Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

Which activity most likely violates Standard VI(B), Priority of Transactions?

1. Trades for client accounts before trading for the firm's account.

2. Buys stock for his own account on an inside tip while not doing so for his clients.

3. Buys shares for his personal account after all of the firm's clients have been informed and before their consequent trades are completed.

4. Makes trades for his father's client account at the same time he trades his institutional accounts.

The correct answer is: Buys shares for his personal account after all of the firm's clients have been informed and before their consequent trades are completed.

The correct choice reflects a situation where the individual prioritizes their personal interests over those of their clients. Standard VI(B), Priority of Transactions, emphasizes that investment professionals must place their clients' interests ahead of their own, avoiding any actions that could disadvantage client accounts. In this scenario, buying shares for a personal account after the firm’s clients have been informed but before their trades are completed suggests a clear conflict of interest. The individual is capitalizing on the knowledge of the potential trades of the clients, thus putting himself in a position to benefit from information that should be equally available to the clients. This behavior undermines the trust necessary for a fiduciary relationship and violates the principle of ensuring that clients get the best possible trade execution and outcomes. The other options do not illustrate the same degree of conflict of interest or failure to prioritize client interests in the same manner. For example, in other scenarios, trading for a firm's account first or using insider tips implicates different ethical considerations but does not directly violate the standard of prioritizing clients' transactions over personal interests in quite the same way as the correct answer does.