Reading 2-III: Standards of Professional Conduct & Guida 2010, following, border, center, style

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Session 1: Ethical and Professional Standards
Reading 2-III: Standards of Professional Conduct & Guidance: Duties to Clients and Prospective Clients

LOS B.: Fair Dealing.

 

 

 

Which of the following would be a violation of Standard III(B), Fair Dealing?

A) Having well defined guidelines for pre-dissemination.

B) Limiting the number of employees privy to recommendations and changes.

C) Trading for regular accounts before discretionary accounts.

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Do not discriminate against a client when disseminating investment recommendations. If the firm offers different levels of service, this fact must be offered and disclosed to all clients. The other choices are necessary parts of the Standard. The Standard actually says to have published personal guidelines for pre-dissemination, which implies that the guidelines be well-defined.

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An analyst meets with a new client. During the meeting, the analyst sees that the new client’s portfolio is heavily invested in one over-the-counter stock. The analyst has been following the stock and thinks it will perform well in the long run. The analyst arranges through a brokerage firm to simultaneously sell a large number of shares of the stock via a series of cross trades from the new client’s portfolio to various existing clients. He arranges the trades to be executed at a price that approximates the current market price. This action is:

A) not in violation of the Standards.

B) a violation of Standard III(A), Loyalty, Prudence, and Care.

C) a violation of Standard III(B), Fair Dealing.

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There is no violation. It is in the best interest of the client to be diversified and selling via a series of cross trades will likely reduce price impact costs when compared to selling directly into the market. The analyst appears to have reasonable basis for putting the securities in the accounts of other clients.

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Which of the following statements is least accurate regarding being a part of Standard III(B), Fair Dealing?

A) Shorten the time between decision and dissemination.

B) At the same time notify clients for whom an investment is suitable of a new investment recommendation.

C) Maintain a list of clients and their holdings.

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All of these are part of Standard III(B) except notifying clients at the same time. Standard III(B) states that clients for whom the investment is suitable should be notified at approximately the same time.

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An analyst goes straight from a research seminar to a meeting with a prospective new client with whom she has never been in contact. The analyst is very excited about the information she just received in the seminar and begins showing the prospect the new ideas her firm is coming up with. This is most likely a violation of:

A) Standard III(B), Fair Dealing.

B) both of these.

C) Standard III(C), Suitability.

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It is a violation of Standard III(B) because the analyst should act first on behalf of existing clients whose needs and characteristics she already knows. It is a violation of Standard III(C) because she has never met the prospect and does not know if the new ideas are appropriate for the prospect. Thus, “both of these” is the best response.

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A money management firm has the following policy concerning new recommendations: When a new recommendation is made, each portfolio manager estimates the likely transaction size for each of their clients. Clients are notified of the new recommendation in the order of their estimated transaction size—largest first. All clients have signed a form where they acknowledge and consent to this allocation procedure. With respect to Standard III(B), Fair Dealing, this is:

A) a violation of the standard.

B) not a violation because the clients have signed the consent form.

C) not a violation because the clients are aware of the policy.

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Such a policy is a violation of the Standard and client acknowledgement and/or consent does not change that fact.

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In securing the shares for all accounts under her management, Linda Kammel of Northwest Futures purchased three blocks of shares at three different prices. She then allocated these shares by placing shares from the first block in accounts with surnames beginning with A-G. The second was allocated over accounts H-P, and the third over Q-Z. This action is:

A) consistent with her responsibilities under the Code and Standards.

B) permissible only if the clients are informed of the allocation procedure.

C) not permissible under the Code and Standards.

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Standard III(B) requires a member to deal fairly with all clients when taking investment actions. Since she knew at the outset that she was going to place shares in all accounts, regardless of the first letter of the surname, all accounts must participate on a pro-rata basis in each block in order to conform to the Standard. Her actions constitute a violation of the Standard concerning fair dealing.

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