Ethics - 'prior clearance'

CFA Level I
#1

can someone explaine this pls? I can’t understand No.16 in CFAI MOCK, morning session. what does ‘precleared transactions are approved only for that trading day’ mean? also, why purchase after receiving prior clearance violated her employer’s compliance procedures?

#2

i assume you are talking about preclearance of transactions that can potentiallly have a conflict of interest.

#3

No… If I remember correctly from that question, the employer had a specified precleared transactions allowed for EACH day…and the investor went over the specified limit…and hence made a violation… I’m not sure if I remember entirely but I’m fairly confident this is what you are referring to

#4

The Advisor in question was authorised to place 2 trades, 150 units of one stock, 100 of another on a given day (e.g. 1st June) however, the clearance was only for that number of shares on that day, anything in excess would be a violation. In the scenario given, the advisor bought 250 units of one stock, a few days after clearance was given. So they violated the compliance by placing a larger order than was approved, and also by placing the order on a day when it wasn’t cleared.

#5

thanks all, i read the question again, and since pre cleared transactions are approved only for that trading day, the employee not only exceed the limit but also make the transaction two days after she received prior clearance, am i right? P.S: I’m not a professional so i don’t understand what exactly preclearance is, is it some kind of permission for personal investment?

#6

Hi Steph, When I was working at JP Morgan we had to go through a pre clearance process. Essentially, employees are required to send a request for approval to trade a stock. Turnabout was roughly 2 -4 hours. I’m not sure about what their internal controls or measures are since it east my department. The reason employees needed to go through preclearance was to create barriers to insider trading. As an accountant, I would be responsible for reconciling trades that would occur the following day. Which is material nonpublic information.

#7

thanks Pgiger!