Standard VI(B) – Priority of transactions

Client and employer investment transactions must take precedence over investment transactions in which a member or candidate is the beneficial owner.

Application 1: Family Account as Equals

Gia Davies, a senior trader at InvestCorp Brokerage, has recently helped her sister open up a standard fee-paying brokerage account with InvestCorp’s Brokerage Divison. One of InvestCorp’s investment banking clients, InfoTrak Inc., is set to go public in the next few weeks through an initial public offering.

Which of Davies’s actions would most likely violate Standard VI (B) – Priority of Transactions?

1. Taking no action and allowing her sister’s account to be treated like any other standard fee-paying account.
2. Increasing the allocation of InfoTrak’s shares in her sister’s brokerage account.
3. Failing to disclose the family relationship to the compliance team.

Solution

The correct answer is B.

Davies increasing her sister’s allocation in InfoTrak’s shares would violate Standard VI (B) – Priority of Transactions. Her sister is a fee-paying client and should be treated like any other client – she should not receive favorable treatment. Her allocation should be treated in the same manner as any other fee-paying client.

Application 2: Personal Trading and Disclosure

Benjamin Cook was a research intern at a prominent active management firm. He purchases a luxury car and several designer accessories during his eight-month-long internship. Regina Perry, chief compliance officer at the firm, is responsible for monitoring personal stock trades for all employees. She investigates Cook’s personal trades and finds that Cook had made significant profits by selling (shorting) stocks just before they were put on the firm’s “SELL” list.

Cook had omitted several personal transactions on his monthly personal trading form. In addition, he failed to submit his trading forms over the last two months of his internship.

Have Cook and (or) Perry violated Standard VI(B) – Priority of Transactions?

1. Neither Cook nor Perry has violated Standard VI(B) – Priority of Transactions.
2. Cook violated Standard VI(B) – Priority of Transactions.
3. Both Cook and Perry have violated Standard VI(B) – Priority of Transactions.

Solution

The correct answer is B.

Cook violated Standard VI(B) – Priority of Transactions by placing his trades before his client’s trades.

Additionally, Perry, the chief compliance officer, has violated Standard IV(C) – Responsibility of Supervisors by allowing Cook to continue his duties without accurate and infrequent submission of his personal transaction form. Note that if Cook had passed on the firm’s recommendations to an individual who traded the security, the use of the information would be a violation of Standard II(A) – Material Nonpublic Information.