Trading Against Recommendations? Good or Bad? Help!

CFA Level II Ethics
#1

I’m probably missing something really obvious, but I am a little confused on if it is acceptable to make trades for one’s own account that are contrary to one’s own recommendations, or those of their firm.

The Conflicts of Interest section on pg. 125 of the CFAI Level II, Volume 1 materials, seems to say that it is allowable to make a transaction counter to current recommendations as long as care is taken to avoid potential conflicts. But then in Reading 4 at the bottom of pg. 209, the text appears to say that it is critical that firms prohibit analysts from trading contrary to their investment recommendations.

End of the Chapter Question number 26 on page 149, seems to agree with it being acceptable. But, end of the Chapter Question #6 on page 214, seems to affirm that it is not acceptable.

Thanks.

#2

According to the book trading against recommendations can only take place when in serious financial hardship (ie anniversary gift for a wife is not allowable, but tuition for kids yes) and when approval from supervisor is received.

#3

I have same exact question. Kobi what you said applies to question 6 referenced but not to 26 referenced

#4

Thanks for the responses.

Perhaps I’m parsing the wording too closely (or just dumb), but I still view the criteria for allowing the transaction to occur as unclear.

Standard VI makes no mention of financial hardship, but instead gives the criteria for allowing the transaction as:

  1. the client is not disadvantaged by the trade

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

  3. the investment professional complies with applicable regulatory requirements Additionally, financial hardships are generally defined as an unavoidable and unanticipated expense (like a medical expense, or funeral). The examples provided in the book: tuition, down-payments for a home, or margin calls really don’t strike me as a financial hardships, but expenses that should be fully expected.

The best interpretation I can take from the text is that it is transactions are okay if it is for a significant expense, but not okay if it is for a trivial expense, but this seems highly subjective. Can I justify a transaction to pay for an anniversary present for my wife, because otherwise she’ll divorce me and paying the alimony would be a significant hardship?

The good news, is that any topic that I spend this much time reflecting upon, is pretty much guaranteed not to be on the exam.