Ethics points that tripped me up

I (grudgingly) spent the better part of the last two days rereading the CFAI ethics (3 out of 6 on mock am so felt it was a must). I’ve made some notes of questions that popped up while I was reading, would appreciate some help: 1. What is the rule on IPOs–can the employer/member participate after all clients have been fairly dealt the IPO or should the employer/member completely stay away? 2. Private placements–what are they exactly and is their treatment just like IPOs? 3. What’s the difference between conflicts of interests and additional compensation? I know most of you will say that they’re similar in that additional compensation may lead to a conflict of interest (i.e. a lavish gift is additional compensation that causes a conflict of interest). But I ask because the book says that you need to DISCLOSE conflicts but SEEK PERMISSION AND DISCLOSE additional compensation–so you kind of need to know what’s what. Or are they not going to have a Q like this most likely? 4. Travel and hotel expenses from another firm–am I correct that best practice is to not accept but it does not violate the standards if the accomodations are modest and you disclose?

  1. I think so. Unless material non-public info is involved or there is restricted list that tells you can’t buy it. 2. Private placement is the same thing as IPO or secondary offering, just on a smaller scale offered to just sophisticated investors. Correct me if I’m wrong. To me private placement is the same thing as IPO on ethics part. 3. You can have additional compensation if your employer agrees. If i’m advising a client of the firm and he wants to reward me additionally for my great work and my employer is fine with it, then it’s fine. As far as conflicts, some of them you might not be able to avoid such as firm has IB and Research. If company sux IB still wants good rating, while Research dep has to be independent. There is a clear conflict of interest and must be disclosed, but there is nobody to as permission for. 4. Correct Dude you’ll nail ethics but it’s only 10%, don’t forget other stuff. Haha.

ok… on point three…bear in mind that client gifts are ok as long as you disclose and agree with employer… BROKER GIFTS ARE NOT ALLOWED UNDER ANY CIRCUMSTANCES… right?

yea gifts from clients are ok especially if its to reward for a good previous year because they wont really influence you–just tell employer so he can monitor if youre biasing that clients account. gifts from a subject firm are not really ok because it sends off a bad image

i think I saw a question where it was ok. It was something along the lines that broker gave a gift as a appreciation of long time business relationship. But if broker gives a gift because of higher volume or a big trade, that’s a no no, since the client is indirectly paying for that gift in reality.

I believe I remember reading that it was best practice to avoid private placements completely, even though there are certain scenarios where it was questionable, but not a violation. Private placements are private (duh). So there is no market (OTC i believe) which means less regulation and oversight. Does anyone else remember reading that private placements were a little more of a gray area than IPOs or am I making that up ?

Can someone give me reading # is CFAI text? I did a very quick glance but didn’t see anything. I’ve sold dpp/lp before and have real world experience with them, but I want to see the context that CFAI discusses them before I comment.

I’m pretty certain IPOs are an absolute no-no. The assumption is that IPOs are always immediate gain opportunities and will always be over-subscribed. For difference between additional comp and conflicts of interest… any questions where a CLIENT offers you some rewards (more money, vacation home, dinner) for your performance (say beating an index), it is 100% fine to accept once disclosed to your company. This falls under additional compensation because a client relationship already existed. Now, if a brokerage firm tried to do the same to win your business, this is never allowed, even if disclosed to management, because of the actual or potential conflict of interest. As for the hotel question, the only allowable situation will involve questions that state “in a remote, inconvenient location… no other accomondations…”

Isn’t there a waiting period for IPO participation?? Something like 30 days before and one week after an IPO?

Private placements are illiquid so I’m not sure how they can be equated to IPOs. Lock ups are usually 7-10 years with liquidations occuring, at the latest, 13-15 years. That will be in Private placement memorandum (prospectus). Reading #?

Regarding MCF’s second point, if the client reward is based on FUTURE performance (eg. get me a 10% return and i’ll let you use my condo in hawaii) that’s not allowed. However, a reward for something that’s already occured, (client is happy with analyst so gives him a gift) is okay.

Chad, I disagree. You are allowed to enter into future performance based arrangements with clients so long as they are disclosed.

no chad is right. if its based on future performance then youre going to be influenced to work harder for that account.

Nope, reason being you may favor the client in question and this may disadvantage other client accounts. It’s the standard on fair dealing and loyalty as well i think… i’m fairly certain man …

Sorry, but you’re wrong. Read page 75 of book one. The whole idea to protect the employer. Issues of fair dealing are governed elsewhere. If you read the section, you’ll not that any additional compensation requires disclosure of type of compensation, services covered, and DURATION OF ARRANGEMENT. That’s a forward looking statement.

i think chad is right…

Do what you want on the test – I think the book is pretty clear on this one.

hmmmmmmmm my 2 cents i will check later but as far as i can recall u need written consent from ur employer to enter into this arrangement in which he will monitor to make sure u do not favor the client…otherwise u cannot enter into this agreement

i think people are missing the point that this item has to do with loyalty to the employer more than anything else.

Okay, by the looks of it, if the gift is for something you have already performed, you can accept it only if you disclose it to your employer (so I’m guessing permission of the employer isn’t necessary here … ?) However, if the gift is contingent on future performance, the gift must be disclosed and the employers permission is needed to accept it due to the inherit risk that you might favor one client over the other.