With respect to their plans to go into competition with Federal Securities, have Ybarra or Cliff violated any CFA Institute Standards of Professional Conduct?

The firm must increase the level of review or restriction of proprietary trading activities during periods in which the firm has knowledge of information that is both material and nonpublic.

Bentley has identified two of Green’s analysts, neither of whom have non-compete contracts, who are preparing to leave Federal Securities and go into competition. The first employee, James Ybarra, CFA, has agreed to take a position with one of Federal’s direct competitors. Ybarra has contacted existing Federal clients using a client list he created with public records. None of the contacted clients have agreed to move their accounts as Ybarra has requested. The second employee, Martha Cliff, CFA, has registered the name Cliff Investment Consulting (CIC), which she plans to use for her independent consulting business. For the new business venture, Cliff has developed and professionally printed marketing literature that compares the new firm’s services to that of Federal Securities and highlights the significant cost savings that will be realized by switching to CIC. After she leaves Federal, Cliff plans to target many of the same prospects that Federal Securities is targeting, using an address list she purchased from a third-party vendor. Bentley decides to call a meeting with Green to discuss his findings.

After discussing the departing analysts. Green asks Bentley how to best handle the disclosure of the following items: (1) although not currently a board member. Green has served in the past on the board of directors of a company he researches and expects that he will do so again in the near future; and (2) Green recently inherited put options on a company for which he has an outstanding buy recommendation. Bentley is contemplating his response to Green.

With respect to their plans to go into competition with Federal Securities, have Ybarra or Cliff violated any CFA Institute Standards of Professional Conduct?
A . Both Ybarra and Cliff have violated CFA Institute Standards.
B . Neither has violated CFA Institute Standards.
C . Ybarra has violated CFA Institute Standards, while Cliff has not.

View Answer

Answer: A

Explanation:

Standard IV(A) Loyalty governs Ybarra s and Cliffs actions in this case. Neither Ybarra nor Cliff have non-compete agreements and are therefore not precluded from preparing to go into competition with Federal Securities while still employed by the firm. In making such preparations, however, members and candidates must not breach their duty of loyalty to their current employer. Ybarra has breached his duty by contacting Federal Securities’ existing clients to solicit their business. Thus, he is in violation of Standard IV(A). Cliff has not violated the Standard. She is allowed to make preparations to compete before leaving Federal Securities and has not done anything to interfere with Federals operations. She is allowed to market her services to Federal clients as long as she does not do so before leaving the company and does not use Federal’s client lists or other resources to do so. Cliff has purchased the client list on her own and is not planning to market to Federal clients until after she resigns from the firm. (Study Session 1, LOS 2.a)