Ethical and Professional Standards
Reading 3. Guidance for Standards I-VII
Learning Outcome Statements
a. demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity;
b. distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards;
c. recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
CFA Curriculum, 2020, Volume 1
Subject 19. Standard VI (B) Priority of Transactions
B. Priority of Transactions.
Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.
This standard is designed to prevent any potential conflict of interest or even the appearance of a conflict of interest with respect to the analyst's personal transactions. Transactions for clients and employers shall have priority over transactions in securities or other investments in which a member is the beneficial owner so that such personal transactions do not operate adversely to clients' or employers' interests. If members make a recommendation regarding the purchase or sale of a security or other investment, they shall give their clients and employer adequate opportunity to act on their recommendations before acting on their own behalf.
For purposes of the Code and Standards, a member is a "beneficial owner" if the member has:
- A direct or indirect pecuniary interest in the securities.
- The power to vote or direct the voting of the shares of the securities or investments.
- The power to dispose or direct the disposition of the security or investment.
This standard applies to all access persons. Personal transactions include those made for the member's own accounts, family accounts, and accounts in which the member has a direct or indirect pecuniary interest. Note that family accounts that are also client accounts should be treated like any other firm accounts. Neither special treatment nor disadvantage should be given to such accounts.
Procedures for compliance
Members should encourage their firms to prepare and distribute a Code of Ethics and compliance procedures, applicable to principals and employees, emphasizing their obligation to placing the interests of clients above personal and employer interests. The form and content of such compliance procedures depend on the size and nature of each organization and the laws to which it is subject. In general, however, the code and procedures should do the following:
- Limited participation in equity IPOs.
Members and candidates should not benefit from the position that their clients occupy in the marketplace - through preferred trading, the allocation of limited offerings, and/or oversubscription.
- Restriction on private placements.
As participants in private placements have an incentive to recommend these investments to clients, members and candidates should not be involved in these transactions, which could be perceived as favors or gifts designed to influence future judgment or to reward past business deals.
- Establish blackout/ restricted periods.
Managers or employees involved in the investment decision-making process should be prevented from initiating trades in a security for which their firms have a pending "buy" or "sell" order within a specific period before the order is executed or cancelled. They should not be allowed to do "front running."
- Reporting requirements.
- Disclosure of holdings in which the employee has a beneficial interest.
- Providing duplicate confirmations of transactions. Investment professionals should ask their brokers to supply duplicate copies to their firms of all their personal securities transactions and copies of periodic statements.
- Pre-clearance procedures. Investment professionals should clear all personal investments, to identify possible conflicts before the execution of personal trades.
- Disclosure of policies.
You receive a news release that a small firm in the industry that you follow has obtained a major contract with a multinational firm. The contract will double sales for the small firm. You note that the small firm's stock price has already increased from $12 to $13. You immediately submit an order to buy 1,000 shares. After your order is confirmed, you send an email advisory to all clients summarizing the news and suggesting that this is a buying opportunity. This is a clear violation of this standard. Clients had no opportunity to act on this information prior to your personal trading.
An analyst tells her father about a tender offer. She does not trade for her client until her father has made the trade. She violates this standard by placing her father's interest above her clients'.
An analyst maintains an account in his wife's maiden name at another firm. Using that account, he often buys hot issues in which his clients cannot participate. He violates the standard by trading for his wife before his clients can acquire shares. He also should disclose the trading for the account in his wife's name to his employer.
David is a portfolio manager. He manages the retirement account established with the firm by his parents. David does not trade for this account until all other accounts are traded. He violates this standard by discriminating against his parents' account. As fee-paying clients to the firm, his parents should be treated the same as any other clients.
A member manages a portfolio of 20 clients. Included in this portfolio is the portfolio of a family member. The member may NOT first allocate transactions to all the other clients in the portfolio and then only to the family member, as this would be unfairly prejudiced against the family member. The family member's account must be treated like a normal client account.
User Contributed Comments 9You need to log in first to add your comment.
no Proirity of transaction for anybody
trade after clients & employer. don't trade during decisions are pending. family members = normal clients.
best is to make one of your family members as your cient :)
Whole page in one sentence, perfect asianl6, you make summaries of analyst notes? I am interested;)
I would add the always disclose part but otherwise perfect summary
I think immediate family members :"wife, son, daughter" as personal interest.
Others like family members 'fathers, sisters, brothers, mothers' if they are fee-paying in firm's account they are "normal clients".
so does CFA professional standard prohibits participation in IPO and private placement? Or notification to clients on the part of member would be suffice? It's still unclear here. The caption says limited participation (which means allowable), then it explains member should not benefit from... It sure does make a lot of sense here.
example 4 is very good