CFA Level II ExamEthical and Professional StandardsMedium
A portfolio manager, Alex Chen, CFA, manages several institutional accounts. He intends to place a large order for a thinly traded small-cap stock that he believes is undervalued. To avoid moving the market significantly, he decides to execute the trade for his largest and most important client first, ensuring they get the best possible price. He plans to execute trades for his other clients in the same stock over the next few days, acknowledging they might get a slightly worse price due to his initial large order. Which CFA Institute Standard is Alex most likely violating?
- AStandard II(A) Material Nonpublic Information
- BStandard III(B) Fair Dealing
- CStandard VI(A) Disclosure of Conflicts
- DStandard III(A) Loyalty, Prudence, and Care
Show answer & explanationAnswer & explanation
Correct answer: B. Standard III(B) Fair Dealing
Alex's action of prioritizing one client's trade over others, especially knowing it will negatively impact the execution price for subsequent trades, is a direct violation of Standard III(B) Fair Dealing. This standard requires members to treat all clients fairly and impartially in all investment actions.
Why the other options are wrong
- A. This standard concerns insider trading, which is not the issue here.
- C. This standard concerns disclosing conflicts of interest, which is not the primary issue of prioritizing clients.
- D. While loyalty to all clients is generally expected, 'fair dealing' specifically addresses impartial treatment in transaction execution.
Standard III(B) Fair Dealing
Members and Candidates must deal fairly and objectively with all clients when taking investment action.
- Treat all clients impartially.
- Do not discriminate against any clients.
- Allocate investment opportunities (e.g., IPOs, block trades) fairly.
Memory trick: Treat Clients Fairly: No favoritism, equal opportunity.