Reading 2-VI: Standards of Professional Conduct & Guida

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CFA Institute Area 1-2: Ethical and Professional Standards
Session 1: Code of Ethics and Professional Standards
Reading 2-VI: Standards of Professional Conduct & Guidance: Conflicts of Interest
LOS B.: Priority of Transactions.

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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. Rocks wife has an account at Best Trade Co. that contains Biomed stock. According to the Code and Standards, trading on Rocks wifes account can begin:

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

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

C) immediately, if the company already made their final decision about the recommendation.

D) 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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Answer and Explanation

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.

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.

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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 immediately on behalf of her clients then act on her behalf.

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

D) refrain from acting until she notifies her supervisor.

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Answer and Explanation

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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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) may not invest in the stock because of his position as a portfolio manager.

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

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

D) 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.

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Answer and Explanation

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.

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An unpaid intern at an investment firm has the task of photocopying unannounced investment recommendations after all regular employees have left for the day. With respect to Standard VI(B), Priority of Transactions, the firm:

A) is acting appropriately by having an unpaid intern do the job.

B) is acting appropriately by having the intern perform the task after all employees have left.

C) cannot be in violation because Standard VI(B) does not address this issue.

D) is probably violating the Standard.

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Answer and Explanation

Among other things, Standard VI(B) covers how the firm keeps unannounced information confidential. At a minimum, the intern should be supervised by someone familiar with the Code and Standards. The firm needs to have adequate procedures for preventing the dissemination of information before it is released to the public. One method of doing so is to limit the number of access persons privy to confidential information. An intern should not be an access person.

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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 own the stock 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 with Standard V(A), Diligence and Reasonable Basis.

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

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

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Answer and Explanation

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 own the stock.

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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) A person working in the mail room.

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

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

D) An agent from a government agency that reviews the compliance procedures of the analyzing firm.

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Answer and Explanation

Persons with access to information during the normal preparation of research recommendations are subject to Standard VI(B). A compliance officer should not have access to such materials. An independent auditor is not involved in the normal preparation of research recommendations.

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An analyst has the opportunity to offer his clients shares in a hot new issue. One of the analysts 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 even if he has a direct personal interest in his brother's account.

B) a violation of the Standard under all circumstances.

C) congruent with the Standard under all circumstances.

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

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Answer and Explanation

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

A) all of these.

B) his employer.

C) his clients.

D) personal accounts.

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Answer and Explanation

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

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

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

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

D) may be a violation because clients should not be offered "hot" securities.

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Answer and Explanation

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 analysts interests ahead of the clients interests.