Schwser Vol III Exam 3 PM Q14.2 Many of Smith’s employees etiehr personally own or maintain, through a family member, beneficial ownership of stocks that are also beld in accounts for many of the firm’s clients. While the company maintains a strict disclosure policy to the firm of such beneficial ownership and an " at will" disclosure policy to its clients, employees are not barred fromt rading trhese secruities for their personalb enefit even if their clients also own or have a direct or indirect financial interest int he same securities. Determine if Smith’s disclosure policies are in violation of the CFA insitute Code and Standards and suggest a strategy to eliminate the violation if one exists A. The policy violates the Code and Standards and can be fixed by barring employees from trading the conflicting securities. B the policy violates the Code and Standards and can be fixed by requiring written disclosure to clients regarding Smith employees with beneficial ownership of conflicting securities C. Does not violate I think the answer should be A because even with a properiate disclosure, it is still a violation for mgr to trade for their own accounts when clients are also intrerested. Clients’ interest should come first. Any thoughts?
Nothing wrong with a manager owning the same securities as a client. They cannot trade their own accounts ahead of a client’s but doesn’t seem that is happening here. In any case the question asks about disclosure policies, so I would go with B because the disclosure policy should be mandatory, not at will.
Now I somehow remember it is ok to be trading on the same side as the clients, but not ok with to doing the opposite side? What about the conficting interest? Front run is certainly out.
I think the answer is B. Written disclosure is required if the ownership of conflicting securities is not blatantly unfair for the clients. From this question, it does not seem that the employees are making a blatantly unfair disclosure. A blanket barring of trading conflicted securities does not make sense - even if the firm barred the trading of conflicted securities, the employees still own the securities either directly or indirectly, so it doesn’t solve the conflict. What is the suggested answer in Schweser by the way?
singlesong - I don’t think the question gives enough information to conclude that they are trading the opposite side of the client. Additionally, they could be liquidating securities for cash, rebalancing, or their could be suitability concerns. If the manager was recommending his clients buy, and all the employees were selling, then I think you would be correct.
B … these kind of conflicts (holding same securities as our clients) should preferably be avoided but arent a strict no-no. if employees do hold the same securities as in client’s account, proper disclosure should be made in plain, simple and easy to understand language.