CFA CFA Level 1 Question from ethics

Question from ethics

  • This topic has 8 replies, 7 voices, and was last updated Jan-18 by Pranav.
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    • Ankita
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      This is a question from the Schweser mocks. Members and candidates who are involved in distributing an IPO wish to participate in the IPO. According to Schweser, they can do so unless the IPO is oversubscribed. But I checked the readings and CFA curriculum, and I think that members and candidates must avoid IPOs (esp oversubscribed ones), or obtain pre-clearance from their supervisors. Which is correct?

    • malkadhi
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      What are the other options? Sometimes you have to go with an answer that’s not really explicit, where the other selections have something that’s wrong, and you’re left with a choice that’s not really all that obvious but it’s the best out of the rest.

    • simply_complex2
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      double check the CFA books to see if its just a best practice to avoid IPOs. I just got a question wrong on a mock because I thought the best practice was the hard law, not the recommendation. If its a best practice, than that means that that is what the CFA would recommend, but its not necessarily saying you can’t participate in the IPO (sorry i would look for you, but I don’t have my books with me)

    • RoyD
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      From what I’ve learnt, members cannot allocate shares in an oversubscribed IPO to personal accounts. Members’ participation should be restricted in IPOs and private placements and are required to obtain pre approval for IPOs.

    • ommthree
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      I think you just have to allocate to client accounts first. Possibly pre-clearance also required.

    • Ankita
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      The exact question is “According to the Code and Standards, members and candidates who are involved in distributing an IPO of equity shares and wish to participate in the IPO:
      a) may participate unless the IPO is oversubscribed
      b) may not participate because this creates a conflict of interest
      c) must obtain pre-clearance from a supervisor before participating

      The answer, according to Schweser is a), the reason being that Std VIB recommends but does not require members to obtain pre-clearance from his or her supervisor before participating in an equity IPO. So the best answer is a). 

      I however still think it is c). To quote from the CFA curriculum: “Members and candidates should pre-clear 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. “

       (Institute 130)
      Institute, CFA. CFA Institute Level I 2014 Volume 1 Ethical and Professional Standards and Quantitative Methods. Wiley Global Finance, 2013-07-12. VitalBook file.
      The citation provided is a guideline. Please check each citation for accuracy before use.

      Thoughts?

    • jmsatchwell
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      It says the should not that they must… I think that about clears it up. A is correct because the CFA is simply providing a recommendation not a hard rule.

    • Ankita
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      Thank you all 🙂

    • Pranav
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      @Ankita‌ 
      conflict of interest during ipo subscription arises only if the ipo is oversubscribed since every investor does not get the requested number of shares…shares need to be allocated pro-rata to the clients…in such a scenario, if ipo subscription is done on your personal account, and you allot shares to it, you are disadvantaging your clients from getting a better allocation on their ipo shares…hence, only for oversubscribed IPOs does it become a conflict of interest
      for undersubscribed IPOs, all the investors get complete allocation of shares and hence there is no conflict…however, since you have traded on your personal account, it is expected that you inform your supervisor of the ipo trade(probably before placing the request for the ipo)…

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