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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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.

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Lance Tuipulotu, CFA, is a portfolio manager for an investment advisory firm. He plans to sell 10,000 shares of Park N’Wreck, Inc. to finance his daughter’s new restaurant venture, but his firm recently upgraded the stock to "strong buy." In order to remain in compliance with Standard VI(B) "Priority of Transactions," Tuipulotu must:

A) not sell the shares of Park N’Wreck.

B) notify his firm of his intention to sell the shares before selling the shares.

C) delay selling the shares until a firm client makes an offsetting purchase to avoid having a market impact.

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Standard VI(B) "Priority of Transactions" does not prohibit Tuipulotu from trading opposite the firm’s recommendation, but he should notify his firm first. Note that if Tuipulotu were a research analyst covering Park N’Wreck, he may be prevented from selling the security if his firm claims compliance with the CFA Institute’s Research Objectivity Standards.

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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.