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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 even if he has a direct personal interest in his brother's account.

C) congruent with the Standard as long as he does not have 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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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) only after the recommendation is announced to the general public.

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

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

A) his clients.

B) his employer.

C) both of these.

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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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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 supervisory analyst who reviews all research reports prior to dissemination.

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

C) A person working in the mail room.

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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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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 IV(A), Loyalty to Employer.

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

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

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

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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Lee Hurst, CFA, is an equity research analyst for a long-term investment fund. His annual bonus is linked to quarterly trading profits. Under a new policy, the quarterly assessment period is switched to a monthly assessment period. According to the Code and Standards, best practices dictate:

A) requiring Hurst to obtain permission from each client prior to implementation of the new policy.

B) keeping the policy change private as a trade secret.

C) updating disclosures when the policy change is implemented.

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Standard VI(A) "Disclosures of Conflicts" recognizes this policy as a potential conflict of interest as members and candidates could be incentivized to favor short-term trading gains over long-term value creation. Best practices dictate updating disclosures when the policy change is implemented. The long-term investors should know how members and candidates are compensated, especially when there is the potential for conflicts of interest.

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To comply with the CFA Institute Standards, employees have a duty to disclose possible conflicts of interest to:

A) neither employers nor clients, but the member must use "prudent judgment."

B) only their employer.

C) both their employer and their clients.

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According to Standard VI(A), Disclosure of Conflicts, employees have a duty to disclose to both their employer and their clients all matters which may impair their independence and objectivity or interfere with their duties to employer, clients, and prospects.

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The following scenarios refer to two analysts who are employed at Global Securities, a large brokerage firm.

• Paula Linstrom, CFA, is instructed by her supervisor to write a research report on Delta Enterprises. Delta's stock is widely held by institutional and individual investors. Although Linstrom does not own any of Delta's stocks, she believes that one of her friends may own 10 shares of Delta. The stock currently sells for $25 per share. Linstrom does not believe that informing her employer about her friend's possible ownership of Delta shares is necessary.
• Hershel Wadel, a member of CFA Institute, is asked by his supervisor to write a research report on Gamma Company. Wadel's wife inherited 500 shares of Gamma Company from her father when he died five years ago. Gamma stock currently sells for $35 per share. Wadel does not believe that informing his employer about his wife's ownership of Gamma shares is necessary.

According to CFA Institute Standards of Professional Conduct, which the following statements about Linstrom and Wadel's conduct is most accurate?

A) Neither of these analysts must disclose a potential conflict of interest.

B) Both of these analysts must disclose a potential conflict of interest.

C) Only one of these analysts must disclose a potential conflict of interest.

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The possibility that Linstrom’s friend may own a few shares of Delta's stock, worth a low dollar amount, does not create a conflict of interest such potential ownership could not reasonably be expected to interfere with her duty to employer or ability to make unbiased and objective recommendations. On the other hand, Wadel has a beneficial interest in his wife's ownership of Gamma shares. Standard VI(A) Disclosure of Conflicts requires that Wadel disclose this information so that his employer can make the proper determination.