Level II Ethics item sets

Daniel Okafor, CFA, is a mining analyst at Westbrook Partners, an investment management firm that runs discretionary equity portfolios for pension plans, charities and wealthy families. Okafor's research is used by Westbrook Partners' portfolio managers and is also sent to clients who subscribe to the firm's research service. Sofia Brandt, CFA, is Westbrook Partners' chief compliance officer. Leo Marsh, CFA, is a portfolio manager who uses Okafor's research.

In March, Halden Mining, a listed copper producer that Okafor covers, invites him to tour its new mine in northern Chile. The invitation says that Halden Mining will fly a small group of analysts there on the company's private jet and pay for three nights at a resort near the mine, including golf and a spa programme. Analysts may bring a spouse at the company's expense. Commercial flights to the region are available, but the journey would take a day longer. Okafor tells his manager about the trip, accepts the full package and takes his wife. He does not ask Westbrook Partners to pay for any part of the trip, and the firm does not have a policy on issuer-paid travel.

During the tour, Halden Mining's managers answer only questions that relate to information already in the company's public filings. Okafor notices that the processing plant appears to be running well below capacity and that several haul trucks are parked in a maintenance yard. In the town near the mine, he talks to the owner of a supply business, who says that orders from the mine have slowed. Okafor combines these observations with a public industry report on lower ore grades in the region and with Halden Mining's published production guidance. He concludes that the company is likely to miss its guidance for the year, and he lowers his rating from Buy to Hold. No one at Halden Mining tells him anything about production that has not been made public.

Okafor's report states: "Halden Mining's share price will fall 20% by the end of the year as production disappoints." The report includes a detailed model, a description of his site visit, a list of the key assumptions and a section on risks. Okafor keeps his notes and the model in the firm's research files.

In May, Westbrook Partners receives an allocation of shares in an oversubscribed initial public offering by a lithium producer. The allocation is much smaller than the amount the firm requested. Marsh decides that the shares are suitable for all twelve of the accounts he manages that are permitted to hold small-cap resource stocks. Because the allocation is small, he gives all of the shares to the three largest of those accounts, which pay the highest fees, saying that splitting the shares across twelve accounts would make each position too small to matter. One of the three large accounts belongs to Marsh's father, who has been a fee-paying client for many years and whose account is managed under the same mandate and fee schedule as other clients' accounts.

Brandt reviews the year's activity. She notes that Westbrook Partners has written policies on the allocation of trades and on research, but that the allocation policy only says that "allocations must be fair" and does not explain how to allocate shares when an offering is oversubscribed. She wants to update the policy so that all portfolio managers apply the same method in future and so that clients can be told how allocations are made.

Brandt also plans to write guidance on issuer-paid travel and on how analysts should present forecasts in research reports. She asks Okafor to review the draft before it is sent to the firm's staff, because he is the analyst who travels most often to visit companies. Okafor says he is happy to help and suggests that the guidance should include examples of trips that would and would not be acceptable.