In this sequence of events, which of the following is/are true?

Sterling Drachma is a senior investment consultant currently researching a few high- risk internet stock companies which recently started trading on NASDAQ. Sterling manages 5 large and private investment accounts for which he has discretionary investment authority. Sterling is about 3 years away from retirement and his retirement portfolio is managed by Franc Escudo. Sterling has concluded from his research that two of the internet stocks he has been following are great buys and instructs Franc to divert part of the retirement investments into these stocks. Franc executes the orders as soon as he receives them. Sterling then instructs his brokers to buy the stocks for the two discretionary accounts that he knows are inclined toward high- risk investments. He does not buy any for the remaining three accounts since those are income- oriented, low- risk accounts.

In this sequence of events, which of the following is/are true?

I. Franc has violated Standard IV (B.1) – Fiduciary Duties – by investing retirement account funds in the high- risk stocks.

II. Sterling has violated Standard IV (B.3) – Fair Dealing – by not treating all his accounts equally.

III. Sterling has violated Standard IV (B.4) – Priority of Transactions – by trading for his retirement account before trading for his client accounts.
A . I, II and III
B . I and III only
C . II and III only
D . III only

View Answer

Answer: D

Explanation:

Franc is managing a personal portfolio and as such must execute the orders of his client. The fact that it is a retirement account makes no difference in this situation. Franc would be in violation if he was managing a pension portfolio or a personal trust portfolio and the investments were deemed in violation of plan directives. Franc, however, should try to understand Sterling’s motives in the redeployment of funds since this could prevent his client from what could be reckless investment. Sterling, for his part, as definitely violated Standard IV (B.4) – Priority of Transactions – by trading for his retirement account before trading for his client accounts. Personal transactions should never take precedence over client and employer transactions. He has, however, not violated Standard IV (B.3) – Fair Dealing – by not treating all his accounts equally. Standard IV (B.3) requires a fair treatment of all clients, not an equal treatment precisely because different accounts have different investment needs and risk appetites. The internet stocks should only be bought for accounts for which they are a suitable investment.