Ethics Question

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Paul James, CFA, is a retail stock broker for a national financial services corporation. James's client base is mainly comprised of small to mediumsized individual accounts. James notices that one client in particular, Chet Young, Ph.D., is particularly adept at picking undervalued stocks. James decides to watch Young's trades and mimic them in his own account. James:
A. is in violation of Standard VI(B) Priority of Transactions because he is front running the client's account.
B. is in violation of Standard YeA) Diligence and Reasonable Basis because he doesn't have a reasonable basis for his trades.
C. is not in violation of any Standards.
D. is in violation of Standard I(D) Misconduct because he has misappropriated confidential client information.
 
You would think it would be B.......I have a horrible feeling the answer given was C when I came across this.
 
C - he allowed his client's trade to be executed first and reasonable basis applies to investment recommendations and actions taken for clients
 
Yea this is a tricky one. C is the correct answer.
 
Ethics is tough, you would think that CFAI is strict on everything but there is leniency here and there
 
Bump

C is correct. If he used this same process for selecting securities for a clients accounts, then he would be in violation of a number of standards, including knowledge of the law, suitability, reasonable basis and so on.
 
I have a question here,

does the manager needs to have a reasonable and diligence basis for his own account trades as well? I think this constraint is only for clients accounts..

not sure
 
gauri Wrote:
-------------------------------------------------------
> I have a question here,
>
> does the manager needs to have a reasonable and
> diligence basis for his own account trades as
> well? I think this constraint is only for clients
> accounts..
>
> not sure

isn't there a chance that manager will (might) lose money in case he doesn't follow reasonable and diligence?
 
The standards are universal, I would assume the answer is yes. That being said, if the manager doesn't have any accounts and performs a more maintenance role within the organization, is there really a case for reasonable and diligent? The answer is no, you can pick a stock for your own account that isn't suitable for your investment needs, is based on a rumor you heard from a starbucks employee and so on.
 
im convinced C is the correct answer but i need an explanation of D as the incorrect answer
 
I don't really know the answer to that one. It's obviously C, but I don't see why D isn't right either. C is more right, but I do agree D makes a lot of sense. Wish I could help.
 
I would have chosen D. He's making decisions based on confidential information without the clients permission. This seems like a flagrant violation to me.


For C to be correct then D must be incorrect, but I don't see how that is possible.

I hate ethics...
 
This is a crazy question. Common sense tells you that using private client information for your own gain would be wrong. But apparently not.
 
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