Hilda Olson covers the chemical industry for Bern Securities. Based on conversations with two executives of InterChem, a major producer of synthetic fabrics, she issues a generalized sector report claiming that "according to a survey of industry executives, rayon feedstocks will be in short supply for at least the next 12 months." In addition, Olson recommends Han Chemical, a major producer of rayon, which has routinely reported higher profits than its competitors and should be well positioned to gain further from reduced supply.

Hilda Olson covers the chemical industry for Bern Securities. Based on conversations with two executives of InterChem, a major producer of synthetic fabrics, she issues a generalized sector report claiming that "according to a survey of industry executives, rayon feedstocks will be in short supply for at least the next 12 months." In addition, Olson recommends Han Chemical, a major producer of rayon, which has routinely reported higher profits than its competitors and should be well positioned to gain further from reduced supply.

In her efforts to learn more about Han Chemical and support her recommendation, Olson scrambles to compile a research report on the firm. She reproduces financial data provided in a research report by Standard & Poor’s (S&P) and the Bank of Korea (BOK), the Korean government’s central bank. She also obtains two research reports from brokerage firms with operations in Korea, and incorporates portions of the text and charts from these reports into her research report.

Olson describes Han Chemical in her research report as "low risk," even though she knows that the operating risk of the chemical industry is above average and that Han has a higher debt-to-equity ratio than its average competitor. She justifies this to her supervisor by saying that since the market for rayon feedstocks is tight, an investment in Han has a very low risk of suffering a loss in the near term. Olson’s supervisor accepts her explanation as valid and the report is issued to the firm’s clients.

Shortly after issuing her research report, Olson visited Han Chemical’s operations in New Jersey. During her conversation with the firm’s vice president of operations, who is also one of Bern’s personal trust clients, she was told in confidence that Han Chemical’s profit margins are higher than its competitors, partly because they routinely discharge untreated chemical waste into the Delaware River in order to reduce production costs. Such action is a direct violation of U.S. environmental laws.

When Olson returns from her trip to New Jersey, Wolfgang Hundt, director of research at Bern Securities, requests a meeting. Hundt has developed a compliance procedure and has provided relevant written information to employees. Every quarter, he issues written reminders regarding the program to Olson and her peers, so when Olson tells Hundt of Han’s chemical dumping, he immediately begins an investigation into the violation.

In her report on Han Chemical, Olson has also utilized two brokerage firms’ reports. With regard to these sources, Olson is:
A . allowed to use the text and charts, but must acknowledge the sources.
B . allowed to use the text and charts, and need not acknowledge the sources.
C . not allowed to use the text and charts from other reports.

View Answer

Answer: A

Explanation:

Under CFA Institute Standard 1(C) Misrepresentation, members and candidates are required to acknowledge the sources of information that they incorporate into their own work that do not originate from a recognized financial/statistical reporting service. Therefore, Olson must properly cite the information obtained from the brokerage reports in order to comply with Standard 1(C). (Study Session 1, LOS l.b)