Standard VI(B) Priority of Transactions

Standard VI(B) requires that members and candidates give the interests of their clients and employers priority over their personal financial interests. This standard is designed to prevent any potential conflict of interest or the appearance of a conflict of interest with respect to a member’s or candidate’s personal transactions. Conflicts between the client’s interest and an investment professional’s personal interest may occur. Client transactions must take precedence over transactions made on behalf of the member’s or candidate’s firm or personal transactions.

The objective of the standard is to prevent personal transactions from adversely affecting the interests of clients or employers. A member or candidate having the same investment positions or being co-invested with clients does not always create a conflict. Some clients in certain investment situations require members or candidates to have aligned interests. Personal investment positions or transactions of members or candidates or their firm should never, however, adversely affect client investments.

Although conflicts of interest exist, nothing is inherently unethical about individual managers, advisers, or mutual fund employees making money from personal investments as long as (1) the client is not disadvantaged by the trade, (2) the member or candidate does not benefit personally from trades undertaken for clients, and (3) the member or candidate complies with applicable regulatory requirements. Transactions for clients must have priority over transactions in securities or other investments for which a member or candidate is the beneficial owner.Although conflicts of interest exist, nothing is inherently unethical about individual managers, advisers, or mutual fund employees making money from personal investments as long as (1) the client is not disadvantaged by the trade, (2) the member or candidate does not benefit personally from trades undertaken for clients, and (3) the member or candidate complies with applicable regulatory requirements. Transactions for clients must have priority over transactions in securities or other investments for which a member or candidate is the beneficial owner.

Sometimes, members and candidates may need to enter a personal transaction that runs counter to current recommendations or strategies they are pursuing for client portfolios. For example, a member or candidate may be required at some point to sell an asset for personal financial reasons, and the sale may be contrary to the recommendations or advice the member or candidate is currently providing to clients. In such situations, members and candidates may be justified in acting counter to their advice to clients.

Standard VI(B) covers the activities of members and candidates who have knowledge of pending transactions that may be made on behalf of their clients or employers. Members and candidates are prohibited from benefiting from or conveying information about client transactions.

Members or candidates may undertake transactions in accounts for which they are a beneficial owner only after their clients and employers have had adequate opportunity to act on a recommendation. Members and candidates are beneficial owners if they ultimately own, control, have the power to direct, or have a material interest in a security or investment. Personal transactions include those made for the member’s or candidate’s own account, for the accounts of immediate family members, and for accounts in which the member or candidate has a direct or indirect financial interest. Family accounts that are client accounts should be treated like any other firm account and should neither be given special treatment nor be disadvantaged because of the family relationship.

Complying with an employer’s policies and procedures that are designed to prevent potential conflicts of interest and even the appearance of a conflict of interest with respect to personal transactions is critical to establishing investor confidence in the investment industry. Because investment firms vary greatly in assets under management, types of clients, number of employees, and so on, members and candidates must carefully consider the policies regarding personal investing that are applicable to their situation. Members and candidates should then prominently disclose these policies to clients and prospective clients.

While the specific provisions of each firm’s approach will vary, many firms adopt certain basic procedures to address the conflict areas created by personal investing. Members and candidates must comply with their employer’s personal investing policies, which could include the following:

• Limited participation in equity IPOs: Some eagerly awaited IPOs rise significantly in value shortly after the issue is brought to market. Because the new issue may be highly attractive and sought after, the opportunity to participate in the IPO may be limited. Purchases of IPOs by investment personnel create conflicts of interest in two principal ways. First, participation in an IPO may have the appearance of taking away an attractive investment opportunity from clients for personal gain—a clear breach of the duty of loyalty to clients. Second, personal purchases in IPOs may have the appearance that the investment opportunity is being bestowed as an incentive to make future investment decisions for the benefit of the party providing the opportunity. Members and candidates can avoid these conflicts or appearances of conflicts of interest by not participating in IPOs. When participation in IPOs is permitted by a firm’s policies, members and candidates should preclear their participation in IPOs, even in situations without any conflict of interest between a member’s or candidate’s participation in an IPO and the client’s interests. Members and candidates should not benefit from the position that their clients occupy in the marketplace—through preferred trading, the allocation of limited offerings, or oversubscription.


