Dominic Morris works for a small regional seucrities firm. His work consists of corporate finance activities and investing for instiutional clients. Arena, Ltd., is planning to go public. The partners have secured rights to buy an Arena football league franchise and are planning to use the funds from the issue to complete the purchase. Because arena football is the current rage, Morris believes he has a hot issue on his hands. He has quietly negotiated some options for himself fror helping convince Arena to do the financing. When he seeks expressions of interest, the institutional buyers oversubscribe the issue. Morris, assuming that the institutions have the financial clout to drive the stock up, then fills all orders (including his own) and cuts back the insitutional blocks. Is this a violaion of Fair Dealing or Priority of transactions? I keep getting these 2 mixed up!
Here’s another one: Erin Toffler, a portfolio manager at Esposito Investments, manages the retirement acct established with the firm by her parents. Whenever IPO’s become available, she first allocates shares to all her other clients for whom the investment is appropriate; only then does she place any remaining portion in her parents’ acct, if the issue is appropriate for them. She has adopted this procedure so that no one can accuse her of favoring her parents. violaion of Fair Dealing or Priority of transactions?
The first seems to be a priority of transactions violation. Analysts’ orders should be filled only after the issue is subscribed to all clients to whom the investment is appropriate, if the issue is not oversubscribed. If it is oversubscribed (as said in the text), the allocation of trades should follow company’s allocation procedures for oversubscribed issues, and definitely the analyst has no slack into it. The second seems to be a violation of fair dealing. The parents accounts are established with the firm, and should be treated like any other account.
It’s actually reversed. The first one is Fair dealing the second is Priority of transactions. That’s straight out of the CFAI text. I keep getting these confused. I keep getting these wrong and the ones that refer to Facts and Opinions and reasonable and adequate basis. Questions with both of those options are confusing.
Wow…I was quite sure 2nd was fair dealing as why should she treat her parents worse…equal but certainly not better The first one…I was 60/40 on fair dealing as he angled his options before the rights issue and cuts back the institutional blocks,…that swwayed that one for me…tough call though!
I hate these questions and I keep getting them wrong. I’m about to call the institute to get a verbal explanation of the distinction of the 2
Would be grateful if you would let us know on these 2, as it is somewhere between intriguing and infuriating.
u got it, I’ll call after work
For the first - Hopefully this clarifies, straight out of the CFAI Text: “For example, when making investments in new offerings or in secondary financings, members and candidates should distribute the issues to all customers for whom the investments are appropriate in a manner consistent with the blockallocation policies of the firm. If the issue is oversubscribed, then the issue should be prorated to all subscribers. This action should be taken on a round-lot basis to avoid odd-lot distributions. In addition, if the issue is oversubscribed, members and candidates should forgo any sales to themselves or their immediate families to free up additional shares for clients.” For the second - He should not have treated his parents account any differently because they are fee paying clients. From the text: “Family accounts that are client accounts should be treated like any other firm account and should neither be given special treatment nor be disadvantaged because of an existing family relationship with the member or candidate” I agree that those two situations could go towards either Standard, however it was the key issue of allocating and oversubscribed issue to himself that makes the first Fair Dealing. Hope this helps.
In either case he’s not handling his clients accts in a fair manner. I can see how the first one is fair dealing but I was leaning more towards fair dealing as well for the second.
Isn’t the first one is a violation of Fair Dealing because analysts aren’t allowed to participate in IPO’s and the question clearly says he has negotiated some options for himself? The second one has to be a violation of the Priority of Transactions since all clients (even family) must be treated equally and Erin cannot INTENTIONALLY put off dealing with her parents accounts until she has dealt with other clients’ accounts first.
JP_RL_CFA Wrote: ------------------------------------------------------- > It’s actually reversed. The first one is Fair > dealing the second is Priority of transactions. > That’s straight out of the CFAI text. I keep > getting these confused. > > I keep getting these wrong and the ones that refer > to Facts and Opinions and reasonable and adequate > basis. Questions with both of those options are > confusing. The thing is there are often 2 or more violations. These examples are from the handbook, and so they are under a particular section of the code. But 1 is definitely also priority of transactions, conflict of interest (options should be disclosed). 2 is definitely fair dealing as well. He’s treating his family clients unfair treatment while they pay the same.
Yea but when they include both options for the answer choices how are u supposed to know which one they are referring to if all they ask is “Is he in violation of the CFA Institute?” JDane is definitely right tho: “allocating and oversubscribed issue” is fair dealing.
Was this a question? iirc it was an example straight from the handbook
example from the CFAI text
The example is taken out of the text, and it is drafted a an example for a specific breach. The fact that in the question there are more than one breach, is a different issue altogether. This ones are meant to stress one particular breach, not both, or one versus the other.