CFA Level IEthical and Professional StandardsMedium
A portfolio manager decides to purchase 5,000 shares of a small-cap stock for his personal account. Before entering any client orders, he places and completes his personal trade. Two hours later, he submits buy orders for the same stock across his client accounts, causing the price to rise further. Which Standard has the manager most likely violated?
- AStandard VI(B), Priority of Transactions, because client transactions must be given priority over personal trades
- BStandard II(B), Market Manipulation, because his trading artificially inflated the stock price
- CStandard III(A), Loyalty, Prudence, and Care, because he failed to act with reasonable care
- DStandard I(B), Independence and Objectivity, because his personal view could be an inducement
Show answer & explanationAnswer & explanation
Correct answer: A. Standard VI(B), Priority of Transactions, because client transactions must be given priority over personal trades
Standard VI(B) requires that investment transactions for clients and employers take priority over transactions in which a member is the beneficial owner. By trading for his personal account ahead of client accounts in the same security, the manager violated the priority-of-transactions requirement, regardless of any resulting price impact.
Why the other options are wrong
- B. There is no evidence of intent to manipulate price; the issue is trade sequencing, not manipulation.
- C. This is more specifically a priority-of-transactions issue than a general duty-of-care issue.
- D. There is no conflict-of-interest inducement issue here; this is a trading priority problem.
Priority of Transactions (VI(B))
Client and employer transactions must be given priority over transactions in securities in which the member or the member's family has a beneficial ownership interest.
- Personal trades should not precede client trades in the same security
- Applies to accounts of immediate family if the member has beneficial ownership
- Firms often use trade rotation systems to prevent front-running
Memory trick: "Clients cross the finish line first — personal trades wait."