• Restrictions on private placements: Employers may place strict limits on investment personnel acquiring securities in private placements. Participation in private placements raises conflict-of-interest issues that are similar to issues surrounding IPOs. Investment personnel should not be involved in transactions, including (but not limited to) private placements, that could be perceived as favors or gifts that seem designed to influence future judgment or to reward past business deals.
  
  
• Blackout/restricted periods: Investment personnel involved in the investment decision-making process should comply with established blackout periods so that managers cannot take advantage of their knowledge of client activity by “front-running” client trades (trading for one’s personal account before trading for client accounts).
  
  
• Reporting requirements: Members and candidates must comply with employer reporting policies, including disclosure of personal holdings/beneficial ownerships, confirmations of trades to the firm and the employee, and preclearance procedures. Reporting requirements may include the following:
  • Disclosure of holdings in which the employee has a beneficial interest. Firms may require disclosure upon commencement of the employment relationship and periodically thereafter.
  • Providing duplicate confirmations of transactions. Firms may require employees to direct their brokers to supply to their employer duplicate copies or confirmations of all their personal securities transactions and copies of periodic statements for all securities accounts. The duplicate confirmation requirement has two purposes: (1) The requirement sends a message that there is independent verification, which reduces the likelihood of unethical behavior, and (2) it enables verification of the accounting of the flow of personal investments that cannot be determined from merely looking at holdings.
  • Preclearance procedures. Firms may require employees to disclose all planned personal trades so that they may identify possible conflicts prior to the execution of the trades. Preclearance procedures are designed to identify possible conflicts before a problem arises.


• Disclosure of policies: Upon request, members and candidates should fully disclose to investors their firm’s policies regarding personal investing. The information about employees’ personal investment activities and policies will foster an atmosphere of full and complete disclosure and address concerns about the conflicts of interest posed by personal trading. The disclosure must provide helpful information to investors; it should not be simply boilerplate language, such as “investment personnel are subject to policies and procedures regarding their personal trading.”

Long, a research analyst, does not recommend purchase of a common stock for his employer’s pension account, because he wants to purchase the stock personally and does not want to wait until the recommendation is approved and the stock is purchased by his employer.

Baker, the portfolio manager of an aggressive growth mutual fund, maintains an account in her husband’s name at several brokerage firms with which the fund and a number of Baker’s other individual clients conduct a substantial amount of business. Whenever a hot issue becomes available, she instructs the brokers to buy it for her husband’s account. Because such issues normally are scarce, Baker often acquires shares in hot issues but her clients are not able to participate in them.

Toffler, a portfolio manager at Esposito Investments, manages the retirement account established with the firm by her parents. Whenever IPOs become available, she first allocates shares to all her other clients for whom the investment is appropriate; then, she places any remaining portion in her parents’ account, if the issue is appropriate for them. She adopted this procedure so that no one can accuse her of favoring her parents.

Michaels is an entry-level employee who works for both the research department and the investment management department of an active investment management firm. George, the director of the investment management department, who has responsibility for monitoring the personal stock transactions of all employees, discovers that Michaels has made substantial investment gains by purchasing stocks just before they were put on the firm’s recommended “buy” list. Michaels regularly declined to complete the firm’s quarterly personal transaction form.

Wilson, a brokerage’s insurance analyst, makes an internal video conference presentation to her firm’s branches around the country. During the broadcast, she includes negative comments about a major company in the insurance industry. The following day, Wilson’s follow-up written report is printed and distributed to the sales force and public customers. The report recommends that both short-term traders and intermediate investors take profits by selling the insurance company’s stock. Seven minutes after the video conference, however, Riley, the head of the firm’s trading department, closed out a long “call” position in the stock. Shortly thereafter, Riley established a sizable “put” position in the stock. When asked about her activities, Riley claimed she took the actions to facilitate anticipated sales by institutional clients.