Case Facts

Edvard Stark is a private client adviser for Eyearne Bank. He is excited about the rapid developments in digital currencies. After spending some time studying cryptocurrencies, he picks one called Meerine. To limit the risk of being wrong, he recommends a 1% position to a few of his smallest clients. For the next few months, as he learns more about the new industry, he gets more optimistic about Meerine's potential. He also starts to "mine" Meerine's currency with his own computing resources. He believes this not only benefits him financially, but also gives him more knowledge and understanding to serve his clients.

Since Meerine's price has continued to rise, Stark makes a 3% buy recommendation to his clients in his client review meetings. He tells his clients that he is "mining" the currency. His clients, knowing little about cryptocurrencies, are unlikely to understand what that means, and have no objections to the 3% buy recommendation.

Since the liquidity of Meerine is very low, Stark offers his larger clients to buy Meerine tokens directly from him so they can establish their positions quickly.

This case depicts violations or possible violations of CFA Institute's Code and Standards.

Standard III (B) - Duties to Clients: Fair Dealing

Members should develop trade allocation procedures to ensure fairness to clients (both in priority of execution and allocation of price obtained on block trades), timeliness of execution, accuracy of trade records, and client positions.

However, Stark offers Meerine tokens directly from his own account to his largest clients so they don't miss out any depreciation potential. He has clearly violated Standard III (B).

He should either offer all his clients to buy from his own account or not offer such a service.

Standard III (C) - Duties to Clients: Suitability

Members should always consider the appropriateness and suitability of the client's investment action and match this up against the needs and circumstances of the particular client in order to determine the suitability of the investment for the client.

Stark makes a 3% buy recommendation to all his clients. It does not look like he considers the specific circumstances (e.g. return objectives and risk tolerance) of his clients.

Standard IV (B) - Duties to Employers: Additional Compensation Arrangements

By mining Meerine, Stark is actually competes against Eyearne Bank, his own employer. He must disclose to his supervisor and receives written consent from Eyearne Bank before doing any mining activity.

Standard V (A) - Diligence and Reasonable Basis

Members must perform the diligent and thorough investigations necessary to make an investment recommendation. Before he makes the 1% buy recommending, Stark has done some research. However, it seems his recommendation is neither diligent nor thorough.

Standard VI (A) - Disclosure of Conflicts

Members shall disclose to their clients and prospects all matters, including beneficial ownership of securities or other investments, that reasonably could be expected to impair the members' ability to make unbiased and objective recommendations.

Stark owns some Meerine tokens and he recommends his clients to buy Meerine. This is clearly a conflict of interest that needs to be disclosed to all his clients and employer.