private placement allocations to staff or clients?

CFA Level II
#1

In the practice problems for the ethics portion on the cfa institute website this is the following question Policy 1: Staff are not allowed to participate in any private placements.

Policy 2: Any client accounts that include staff as beneficiaries must trade after all other client accounts.

Would Blevin’s suggested revisions in Spalding’s conflict of interest policies most likely violate the CFA Institute Standards of Professional Conduct?

  1. Yes, in regard to Policy 1.
  2. Yes, in regard to Policy 2.
  3. No.

the answer is policy 2. the reason is because staff is considered a client and should not be discriminated against. I understand that if you have family members in client accounts you cannot discriminate against them and you treat them equally as you would all other clients but policy 2 states that staff of the company are beneficiaries themselves. in this case shouldn’t the firm first trade for its clients first then its own staff? similar to when there are hot ipos- first the allocations go to client accounts and then any leftover issues are allocated to staff? i.e. first priority is always the client and staff does not mean client. I am confused about this.

#2

The way I see it is that yes, the firm should trade for it’s clients and then for it’s staff. But in this case some staff members are beneficiaries of some accounts that are clients. They’re paying the same as other clients and therefore should be treated equally and must trade at the same time. The keyword is that ultimately they are clients. You’d be effectively penalizing the official client paying for the services if you enforced Policy 2 because he’d be at a disadvantage versus the other clients who are paying the same fees but trade prior.

#3

I am still confused about this. so when would I not consider a staff a client/consider the staff a client? then what about cases like hot ipo allocations? If the staff is a client then would allocating hot ipo’s to internal employees not be a violation? These questions don’t explicitly say that the staff are clients versus internal employees- beneficiaries of accounts sounds vague to me. Any further clarity is appreciated.

#4

The point here is, why you deprive the client of trading equally like others just because one of the beneficiaries is a staff ? that is a violation

#5

It is uncleared for me as well.

Any client accounts that include staff as beneficiaries must trade after all other client accounts.

Does it mean that it should be as follows:

Any client accounts that include staff as beneficiaries must trade as all other client accounts?

#6

“Any client accounts that include staff as beneficiaries must trade as all other client accounts?”

I think this is correct as long as it is not oversubscribed IPOs.

#7

this is there in the curriculum

#8

What if it is oversubscribed IPOs?

#9

You cannot discriminate against a client account on the basis that a firm employee is a beneficiary of the account. That is why Policy 2 is a violation. Yes, these accounts would also get a fair allocation on an IPO. Beneficiary is a legal term meaning that an individual is listed as a beneficiary on the account or may be a beneficiary through some other path such as through a trust.

#10

So this is what I summarize from the above.

  1. dont discriminate against family members if they are regular clients like everybody else

  2. if your staff is a beneficiary in an account- they are a client. so whether its an oversubscribed ipo/hot private placement they should get their pro-rata share

  3. if the above 2 dont hold then the employee typically has done something wrong.