An analyst meets with a new client. During the meeting, the analyst sees that the new client’s portfolio is heavily invested in one over-the-counter stock. The analyst has been following the stock and thinks it will perform well in the long run. The analyst arranges through a brokerage firm to simultaneously sell a large number of shares of the stock via a series of cross trades from the new client’s portfolio to various existing clients. He arranges the trades to be executed at a price that approximates the current market price. This action is: A) not in violation of the Standards. B) a violation of Standard III(A), Loyalty, Prudence, and Care. C) a violation of Standard III(B), Fair Dealing. D) a violation of Standard V(A), Diligence and Reasonable Basis.
d – sounds like he is just throwing it around to random clients rather than think about each one individually
I forget which standard suitability is under because he is helping to diversify the client but clearly not making sure the stock is suitable for the other accounts. I think its under Standard III(A). B
I am thinking D in addition to Mike
A
I am going to say A. B - Not sure I believe that the existing clients accounts have not been checked for suitability. If it said “random existing clients”, then I would say B. C - The cross trades are fair. D - The analyst has been following the stock, she he should have a reasonable basis.
the answer is A. it’s good for the client - better diversified portfolio, it’s good for other clients - good stock. Execution costs are minimized. I remember the question from Level I.
It may be a good stock but what if a client only wants high dividend yielding stocks? It wouldn’t be suitable to put that OTC stock in some clients portfolios if it had no dividend.
Niblita75 Wrote: ------------------------------------------------------- > I forget which standard suitability is under > because he is helping to diversify the client but > clearly not making sure the stock is suitable for > the other accounts. I think its under Standard > III(A). > > B Hi…you are right suitability III ( C )seems to be violated but that is not given here.
i’d go w/ a.
Answer is A.
I would’ve picked B… isn’t he violating his duties to the new client, by selling off shares from his portfolio to distribute them to other clients?? what if the new client wants to maintain his current level of the stock…and doesn’t want to sell them!? especially considering it’s a good stock!
You need to read SS18 again. and again. and again. Diversification - the only free lunch in investment.
wanderingcfa Wrote: ------------------------------------------------------- > I am going to say A. > > B - Not sure I believe that the existing clients > accounts have not been checked for suitability. If > it said “random existing clients”, then I would > say B. > C - The cross trades are fair. > D - The analyst has been following the stock, she > he should have a reasonable basis. I totally agree
I go for A. Although cross trading can be subject to conflict of interest the trades are executed at a price that approximates the current market price and the intention is diversification. Do you agree?