Conflicts of Interest - VI(B) Priority of Transactions

LOS

a. demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations of issues involving issues of personal integrity

b. distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards

c. recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct

What is the primary objective of Standard VI(B) Priority of Transactions? Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.

What is Standard VI(B) Priority of Transactions designed to prevent? This standard is designed to prevent any potential conflict of interest or even the appearance of a conflict of interest with respect to the analyst’s personal transactions.

When is it appropriate for you to purchase securities that you’ve recommended to others? If you make a recommendation regarding the purchase or sale of a security or other investment, give your clients and employer adequate opportunity to act on the recommendations before acting on your own behalf.

What three things determine if you are a “beneficial owner”? 1. A direct or indirect pecuniary interest in the securities. 2. The power to vote or direct the voting of the shares of the securities or investments. 3. The power to dispose or direct the disposition of the security or investment.

Does Standard VI(B) Priority of Transactions only apply to interests in your own accounts? What is the definition of “personal transactions”? Personal transactions include those made for your own accounts, family accounts, and accounts in which you have a direct or indirect pecuniary interest. Note that family accounts that are also client accounts should be treated like any other firm accounts. Neither special treatment nor disadvantage should be given to such accounts.

What does Standard VI(B) recommend that firms include in their own rules regarding IPOs? Firms should limit their employees participation in IPOs. Members and candidates should not benefit from the position that their clients occupy in the marketplace - through preferred trading, the allocation of limited offerings, and/or oversubscription.

What does Standard VI(B) recommend that firms include in their own rules regarding private placements? As participants in private placements have an incentive to recommend these investments to clients, members and candidates should not be involved in these transactions, which could be perceived as favors or gifts designed to influence future judgment or to reward past business deals.

According to Standard VI(B) should firms trading rules include personal blackout/restricted periods? Managers or employees involved in the investment decision-making process should be prevented from initiating trades in a security for which their firms have a pending “buy” or “sell” order within a specific period before the order is executed or cancelled. They should not be allowed to do “front running.”

Which three reporting requirements should firms include in their own rules/standards? 1. Disclosure of holdings in which the employee has a beneficial interest. 2. Providing duplicate confirmations of transactions. Investment professionals should ask their brokers to supply duplicate copies to their firms of all their personal securities transactions and copies of periodic statements. 3. Pre-clearance procedures. Investment professionals should clear all personal investments, to identify possible conflicts before the execution of personal trades.