Question

Smith, a research analyst with a brokerage firm, decides to change his recommendation for the common stock of Green Company, Inc., from a 'buy' to a 'sell.' He mails this change in investment advice to all the firm's clients on Wednesday. The day after the mailing, a client calls with a buy order for 500 shares of Green Company. In this circumstance, what should Smith do?

1) Accept the buy order and execute it
2) Reject the buy order and inform the client about the change in recommendation
3) Accept the buy order but inform the client about the change in recommendation
4) Reject the buy order without informing the client about the change in recommendation

Answer 1

Smith should reject the buy order and inform the client about the change in recommendation for Green Company's stock to ensure the client makes an informed decision.

Step-by-step explanation:

In the scenario where Smith, a research analyst, has changed his recommendation for the common stock of Green Company, Inc. from 'buy' to 'sell', the appropriate action for Smith when a client calls with a buy order for 500 shares is to inform the client about the change in recommendation before executing any trades. This means that the correct action would be option 2 or option 3, but given that the question does not specify if Smith can execute the order after informing the client, the safest and most ethically sound approach would be to reject the buy order and inform the client about the change in recommendation (option 2). This is in line with the duty of a research analyst to provide the most current and relevant information to the client to ensure informed decision making.