Standard I: Professionalism: practice question

Petra Halloran, CFA, covers Ostergaard Renewables for Tavistock Research under a flat monthly fee that every report discloses. After learning that the company's largest customer is defecting, Halloran downgrades the shares from Buy to Sell. Ostergaard's chief executive protests that his company pays for the coverage and demands the earlier rating back. Halloran's most appropriate action is to:

1. restore a more favorable rating for the remainder of the engagement, because an issuer that funds coverage is entitled to a constructive view of its prospects
2. maintain the Sell rating her analysis supports, because the flat, disclosed fee gives the issuer no claim to a particular recommendation and her duty runs to readers
3. retain the Buy while applying an unusually high burden of proof to any downgrade of a paying issuer, so the change cannot be mistaken for bias

Show answer and explanation

Correct answer: B

Explanation: B is correct. Under a flat, fully disclosed fee, the issuer's payment buys research attention but no control over its outcome, and Halloran's obligation runs to the readers who rely on her analysis, so the rating must stand where her work places it. A is incorrect because funding coverage does not entitle the payer to a constructive assessment; restoring a rating under commercial pressure would subordinate her analysis to the issuer's wishes. C is incorrect because the burden of proof behind a rating change must be the same whatever the payer expects; imposing a special hurdle on negative conclusions is itself a distortion in the payer's favor.