Ethics - IPO & Additional Compensation

I have two doubts in the Ethics section (which is a wee bit emabrasssing considering this is the third time I’m having a look at it!). Here goes -

  1. In case of an IPO, the member gets the shares only after the clients get their share. Now if the member’s wife has a discretionery account with the firm, should she be allocated shares on a pro rata basis with the other clients? According to an example in the book, she should not. But what if the parents have an account with the firm? I just wanted soem clarity on when is it alright to place the account at par with clients and when not. The Standards use beneficial interest as an indicator, but that is a little nebulous to me.

  2. Could someone please explain to me the difference in 4A, 4B and 1B? So if my secondary job competes with my primary one, I need permission from all parties and that is covered under 4B right? 4A only includes secondary jobs which do not complete with my employer? Am I right here?

Member’s wife/parents is considered a client as long as they have an account with firm. By not allocating shares equitably to those account is breach of fair dealing.

Thanks! So I gather that if the account belongs to a family member and is non-fee paying then you allocate IPO shares to clients and if anything remains, to the member’s family account.

not entirely true. wife/kids are different than uncles or aunts.

If there is a direct benefit to the advisor, its a no-no.

WIfe/ Kid/ Uncle/ aunt/ dad/ mom…as long as they are clients, then get similar benefits. They get their allocation. At least thats what my understanding is. You cannot discriminate any client.

NOT true. With your wife/husband, you have a beneficial interest. Uncles, aunts, and parents you don’t.

“Members or candidates may undertake transactions in accounts for which they are a beneficial owner only after their clients and employers have had adequate opportu- nity 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.”

(Institute 125) Institute, CFA. Level III 2013 Volume 1 Ethical and Professional Standards. John Wiley & Sons (P&T), 6/18/2012. .


To sum it all up:

If your parents, aunts, uncles, grandparents, etc. have a fee-paying account, then you allocate equitably.

If your wife/husband/children have a fee-paying account, you allocate ONLY after distributing to your clients. Your wife’s account is considered a “personal” account, not a “family” account. (the distinction lies in the beneficial interest…do you have access to your parents personal bank accounts? No, probably not. Do you have access to your wife’s bank accounts? Yes, they’re pretty much yours. THIS is beneficial interest).

now its crystal

what about mistresses?

offshore… haha

Depends on whether you have fathered their children.

what about if you children are grown up and moved out. Clearly you no longer have beneficial interest

It is still not clear. In example 2 on 127, Baker’s husband is not a client. What if husband was a fee paying direct client of baker? Example 4 is related to parents, which we are clear on. The text says you cannot trade for accounts that you have beneficial ownership before client accounts (doesnt talk about what if beneficial ownership account is also a client). It also says " 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." When they say family, I would think it would meand everyone - including wife and kids. Also, i can have a beneficial ownership in my father’s account, who could be a fee paying client.

Although that is correct, it does imply that she has beneficial interest in her husband’s account. Given that…

They make this clear in EOC question #81: “When an issue is oversubscribed, allocations cannot be made to accounts where members and candidates have beneficial interest.”

EDIT: I take that back, in the vignette for question #81 it says that his wife’s account is non-fee-paying. However, the answer doesn’t mention that as having an effect… so I guess, still up in the air.

That could be true, but I would image it would be clear in the context:

“Mr. Manager works at a firm in which his father is a fee-paying client” might get a different answer than:

“Mr. Manager works at a firm in which his father is a fee-paying client. His mother died 5 years ago, and since then Mr. Manager’s father has lived with him and Mr. Manager manages all his finances.”