Selling securities contrary to firm recommendation

Hi all. Question in regards to a situation of selling securities with a “buy” recommendation from the CFAI Ethics Readings 2 and 4:

Facts : Rose, portfolio manager, wants to sell a portion of his holdings in Household Products, but his firm recently upgraded the stock to “strong buy” to cover the costs of his child’s academic tuition.

Answer to Question 26 (172): Priority of Transactions does not limit transactions of company employeees that differ from current recommenations as long as the sale does not disadvantage current clients.

Facts : Kepsh, junior research analyst, sells shares of GeoTech, which recently had a “buy” recommendation, to pay for a wedding anniversary gift for his wife.

Answer to Question 6 (pg 219): The Standards prohibit Kepsh from trading in a manner that is contrary to the employee’s or firm’s most recent published recommendations.

The two answers seems contradictory, how do we reconcile the two? Or is the second situation only relevant if the firm chooses to comply with the Institute Research Objectivity Standards?


noticed this too and was wondering the same thing…

Unless the first case says something about Rose being in financial hardship, the answer is wrong.

You may act in contrary to the recommendation to cover financial distress (with consent from employer). Buying an anniversary gift is not considered as financial distress.

I would say second situation is only relevant if the firm claims to comply with Institute Research Objectivity Standards.

In the section on Priority of transactions, it states:

“Some situations occur where a member or candidate may need to enter a personal transaction that runs counter to current recommendations or what the portfolio manager is doing for client portfolios. For example, a member or candidate may be required at some point to sell an asset to make a college tuition payment or a down payment on a home, to meet a margin call, or so on. The sale may be contrary to the long-term advice the member or candidate is currently providing to clients. In these situations, the same three criteria given in the preceding paragraph should be applied in the transaction so as to not violate Standard VI(B).”

The 3 criteria mentioned were:

  1. the client is not disadvantaged by the trade,

  2. the investment professional does not benefit personally from trades undertaken for clients,

  3. the investment professional complies with applicable regulatory requirements.

I believe the reason is that Kepsh is a research analyst who complies with Institute Research Objectivity Standards while Rose is a portfolio manager who is only complying with the Standards. Not 100% though so correct me if you think otherwise.