Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

A money management firm notifies clients of new recommendations based on estimated transaction size. What does this policy represent according to CFA Institute Standards?

1. This is a violation.

2. This is acceptable as clients are informed.

3. This is acceptable as clients signed a consent form.

4. This represents a pro-rata procedure for disseminating information.

The correct answer is: This is a violation.

The situation described involves a money management firm notifying clients of new recommendations based on estimated transaction size, which suggests that the firm may be prioritizing some clients over others based on the size of their transactions. According to the CFA Institute Standards, this practice raises concerns regarding fairness and equal treatment of clients. The correct interpretation here emphasizes that clients should receive recommendations and information in a manner that is transparent and equitable. By tailoring the information dissemination based on the estimated transaction size, the firm may inadvertently create a disparity in the information access of clients, which can lead to a breach of fiduciary duty and standards of conduct. The principle of treating all clients fairly and avoiding any preferential treatment is paramount in maintaining the integrity of investment management practices. As such, the action of notifying clients based on transaction size is viewed as a violation of the standards, reflecting a failure to uphold the necessary ethical guidelines that govern the equitable treatment of all clients, regardless of their investment size or status.