CFA Institute’s Code of Ethics and Standards of Professional Conduct codify the ethical guidelines for the investment profession that are critical to maintaining the integrity of capital markets and investor trust. Members, candidates, and even firms make a commitment to uphold these standards as they help elevate ethical decision-making universally around the globe.
As investment professionals, we are certain to face important ethical decisions in our day-to-day activities. Some scenarios we encounter will be straightforward, while others may be more complex. No matter what circumstances we face, continuous learning remains imperative in an investment industry that continues to evolve with products undergoing innovation and a regulatory environment continuing to adapt.
For that reason, each week we will feature a sample case from CFA Institute’s Ethics in Practice Casebook. Each case is built upon a real-life example that may involve a regulatory matter or even a CFA Institute Professional Conduct investigation. At the end of the case is a multiple-choice question that addresses the ethical nature of the actions taken in that case.
This week’s case involves Standard III(B) Fair Dealing.
Different Service for Different Clients?
Korloff is a money manager for several clients. One of the clients, a pension fund, accounts for 35% of the assets under management at Korloff’s firm. The fund pays more management fees to the firm than any other client. The executive director of the pension fund has made it clear that, because of this dominant position, she expects Korloff to give the pension fund “enhanced service” service in the form of advance information on investment recommendations, priority position for initial public offerings, supplemental research reports on potential investments, and daily personal contact. Korloff should
A. refuse to comply with the request.
B. comply with the request only if his preferential treatment does not disadvantage other clients.
C. comply with the request because the fund is such a large and important client.
D. comply with the request because the fund is paying for the preferential treatment with the higher fees.
What do you think is the correct choice? Feel free to discuss in the comments below and make sure to check back later this week as we post the analysis. The completion of this case qualifies for 0.25 hour of Standards, Ethics, and Regulation (SER) credit.
[Update – 6/4/2020]
Welcome back! Here is the analysis of this case:
This case relates to Standard III(B): Fair Dealing, which states that CFA Institute members and candidates “must deal fairly and objective with all clients when providing investment analysis, making investment recommendations, and taking investment action.” Treating clients “fairly” means not favoring one client over another or discriminating against clients when disseminating investment recommendations or actions. Differentiated service to clients, in the form of personal, specialized, or in-depth service to clients who are willing to pay for premium service, is acceptable under the standard. Fair dealing also dictates that recommendations be distributed in way that all clients for whom the investment is appropriate for have a fair opportunity to act on the recommendation. Korloff may provide preferential treatment (reflecting the amount and level of fees paid by the pension fund) in the form of supplemental research and daily contact to the pension fund without disadvantaging other clients.
But different levels of service cannot disadvantage or negatively affect other clients and should be disclosed and made available to all clients and potential clients. So, in this case, providing “enhanced service” to the pension fund is acceptable as long as the preferential treatment does not disadvantage other clients and it has been disclosed to them that they can also receive enhanced service along with the pension fund. Two aspects of the request — providing advanced recommendations to the fund and giving the fund priority position for initial public offerings — would disadvantage other clients by systematically benefiting the pension fund at the expense of other clients. With all of this in mind, choice B is the best response.
Image by mohamed Hassan from Pixabay#Ethics
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