Here is a question on ethics. Is it a violation if a company has different levels of service even after written consent? ---------------------- A money management firm has the following policy concerning new recommendations: When a new recommendation is made, each portfolio manager estimates the likely transaction size for each of their clients. Clients are notified of the new recommendation in the order of their estimated transaction size—largest first. All clients have signed a form where they acknowledge and consent to this allocation procedure. With respect to Standard III(B), Fair Dealing, this is: A) not a violation because the clients are aware of the policy. B) a violation of the standard. C) not a violation because the clients have signed the consent form. D) not a violation because this policy qualifies as a pro rata procedure for disseminating information. Your answer: C was incorrect. The correct answer was B) a violation of the standard. Such a policy is a violation of the Standard and client acknowledgement and/or consent does not change that fact.
See p.63 of the Handbook. “A member or candidate’s duty of fairness and loyalty to clients can never be overridden by client consent to patently unfair allocation procedures.”
Yes, in this case they are categorized by the size of the transaction, with the largest size transaction clients group being notified first. This violated the fair dealing rule as that particular group of clients are not paying an extra premium for the priority service…they just happened to be categorized under that particular group
The relevant excerpt from the CFA handbook is: “A member or candidate’s duty of fairness and loyalty to clients can never be overridden by client consent to patently unfair allocation procedures.” An unfair scheme is not cured by client consent. One reason for this may be that the clients that are disadvantaged by the scheme may also be those that are least well positioned to give fully informed consent.
Thanks for replies. I have a question that is bothering for some time. Let us take example of Lehman brothers. Can’t they have different levels of service to provide research reports to rich clients first? I want to make sure if there is any situation for brokerage to have different levels of service and is not violated
The handbook states the following: “Members and candidates can differentiate their services to clients, but different levels of service must not disadvantage or negatively affect clients.” In the hypothetical question, the advantage to some clients was at the direct expense of the others. Moreover, there was no ability for the disfavored clients to pay for the preferential service. As a rule of thumb, as long as each client has the opportunity to receive a certain level of service at a certain price, and full disclosure of the service levels is made, differential service is likely permissible.
Telepathic communication will one day solve the problem of whose fax number gets dialed first : )) Though communication by email already solved it:)