Question

Yang is a research analyst at BAMCO, a registered broker/dealer and investment adviser. While employed with BAMCO, Yang established Prestige Trade Investments Limited and acts as that firm’s investment adviser. Yang is responsible for formulating Prestige’s investment strategy and directs all trades on behalf of Prestige. Over the course of several days, Yang purchases 50,000 shares of Zhongpin stock and 1,978 Zhongpin call options for his personal account at BAMCO. Shortly thereafter, Yang uses $29.8 million of Prestige’s funds to purchase more than 3 million shares of Zhongpin stock. Yang’s actions are

A. acceptable because Yang’s personal investments are not in conflict with the investment advice being given to his clients at Prestige.

B. acceptable as long as BAMCO is aware of and consents to Yang establishing and working for Prestige as a separate entity.

C. acceptable as long as Prestige clients are not negatively affected by Yang’s prior purchase of Zhongpin securities through his account at BAMCO.

D. unacceptable.

1. Which CFA Standards of Professional Conduct does this case relate to? 2. Which of the above actions is/are correct? Please explain clearly one by one why the above actions are or are not acceptable. Simply select an answer without explanation will get no mark.

Answer 1

Correct Answer is 'D'

Please refer the below two clauses of CFA Standards of Profession Conduct -:

1. "Integrity of Capital Markets" : Members should not engage in practices that distort prices or artificially inflate trading volumes with the intent to mislead market participants
2. "Conflict of Interest": Priority of Transactions. Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.

Now referring to the above mentioned statements, it is clearly unacceptable that Yang made a personal investment in Zhongpin and then in order to drive the prices up he used large amount of Prestige's fund  to buy 3 Mn shares of Zhongpin.

Also, as per Conflict of interest clause mentioned above any investment transaction for client/ employer should superceed over personal investment, but Yang made a personal investment before he invested for Prestige. Hence his motive was "Unacceptable" as per standard laws of CFA.