Reading 2-VI: Standards of Professional Conduct & Guidanc 2011, accounts, center, option, trade

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Session 1: Ethical and Professional Standards
Reading 2-VI: Standards of Professional Conduct & Guidance: Conflicts of Interest

LOS B.: Priority of Transactions.

 

 

An analyst likes to trade options in her own account. She does not deem any of her client accounts suitable for option trading. When she finds a favorable options position, in accordance to Standard VI(B), Priority of Transactions, she should:

A) first tell her clients about it before acting herself.

B) act on it on her own behalf as she sees fit.

C) refrain from acting until she notifies her supervisor.

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This is not a violation of Standard VI(B), Priority of Transactions, because the investment is not suitable for her clients. If the analyst believes that none of her clients should trade options, she is not obligated to advise them in this instance.

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Gordon McKinney, CFA, works in the trust department of a bank. The bank's trust account holds a large block of a particular company. McKinney learns that this company is going to buy back one million shares at a 15% premium to the market price on a first-come-first-served basis. McKinney immediately tells his mother-in-law to tender her shares but waits until the end of the day to tender the trust's shares. McKinney has most likely violated:

A) Standard VI(B), Priority of Transactions.

B) Standard IV(A), Loyalty to Employer.

C) Standard II(A), Material Nonpublic Information.

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Standard VI(B), Priority of Transactions, applies. If an analyst decides to make a recommendation about the purchase or sale of a security, he must give his customers or employer adequate opportunity to act on this recommendation before acting on his own behalf. Personal transactions include those made for the member's own account and family accounts. Here, McKinney violated Standard VI(B) by acting on his mother-in-law's behalf and then waiting until the end of the day to act on his employer's behalf. 

Explanations for other responses:

• Standard IV(A), Loyalty to Employer, does not apply. This standard concerns a member competing with his/her employer (independent practice), for example a member who engages in outside consulting.
• Standard II(A), Material Nonpublic Information, does not apply. The question does not indicate that the information is not public.
  

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A firm produces regular proprietary research reports on various companies. According to Standard VI(B), Priority of Transactions, which of the following would be an “access person?”

A) An independent auditor with access to material, non-public information on a company being analyzed.

B) A person working in the mail room.

C) A supervisory analyst who reviews all research reports prior to dissemination.

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Persons with access to information during the normal preparation of research recommendations are subject to Standard VI(B). An independent auditor is not involved in the normal preparation of research recommendations.

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Standard VI(B), Priority of Transactions, applies to transactions an analyst takes on behalf of:

A) his clients.

B) both of these.

C) his employer.

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Standard VI(B) addresses the treatment of both these accounts. The accounts of clients and employers have priority over personal accounts.

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Samuel Goldstein, CFA, is an analyst for Tamarack Securities. Goldstein’s father, Reuben, has a client account at Tamarack. In ordering trades, Goldstein should place orders in:

A) his clients' accounts first, his father's account second, and his account last.

B) his clients' and his father's accounts in the first group and his personal accounts in the second group.

C) all accounts simultaneously.

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Standard VI(B), Priority of Transactions, provides that transactions for clients have priority over personal trades. Family accounts that are considered client accounts receive the same treatment as client accounts.

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Andy Rock, CFA, is an analyst at Best Trade Co. The company is going to announce a sell recommendation on Biomed stock in one hour. Rock was a member of the team who reached the decision on Biomed. Rock’s wife has an account at Best Trade Co. that contains Biomed stock. According to the Code and Standards, trading on Rock’s wife’s account can begin:

A) as soon as the information is disseminated to all clients.

B) only after the recommendation is announced to the general public.

C) only after Rock, as a beneficial owner, has given an appropriate amount of time for clients and his employer to act.

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Family accounts that are client accounts should be treated like any other firm account and should neither be given special treatment nor be disadvantaged because of an existing family relationship with the member or candidate. Members or candidates may undertake transactions in accounts for which they are a beneficial owner only after their clients and employers have had adequate opportunity to act on the recommendation. Personal transactions include those made for the member or candidate's own account, for family (including spouse, children, and other immediate family members) accounts, and for accounts in which the member or candidate has a direct or indirect pecuniary interest, such as a trust or retirement account. It could be argued that Rock is a beneficial owner of his wife's account and the reason why his wife's account should be treated like any other client account is because it does not state that Rock makes the trades in his wife's account. From that we are to infer that another person other than Rock is managing his wife's account thus she should be treated like any other client.

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An analyst has the opportunity to offer his clients shares in a “hot new issue.” One of the analyst’s clients is his brother. When the new issue comes out, for those clients he deems it would be appropriate, he offers them an equal share. He includes his brother in that group. With respect to Standard VI(B), Priority of Transactions, this is:

A) congruent with the Standard if his brother is not a 'covered person'.

B) congruent with the Standard as long as he does not have a direct personal interest in his brother's account.

C) congruent with the Standard even if he has a direct personal interest in his brother's account.

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Client accounts that belong to family members should be treated like any other account so long as there is no direct interest on the part of the analyst. In other words, these types of accounts should not be at a disadvantage relative to other client accounts when there is no direct interest on the part of the analyst overseeing the account.

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An analyst has a large personal holding of a security, and he has just determined that market conditions warrant selling this security. The analyst contacts clients who have a position in the security and advises them to sell some or all of the security. After waiting 24 hours, he sells the security from his personal accounts. This is:

A) a violation of Standard VI(B), Priority of Transactions.

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

C) congruent with Standard VI(B), Priority of Transactions.

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According to Standard VI(B), an analyst must give clients the first opportunity to buy or sell a security before the analyst acts on his own behalf. A 24-hour waiting period seems reasonable under the circumstances presented. The analyst seems to have a reasonable basis, and there is no reason to believe that he is violating Standard III(B) since he contacted all of the clients who have a position in the security.

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An analyst routinely has the opportunity to offer his clients the opportunity to purchase “hot new issues.” He tells his clients that he will distribute each issue equally among those interested, with himself included in the distribution. The clients do not object to this. With respect to Standard VI(B), Priority of Transactions, this:

A) may be a violation despite the clients' approval.

B) cannot be a violation because the clients know of the practice and agree.

C) may be a violation because it is impossible to distribute hot new issues equally.

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Just because the clients know of a practice does not make it right. The analyst must put the clients first. It is a violation for the analyst to participate in a “hot new issue” which can lower the allocation to any given client below what that client would prefer. This is tantamount to putting the analyst’s interests ahead of the clients’ interests.

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An analyst, who is a CFA Institute member, manages a high-grade bond mutual fund. This is his only professional responsibility. When the analyst comes across a speculative stock investment that he feels is a good investment for his personal portfolio, the analyst:

A) is in violation of Standard IV(A), Loyalty to Employer, by spending time analyzing stocks when he should only analyze bonds.

B) must notify his supervisor about the stock according to Standard VI(B), Priority of Transactions, to see if it is appropriate for the portfolio that he manages.

C) may invest in the stock because the analyst would not purchase the stock for the bond portfolio he manages.

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The problem says the analyst “came across” the speculative stock investment. We do not know if the analyst neglected his duties. Since such an investment is clearly not appropriate for a high-grade bond fund, the analyst may invest in the stock without any restrictions relating to the fund.