Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

Which statement violates CFA Institute Standard VI(B), Priority of Transactions?

1. Restrictions should be placed on a member's participation in private placements.

2. It is recommended that members not participate in IPOs.

3. The client accounts of non-relatives should have priority over the client accounts of relatives.

4. Client transactions take precedence over both the personal transactions of the member and the transactions of the member's firm.

The correct answer is: The client accounts of non-relatives should have priority over the client accounts of relatives.

The statement that client accounts of non-relatives should have priority over the client accounts of relatives violates CFA Institute Standard VI(B), Priority of Transactions, because this standard emphasizes that the interests of clients must always come first, regardless of any personal relationships. According to the standard, a member must ensure that the investment transactions for clients are executed with priority over their own transactions and the transactions of any associated individuals, including family members. This protects the integrity of the advisory process and maintains the trust clients place in their advisers. If client accounts were treated differently based on relationships, it could lead to favoritism or conflicts of interest, undermining the principle of treating all clients equitably. In contrast, the other statements align with maintaining a standard of professionalism and prioritizing client interests. Placing restrictions on participation in certain investments helps to manage potential conflicts. Advising against participation in IPOs is a cautionary recommendation to preserve objectivity in investment decisions. Prioritizing client transactions over personal and firm transactions is a fundamental principle that ensures loyalty to clients and adherence to ethical standards in the investment profession.