Views on improving the integrity of global capital markets
01 November 2018

Ethics in Practice: Trade Allocation. Case and Analysis–Week of 29 October

CFA Institute Ethical Decision-Making Framework

Check the analysis of this week’s case (29 October) to see if you made the right choice.

Case

Perkins is the co-owner and chief investment officer of Global Trading Financial (GTF). Perkins’ wife is GTF’s compliance officer. GTF has several dozen retail clients and total assets under management of $70 million. All client assets are managed on a discretionary basis. Perkins frequently makes trades for his clients using an omnibus trading account through a broker/dealer, which allows Perkins to buy and sell securities in a block trade on behalf of multiple clients simultaneously. Perkins regularly allocates the securities purchases to individual client accounts after the market closes. Over one six-month period, Perkins allocates 75% of the profitable trades to nine accounts owned or controlled by Perkins and his wife. At the same time, 82% of the unprofitable trades are allocated to the account of the three largest GTF clients. Perkins’ actions are

  1. acceptable as long as he discloses the trade allocation practices to his clients.
  2. acceptable as long as he accurately represents whether or not he trades in the same securities as his client.
  3. acceptable as long as he reverses his trade allocation practices to favor the larger clients so that they are not harmed over the long term.
  4. unacceptable.

Analysis

This case relates to CFA Institute Standard VI(B): Priority of Transactions, which states that investment transactions for clients have priority over personal transactions. By trading in the firm’s omnibus account and then delaying allocation of trades to a specific account until he has an opportunity to observe the security’s intraday performance, Perkins is able to cherry-pick the winning trades for accounts in which he has a beneficial interest. This is a violation of Standard VI(B). He allocates the losing trades to client accounts that are large enough to absorb incremental, although steady, trading losses without arousing client suspicion that the losses are due to fraud.

Disclosure is not a cure for this unethical, fraudulent behavior. It is also irrelevant to the priority of transactions issue what Perkins tells his clients about whether he trades in the same securities for his personal accounts as he does for his client accounts. (Although if he claimed not to personally trade in securities being considered for purchase by clients, and did so anyway, that would be further fraud.) Finally, Perkins cannot temporarily favor his personal interests over his clients’ interests with the intent of making it up to the clients later. Ethical conduct is not subject to some ledger-keeping exercise. CFA Institute members must, and really all investment professionals should, comply with ethical principles at all times. Choice D is the best answer.

This case is based on a September 2018 Enforcement Action by the US SEC.

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Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.


More About the Ethics in Practice Series

Just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. The Ethics in Practice series gives you an opportunity to “exercise” your ethical decision-making skills. Each week, we post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions. We then encourage you to assess the case using the CFA Institute Ethical Decision-Making Framework and through the lens of the CFA Institute Code of Ethics and Standards of Professional Conduct. Then join the conversation and let us know which of the choices you believe is the right one and explain why. Later in the week, we will post an analysis of the case and you can see how your response compares.


Image Credit: ©CFA Institute

About the Author(s)
Jon Stokes

Jon Stokes is the Director of Ethics and Standards Education at CFA Institute. His responsibilities include design and creation of on-line ethics education, development and maintenance of the CFA Institute Code of Ethics and Standards of Professional Conduct, and the design and management of the CFA Institute Ethical Decision-Making and Giving Voice to Values education programs. Stokes holds a JD degree.

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