MCQ Quiz

Hampton's firm has a policy of avoiding odd-lot allocations below $5,000 to preserve liquidity. A bond issue is oversubscribed. She receives only $55,000 total. Instead of a strict pro-rata reduction that would create odd lots, she allocates $5,000 to three small accounts (who asked for $10,000) and $20,000 to two large accounts (who asked for $50,000). Has Hampton violated Standard III(B)?

• Yes, because she deviated from a strict pro-rata calculation.
• No, because the allocation ensured all clients received at least a functional minimum lot size.
• Yes, because the smaller clients received a higher percentage of their request than the larger clients.

Weng issues a new recommendation via email to all clients. Immediately afterward, he calls his three largest institutional clients to discuss the recommendation in detail. These clients pay higher fees for premium service. Has Weng violated Standard III(B)?

• Yes, because discussing the report with select clients gives them an unfair advantage.
• No, because the recommendation was already disseminated to all clients before the calls.
• Yes, because all clients must receive the exact same level of service regardless of fees.

Morris, an investment banker, secures a hot IPO for a pickleball franchise. The issue is oversubscribed by institutional buyers. Morris fills all client orders, including his own personal allocation, but reduces the institutional blocks to balance the oversubscription. Has Morris violated Standard III(B)?

• No, because he reduced the institutional blocks to ensure his personal account received shares.
• Yes, because he failed to prorate the issue to all subscribers and prioritized his own interest.
• No, because he ensured all clients received at least some shares.

Preston executes block trades for mortgage-backed securities during a busy day but fails to write trade tickets immediately. Later, seeing some securities rose and others fell, she allocates the winners to her largest client, Colby Company, to prevent them from leaving the firm, and spreads the losers among other accounts. Has Preston violated Standard III(B)?

• Yes, because she allocated trades ex-post based on performance to favor a specific client.
• No, because retaining a large client benefits the firm and indirectly benefits all clients.
• No, because she is allowed to use her discretion in allocating trades among suitable accounts.

Burdette, a junior analyst, finishes her first research report with a buy recommendation for Sun Drive Auto. Excited about the finding, she posts a summary of her buy recommendation on her LinkedIn profile before the report is distributed to the firm's clients. Has Burdette violated Standard III(B)?

• No, because LinkedIn is a public forum and ensures broad dissemination.
• Yes, because she released the recommendation to her social network before the firm's clients.
• No, because she is encouraged to expand the firm's social media presence.

Jackson, a portfolio manager, follows a policy where new security recommendations are first purchased for the bank's commingled growth fund, and then executed on a pro-rata basis for individual pension fund accounts. Discretionary accounts also receive priority over non-discretionary ones. Has Jackson violated Standard III(B)?

• Yes, because she failed to treat all clients fairly by systematically prioritizing specific funds and account types.
• No, because commingled funds require different liquidity management than individual accounts.
• No, provided the policy was disclosed to the pension fund clients in their investment management agreement.

Ames, a computer industry analyst, prepares a buy recommendation for a small OTC company after confirming a major contract. While the report is under factual review, he attends a luncheon with top clients and mentions the upcoming recommendation scheduled for distribution next week. Has Ames violated Standard III(B)?

• No, because the recommendation was already decided and only waiting for distribution.
• Yes, because he disseminated the recommendation to a select group prior to general distribution.
• No, because the luncheon discussion was informal and not a written report.

Rove, a performance analyst, proposes a new internal report to the CIO that details securities owned across client accounts to identify outliers and compares performance of similar portfolios. The goal is to detect if any client is receiving preferential treatment. Does this proposal align with Standard III(B)?

• No, because performance analysis should focus on external reporting, not internal policing.
• Yes, because systematic review of accounts is a recommended compliance procedure to ensure fair dealing.
• No, because comparing different portfolios violates client confidentiality.

Chan manages a pension plan for his father's company and several other unrelated plans. To minimize costs for his father's plan, he intentionally trades more frequently in the unrelated accounts to generate enough commissions to pay for research services that benefit all the plans. Has Chan violated Standard III(B)?

• No, because all clients benefit from the research obtained.
• Yes, because he is disadvantaging some clients to subsidize the costs for a preferred client.
• No, provided the total commissions paid are within industry standards.