based on the given information, Treffil, the senior vice president of corporate finance at Omega Prime Securities, received an invitation from Tralth Trevor, owner of a chain of resort hotels, to discuss the issuance of equity-linked callable notes to finance the construction of new hotel businesses. During their conversation, Tralth mentions that Omega could receive an additional 150 basis points above the normal fee if the issuance could be completed within a month.
Treffil realizes that there isn't enough time to conduct thorough research on Tralth's business and determine the issue price. However, he believes that his research department could quickly compare Tralth's business to another hotel chain and determine an approximate issue price. Treffil instructs his department to carry out this comparison.
After a month, the public offering is ready for issuance, and Omega ends up making nearly $15 million more than they would have on similar business deals. Treffil receives commendation from the CEO for going beyond the call of duty for his employer.
Now, let's analyze the options:
I. Violated Standard IV (B.3) - Fair Dealing: This standard requires CFA® charterholders and candidates to deal fairly and objectively with clients and prospects. Treffil's action of instructing his department to quickly compare Tralth's business to another hotel chain in order to determine an approximate issue price may be seen as a violation of fair dealing. By relying on a quick comparison instead of conducting thorough research on Tralth's business, Treffil may not have acted in the best interest of the clients or potential investors. Therefore, Option I is likely correct.
II. Not violated any code of ethics: Given that Treffil took actions that may raise concerns about fair dealing (Option I), it is unlikely that he has not violated any code of ethics. Therefore, Option II is incorrect.
III. Violated Standard IV (A.1) - Reasonable Basis & Representations: This standard requires CFA® charterholders and candidates to have a reasonable and adequate basis, supported by appropriate research, for their investment analysis, recommendations, and actions. Treffil's decision to rely on a quick comparison rather than conducting thorough research on Tralth's business might be seen as a violation of this standard. Without a proper research basis, the issue price may not accurately reflect the value of the securities being issued. Therefore, Option III is likely correct.
IV. Violated Standard IV (B.1) - Fiduciary Duties: This standard emphasizes that CFA® charterholders and candidates must act in the best interest of their clients and place their clients' interests before their own. Treffil's decision to proceed with the issuance and earn an additional fee for completing it within a month, despite not having conducted adequate research on Tralth's business, may be seen as a violation of his fiduciary duty to the investors who would purchase the securities. Therefore, Option IV is likely correct.
Based on the analysis above, the correct answer is Option A: III and IV only. Treffil has likely violated Standard IV (A.1) - Reasonable Basis & Representations and Standard IV (B.1) - Fiduciary Duties by not conducting thorough research and potentially not acting in the best interest of the investors.