Standards of Practice Guidance 2014 Show
The StandardInvestment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner. Test your understanding of Standard VI(B)
GuidanceStandard VI(B) reinforces the responsibility of members and candidates to give the interests of their clients and employers priority over their personal financial interests. This standard is designed to prevent any potential conflict of interest or the appearance of a conflict of interest with respect to personal transactions. Client interests have priority. Client transactions must take precedence over transactions made on behalf of the member’s or candidate’s firm or personal transactions. Avoiding Potential ConflictsConflicts between the client’s interest and an investment professional’s personal interest may occur. Although conflicts of interest exist, nothing is inherently unethical about individual managers, advisers, or mutual fund employees making money from personal investments as long as (1) the client is not disadvantaged by the trade, (2) the investment professional does not benefit personally from trades undertaken for clients, and (3) the investment professional complies with applicable regulatory requirements. Some situations occur where a member or candidate may need to enter a personal transaction that runs counter to current recommendations or what the portfolio manager is doing for client portfolios. For example, a member or candidate may be required at some point to sell an asset to make a college tuition payment or a down payment on a home, to meet a margin call, or so on. The sale may be contrary to the long-term advice the member or candidate is currently providing to clients.In these situations, the same three criteria given in the preceding paragraph should be applied in the transaction so as to not violate Standard VI(B). Personal Trading Secondary to Trading for ClientsStandard VI(B) states that transactions for clients and employers must have priority over transactions in securities or other investments for which a member or candidate is the beneficial owner. The objective of the standard is to prevent personal transactions from adversely affecting the interests of clients or employers. A member or candidate having the same investment positions or being co-invested with clients does not always create a conflict. Some clients in certain investment situations require members or candidates to have aligned interests. Personal investment positions or transactions of members or candidates or their firm should never, however, adversely affect client investments. Standards for Nonpublic InformationStandard VI(B) covers the activities of members and candidates who have knowledge of pending transactions that may be made on behalf of their clients or employers, who have access to nonpublic information during the normal preparation of research recommendations, or who take investment actions. Members and candidates are prohibited from conveying nonpublic information to any person whose relationship to the member or candidate makes the member or candidate a beneficial owner of the person’s securities. Members and candidates must not convey this information to any other person if the nonpublic information can be deemed material. Impact on All Accounts with Beneficial OwnershipMembers 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 a recommendation. Personal transactions include those made for the member’s 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. 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 the family relationship. If a member or candidate has a beneficial ownership in the account, however, the member or candidate may be subject to preclearance or reporting requirements of the employer or applicable law. Back to top Recommended Procedures for CompliancePolicies and procedures designed to prevent potential conflicts of interest, and even the appearance of a conflict of interest, with respect to personal transactions are critical to establishing investor confidence in the securities industry. Therefore, members and candidates should urge their firms to establish such policies and procedures. Because investment firms vary greatly in assets under management, types of clients, number of employees, and so on, each firm should have policies regarding personal investing that are best suited to the firm. Members and candidates should then prominently disclose these policies to clients and prospective clients. The specific provisions of each firm’s standards will vary, but all firms should adopt certain basic procedures to address the conflict areas created by personal investing. These procedures include the following:
Back to top Application of the StandardExample 1 (Personal Trading):Research analyst Marlon Long does not recommend purchase of a common stock for his employer’s account because he wants to purchase the stock personally and does not want to wait until the recommendation is approved and the stock is purchased by his employer.
Example 2 (Trading for Family Member Account):Carol Baker, the portfolio manager of an aggressive growth mutual fund, maintains an account in her husband’s name at several brokerage firms with which the fund and a number of Baker’s other individual clients do a substantial amount of business. Whenever a hot issue becomes available, she instructs the brokers to buy it for her husband’s account. Because such issues normally are scarce, Baker often acquires shares in hot issues but her clients are not able to participate in them.
Example 3 (Family Accounts as Equals):Erin Toffler, a portfolio manager at Esposito Investments, manages the retirement account established with the firm by her parents. Whenever IPOs become available, she first allocates shares to all her other clients for whom the investment is appropriate; only then does she place any remaining portion in her parents’ account, if the issue is appropriate for them. She has adopted this procedure so that no one can accuse her of favoring her parents.
Example 4 (Personal Trading and Disclosure):Gary Michaels is an entry-level employee who holds a low-paying job serving both the research department and the investment management department of an active investment management firm. He purchases a sports car and begins to wear expensive clothes after only a year of employment with the firm. The director of the investment management department, who has responsibility for monitoring the personal stock transactions of all employees, investigates and discovers that Michaels has made substantial investment gains by purchasing stocks just before they were put on the firm’s recommended “buy” list. Michaels was regularly given the firm’s quarterly personal transaction form but declined to complete it.
Example 5 (Trading Prior to Report Dissemination):A brokerage’s insurance analyst, Denise Wilson, makes a closed-circuit TV report to her firm’s branches around the country. During the broadcast, she includes negative comments about a major company in the insurance industry. The following day, Wilson’s report is printed and distributed to the sales force and public customers. The report recommends that both short-term traders and intermediate investors take profits by selling that insurance company’s stock. Seven minutes after the broadcast, however, Ellen Riley, head of the firm’s trading department, had closed out a long “call” position in the stock. Shortly thereafter, Riley established a sizable “put” position in the stock. When asked about her activities, Riley claimed she took the actions to facilitate anticipated sales by institutional clients.
About the Author(s)CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. CFA Institute works with academic institutions
with the University Affiliation Program. Academic institutions that embed a significant portion of the CFA Program Candidate Body of Knowledge (CBOK)—including the Code of Ethics and Standards of Professional Conduct—into their curriculum may be eligible to participate in the University Affiliation Program. Which of the following is needed to open a new customer account?There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number.
When opening an account to buy options Which of the following signatures is needed on the options new account form?The options new account form, required for options trading, is signed by the registered representative, who is attesting to the fact that the information on the form is true; and must be approved before the account is traded by the registered options principal (Series 4 license).
What is not required to be included on the new account form?What is not required to be included on the new account form? Explanation: A new account application must include the customer's name, physical address, and date of birth. The only signature required on the new account application is the principal's.
When opening an account over the phone to trade stocks and options Which of the following signatures is not needed on the new account form S?The customer's signature is not required on a new account form. It is required on the options agreement, margin agreement and loan consent agreement. The regular new account form for equity securities requires the signature of the registered representative and the general principal (Series 24 license).
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