Brian Farley, CFA, is an independent PM. Currently his only client is a $75mm university endowment fund. A representative of the fund calls Farley and places a “sell” order on a portfolio holding whose management has just issued a negative earnings forecast. Farley owns the security in his retirement account and immediately decides to sell his position. He places simultaneous “Sell” orders for both the client and for his personal account. According to the CFA Institute Standards of Professional Conduct, is Farley in violation of Std III(B) Fair Dealing or Standard VI(B) Priority of Transactions? …Std III B…Std VI B A…Yes…Yes B…Yes…No C…No…Yes D…No…No

C There’s only one client so no Fair Dealing issues.

I think C reason: Representative of fund (his client) asked to sell. He sold. so he’s not in violation. He should’ve sold his personal only AFTER the client. (not at the same time). So he’s in violation of VI(B) priority of transactions. Let’s see what others have to say.

I agree. C.

Good job guys… Here’s another one. I found this a bit tricky. Art Dodd, CFA is a registered rep. with Owens Securities. He is currently in a dispute with one client, Madge Phillips, CFP, about a limit order for her IRA a/c that she feels was entered incorrectly, resulting in a loss(in her opinion) of $500. Dodd has been allocated 1000 shares of a new issue that is oversubscribed. He suggest to Phillips that he will give her 250 shares of his allocation if she forgets about the supposed trade error. Further, he offers to buy her dinner at a very nice restaurant that serves an excellent salmon Kulebyaka, which he suggests they pair with a nice 1997 white Cheval-Blanc Signe. According to the Stds of practice, Dodd has most likely violated: A. Std IV(B) Additional Compensation Arrangements only B. Std I (D) Misconduct and Std IV(A) Loyalty. C. Std III (B) Fair Dealing only. D. Std I(D) Misconduct only.

Is it B ? He is guilty of misconduct because he is bribing the client to “overlook” the error. Loyalty - because he should have discussed this with his employer first… and kept his supervisor in the loop?

I’m going to go with B.

Again C. The issue here is the inappropriate allocation of the oversubscribed IPO. I don’t think there’s proof for any misconduct on the rep’s part. The client ‘believes’ there is an error, and so taking her out to dinner does not suggest an implication, IMO. What do you not agree with, Kevin?

cpk123, you’re assuming that there’s an error in the first place.

Whether there’s an error or not, the rep shouldn’t take the client out to dinner etc to get the client to forget about it.

this is one of the types of questions where I tend to overanalyze. So how should such questions be tackled… becomes very often a question of moral debate, and shades of grey creep in…

edit: Nvm…too slow lola’s right.


lola, If a violation of Misconduct AND Fair Dealing was presented as a choice, that would be a more appropriate answer, correct?

the key is the customer’s opinion vs. the actual fact in regard’s to the error. The only fact that we know for sure is the dealing in oversubscribed IPO’s.

Kevin, What is the official answer?

agree with highpark. That was my intuition when I picked C. kevin, I’m still not entirely convinced that there’s any misconduct here. If we knew for a fact that the rep made a mistake and then tried to cover it up, then that’s a clear violation. In this instance though, it is not proven that he made a mistake to begin with and he might have just tried to explain his position and not take her out for dinner for begin with. You don’t have to take people out for dinner just because they believe you’ve screwed up. He doesn’t owe it to her, it doesn’t question his objectivity, he’s just going over and beyond his call of duty, why should he be penalized. That’s just how I see it.

Even if he had screwed up, what’s wrong with agreeing compensation in the form of a nice meal and possibly a bit of how’s you father afterwards? I’d say even if he had made a mistake, he’s still only violated fair dealing by offering an extra allocation, to the detriment of his other clients.

The answer is C as I pointed out earlier. The fact that he made that suggestion led me to the following conclusions (when I was doing this question) : 1) He’s guilty -> which confirms the mistake - > which prompted him to make a suggestion in the first place. 2) The suggestion “reflects adversely on his professional reputation and integrity.” I guess I’m still not seeing this in the correct angle. :S

Hope you don’t mind piggybacking onto this thread. Don’t need to add more clutter to the main page for just one question… David Saul, CFA, heads the trust department at Savage National Bank. Fairway Enterprises invites Saul to sit on its Board of Directors. In return for his services on the Board, Fairway offers to provide Saul and his family with access to the facilities at Wilmont Country Club at no cost. Saul will not receive any monetary compensation for his services on the Board. According to CFA Institute Standards of Professional Conduct, which of the following actions must Saul take? A) Saul must reject the offer to serve on the Board of Directors. B) Saul need not disclose to Savage Bank his acceptance of the offer, because the offer involves no monetary compensation. C) Saul must disclose in writing to Savage Bank the terms of the offer whether or not he accepts the offer to serve on the Board of Directors. D) Saul must obtain written consent from all parties to only if he decides to accept the offer to serve on the Board of Directors. Answer is D, but I picked C. However, the answer states: Standard IV(B) requires that members obtain written consent from all parties involved BEFORE accepting monetary compensation or other benefits that they receive for their services that are in addition to compensation or benefits conferred by a member’s employer. Wouldn’t that mean he would have to obtain permission to have the additional compensation BEFORE accepting the position? Accepting the position then asking for permission for additional compensation doesn’t make any sense.