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 V(C) Record Retention.
Taking Care of Clients Is the Priority.
Dougal McDermott is president of Enhanced Investment Strategies (EIS), a small investment firm. Most clients of EIS are longtime associates of McDermott who have had their investment portfolios with EIS for decades. Because of his close personal relationship with his clients, McDermott is very familiar with their investment profile, income and retirement requirements, and tolerance for risk. He keeps abreast of the life changing events (such as health issues, real estate purchases, children’s university expenses, and retirement) of all his clients and adjusts their portfolios accordingly. McDermott regularly meets with his clients in EIS offices and sees them on numerous occasions outside the office where he has a chance to give them an update on their investments. EIS clients complete a client agreement and risk profile when opening their account and those profiles are updated as McDermott finds the time to do so. McDermott’s business practices are
A. acceptable because he adjusts client investments to ensure that they are suitable for client investment needs given their changes income and risk profile.
B. acceptable because he regularly communicates with clients about their investments.
C. unacceptable because he does not keep adequate written records regarding client investment profiles.
D. unacceptable because his close personal relationship with clients will affect his independence and objectivity when providing investment advice.
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 – 6/25/2020]
Welcome back! Here is the analysis of this case:
Analysis:
The issue in this case involves record keeping. CFA Institute Standard V(C): Record Retention states that CFA Institute members must “develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.” The facts make clear that McDermott is personally close to clients. Although this fact may raise fair dealing concerns (McDermott may be benefiting some clients with whom he has a particularly close personal relationship over other clients), it does not necessarily raise questions about the independence and objectivity of McDermott’s investment advice (Answer D).
It also appears from the facts provided that McDermott is fulfilling his ethical obligations as an investment manager by communicating regularly with his clients (Answer B) and reviewing and adjusting client portfolios on a timely basis to meet clients’ changing financial circumstances (Answer A). But McDermott only updates client records “when he finds the time to do so” and apparently not promptly or on a regular basis. Without necessary, relevant, and up-to-date know your client information, it would be difficult, if challenged, for McDermott to establish and prove that EIS identified the needs and circumstances of the clients and has taken these into account in recommending investments. When client circumstances, investment goals, risk tolerances, or income needs change, records should be promptly updated and reviewed on a regular basis to reflect and document these changes. The correct answer is C.
This case is based on an UK Financial Services Authority enforcement action from 2010.
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