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.