ethics question - disclosure

let’s say a company has a new policy that portfolio manager who is successful in referring clients to the company’s new equity product will receive a bonus. A portfolio manager found the new product fits his client well, so he recommended the product to the client, but he did not tell the client the referal arrangement. Is that OK?

The PM must disclose the referral fee to the client so that the client has the opportunity to judge for themselves. He has violated the standards.

So i started studying for the next one. An analyst is sitting in a cafe and hears a well known trader at his firm talking about a huge buy order of an illiquid stock. He quickly leaves cafe and puts in an order for all his clients? Does this violate a) Priority of transactions b) due dilligence c) material info all of these? im confused as to this concept…

Vipon: C

C, because A doesn’t really make sense

How is it material info? You cannot assume that he is trading on material info. Priorty of transactions makes more sense no? He is essentially front running a co-workers orders…

it cant be priority, because he didnt violate that. He did not trade in his or his employers account before he traded in his clients’ accounts, so there is no violation. had he bought the stock first, and then bought it for his clients, then it would be a violation of priority I could argue for diligence and reasonable basis, not sure if due diligence is the same. Im guessing its not, and thats why B is incorrect. Also, we dont know for a fact that he didnt do his diligent research (although it appears he did not) C is correct. Knowing about a large buy order is material because you figure once the trade goes through it will drive up the stock price (especially for a small illiquid stock). It is non public because the public does not know about it. By trading on the knowledge that this trade is going to happend at somep oint in the future, he is trading on material non public info

The answer is clearly C.

i still don’t get the first question. i checked the 2010 standard book and it says it’s clear that clients know for sure the pm will get some extra benefits from pm’s boss for making a sale. it seems only referral arrangement with third party shall be disclosed. is that right?

If “b) due dilligence” is referring to reasonable basis , the answer is B.

b0tjack I believe you’re right about that. Obv the client should know you are making a commission by selling products. Where are these questions coming from?

JP_RL_CFA Wrote: ------------------------------------------------------- > If “b) due dilligence” is referring to reasonable > basis , the answer is B. No. If there is a huge buy order on an illiquid stock, the reasonable basis is that the buy order will push the price up. However, acting on that information violates MNPI so C is the obvious answer.

I disagree. I believe this violates all options. Priority of Transactions is always violated if your trading on material info because you are affecting the stock price. Due dilligence because you are not doing any research or have any basis for making this trade. Material Info because he is obv. trading on private information. Please correct me if I am wrong.

The answer is B because he did nothin in regards to research on the stock. He also did not see if that stock was suitable for his clients accounts. A is not the right answer because we do not know if that “huge trade” was already made or not…the question does not say. C is not correct because this information would not count as material, non public inforrmation. If the trade has already been made, then it would be in public records. I am making a lot of assumptions here, but to pick one right answer that would have to be what you would need to do.