Standard VI(B) – Priority of Transactions

Standard VI(B) – Priority of Transactions specifies that investment transactions for clients or employers must take precedence over investment transactions for a CFA member.

Compliance

Reinforcing loyalty to clients, Standard VI(B) – Priority of Transactions clearly indicates that the order of transaction priority is (1) clients, (2) employer, and (3) member.

Nothing is inherently wrong with an investment professional making money from investments so long as a client is not put at a disadvantage by a trade, or an investment professional does not benefit personally from transactions undertaken for clients. This includes not making recommendations to clients or employers because a member wants to benefit personally from an investment.

A conflict may also arise when holding an account in the name of a family member. Perhaps an investment professional is tempted to make trades for a short issue thereby preventing clients from being able to invest in the same issue. For this reason, a member’s interests are extended to direct family, as well as any account in which a member may have a pecuniary interest.

Violation

To prevent violation, a firm should adopt a policy that includes the following elements:

  1. Limit personal investment in IPOs.
  2. Put restrictions on private placements (i.e. venture capitalist deals).
  3. Establish black-out periods in which investment professionals cannot transact for their personal portfolios, thereby ensuring transactions are first placed on behalf of clients and/or employers.
  4. Require reporting by personnel of securities holdings, and transaction timelines. This may also include requiring brokers to provide to employers duplicate receipts for all transactions.

Question

An allocation of shares from an oversubscribed IPO are made to Todd Blanco.  He plans to distribute the shares evenly among his clients, one of which is his sister-in-law.  Blanco allocates shares to his sister-in-law first 24 hours before he distributes shares to the rest of his clients.  Which statement is most likely true about Blanco?

A. He is in violation of Standard VI(B) – Priority of Transactions because he favored one client over others.

B. He is not in violation of Standard VI(B) – Priority of Transactions because he eventually made an equal distribution of shares for the oversubscribed IPO to all clients.

C. He is not in violation of Standard VI(B) – Priority of Transactions because his sister-in-law is not a blood-relative.

Solution

The correct answer is A.

Blanco is in violation of Standard VI(B) – Priority of Transactions by acting in a way that may benefit himself over clients. Nothing is inherently wrong, so long as a client is not put at a disadvantage by a trade or an investment professional does not benefit personally from transactions undertaken for clients.  In this case, we can assume his actions have an indirect benefit to himself.  The timeline of a 24 hours lag in investment for other clients may lead to a disadvantage to them.

 

Standard VI(C) – Referral Fees

Reading 3 LOS 3a

demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity

Reading 3 LOS 3b

distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards

Reading 3 LOS 3c

recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct

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