Ethics Case Study of the Week: Personal vs. On-the-Job Investments.

By Gary Sarkissian posted 06-29-2020 08:00


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 VI(B) Priority of Transactions. 

Personal vs. On-the-Job Investments.
Yang is a research analyst at BAMCO, a registered broker/dealer and investment adviser.  While employed with BAMCO, Yang established Prestige Trade Investments Limited and acts as that firm’s investment adviser. Yang is responsible for formulating Prestige’s investment strategy and directs all trades on behalf of Prestige. Over the course of several days, Yang purchases 50,000 shares of Zhongpin stock and 1,978 Zhongpin call options for his personal account at BAMCO. Shortly thereafter, Yang uses $29.8 million of Prestige’s funds to purchase more than 3 million shares of Zhongpin stock. Yang’s actions are

A.  acceptable because Yang’s personal investments are not in conflict with the investment advice being given to his clients at Prestige.
B.  acceptable as long as BAMCO is aware of and consents to Yang establishing and working for Prestige as a separate entity.
C.  acceptable as long as Prestige clients are not negatively affected by Yang’s prior purchase of Zhongpin securities through his account at BAMCO.
D.  unacceptable.

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 – 7/1/2020]
Welcome back!  Here is the analysis of this case:

This case involves an investment adviser “front-running” client trades. Front-running involves trading for one’s personal account before trading for client accounts. In this case, Yang purchased Zhongpin stock and call options in his personal account at BAMCO before directing the Zhongpin trades of clients at Prestige. Standard VI(B): Priority of Transactions states that “investment transactions for clients...must have priority over investment transactions in which a [CFA Institute] the beneficial owner.” Yang’s personal investments are tracking with his client investments, so there is no conflict between his personal trading and the investment actions/advice for clients. But the timing of the trades is what is at issue in this case, making Answer A incorrect. Also, the fact that Prestige clients are not harmed by Yang’s earlier trades for his personnel accounts does not make his actions acceptable.

The issue is Yang’s personal benefit derived from trading before his clients, which makes Answer C incorrect. Disclosure is not a cure for front-running. So, even if Yang had told Prestige clients that he would be making personal trades prior to taking investment action on their behalf that would benefit him, the trading in his personal account would not be acceptable. Yang would have to get permission from BAMCO to create and work for Prestige, according to CFA Institute Standard IV(A): Loyalty, but such permission does not allow Yang to engage in unethical activity while at Prestige, making Answer B incorrect. That leaves Answer D as the best answer.

This case is based on a SEC enforcement action from 2014.

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© 2018 CFA Institute. All rights reserved. You may copy and distribute this content, without modification and for non-commercial purposes, provided you attribute the content to CFA Institute and retain this copyright notice. This case was written as a basis for discussion and is not prescriptive of how a business situation or professional conduct matter should or should not be handled or addressed. Certain characters mentioned are fictional to facilitate discussion, and any resemblance to actual persons is coincidental.