CFA Practice Question

CFA Practice Question

Cindy Granger usually allocates IPO shares to her clients on the basis of pro rata allocations and suitability standard. In a recent hot IPO, she was offered 1,500 shares by the broker for directing trades in their firm's direction. Cindy pays for the shares from her personal funds. A few weeks after the allocation, her shares had gone up over 50%. Cindy has ______
A. violated Standard III (A) - Loyalty, Prudence, and Care, and the broker has violated Standard III (B) - Fair Dealing.
B. violated no standard but the broker has violated Standard III (B).
C. violated Standard III (A) but the broker has not violated any standard.
Explanation: Cindy has violated the standard on fiduciary duty by accepting the shares of a hot IPO which are in short supply. This has resulted in her clients receiving a lower allocation. Cindy has received indirect compensation and has also violated Standard VI (A) - Disclosure of Conflicts.

User Contributed Comments 11

User Comment
Carol1 Fair dealing relationship the fair among clients, and Priority transaction among clients employer and profensionals. I would say Cindy voilance priority transaction.
nike no Carol. She bought these IPO shares for herself and directing trades of other shares to the broker. Priority transaction would be trading the SAME shares for herself and then clients.
steved333 Could also have violated Referral Fees.
Rob09 Why hasn't the broker violated the standard? Does the phrase "she was offered 1,500 shares by the broker for directing trades in their firm's direction" violate fair dealing?
mixer Any one explain prorata Basis
arudkov 2 mixer - pro rata - $100 mln IPO. $150 mln votes. if your vote is $50 mln - you will get 50/150=33.33% of IPO value. that means 33.33%*$100mln=$33.33 mln of hot IPO is yours
chandsingh I dont see why the broker has not violated the rule of fair dealing by inducing cindy via a soft dollar bribe to put her interests ahead of customers?
indrayudha Perhaps because the broker is not a CFA charterholder / candidate?
jjhigdon Also thought the broker violated the standard, since that exact behavior prompted the creation of, and is now prohibited by, two FINRA regulations - FINRA 5130 and 5131...
mstroh314 I don't get it.

III(B) mentions: "Members and candidates are prohibited from withholding such securities for their own benefit and must not use such securities as a reward or incentive to gain benefit."
(page 72, directly before Recommended Procedures)

This seems to be exactly what the broker has done. So why no violation here? The "maybe no CFA charterholder" is not a good reason in my opinion, because the same could be said of Cindy (no CFA charterholder is mentioned in the text, but it makes sense to assume Cindy is a charterholder or candidate).
Lambo83 The broker doesn't have a relationship with Cindy's clients - only Cindy. Cindy is his client so he has allocated some of the IPO to her. Nothing wrong with that. Cindy, however, naughty girl.
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