Ethics Q - CFAI Sample

Alexander Newton, CFA, is the chief compliance officer for Mills Investment Limited. Newton institutes a new policy requiring the pro rata distribution of new security issues to all established discretionary accounts for which the new issues are appropriate. The policy provides for the distribution of new issues to newly established discretionary accounts after the one-month anniversary date. This policy is disclosed to all existing and potential clients. Did Newton violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because the distribution policy fails to treat all discretionary accounts equally. C. Yes, because disclosure of inequitable allocation methods does not fulfill the duty for fair and equitable trade allocation procedures. D. Yes, because the discretionary accounts for which the new issues are not appropriate should still be offered the chance to participate in the offerings. ---------------------------------------------------------------------------------------------------------------- The answer being C but what’s wrong with B?

Because although other accounts have not been established for one month, that is not fair dealing with ALL clients! Whether or not they have accounts for 2 weeks or 2 years, they must all be treated fair and in the same manner…

What should it read then for it to be not a violation? Newton institutes a new policy requiring the pro rata distribution of new security issues to all clients. And once this service has been offered to all clients Newton pro ratas the new security issues to all appropiate discretionary accounts. Would that be correct? What I am trying to get at is that if they have discretionay and non-discrentianary clients who gets the first choice? I know it should be equal but how does that work?

B is wrong because it should be “fairly” instead of “equally”. Equally is not required. E.g. level of service can be different.