Question of the Week

Rennie Asada, CFA, is a portfolio manager with Martek Securities. Rennie just learned that a very influential analyst within his firm is about to issue a sell rating on one of the stocks he owns both for his clients and for his personal accounts. In order to comply with Standard VI-B, Priority of Transactions, which of the following courses of action must Rennie take?

I. Allow Martek Securities to carry out its own trades before Rennie executes the trades for his personal accounts.
II. Ensure that before the clients' accounts are adjusted, Martek Securities has an opportunity to carry out its own trades.
III. Execute the trades for the clients first before Rennie executes any trades for his own personal accounts.
IV. Execute a block trade and then determine on a pro-rata basis, how many shares will be affected from the accounts of the clients, the firm and members' personal accounts.

a) I and III only
b) I, III and IV only
c) II and IV only
d) II and III only

Answer:

The correct answer is: a)

The guiding principle behind Standard VI-B is to take care of clients first, and only after the clients trades have been executed would it be appropriate to take care of personal interests. Both I and III indicate the appropriate priority. A pro-rata distribution of a block order (Choice IV) gives equal priority, while choice II places personal interests first. Both violate the Standard.