Reading 2-VI: Standards of Professional Conduct & Guidanc 2011, purchase, center, issues, style

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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 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 despite the clients' approval.

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 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 as long as he does not have a direct personal interest in his brother's account.

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

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, 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 invest in the stock because the analyst would not purchase the stock for the bond portfolio he manages.

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

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

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

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

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

C) is probably violating the Standard.

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

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

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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.