Ethics Case Study of the Week: Just Taking Care of a Relative’s Investment Account.

By Gary Sarkissian posted 07-06-2020 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 IV(A) Loyalty. 

Just Taking Care of a Relative’s Investment Account.
Elizabeth is an investment manager at a wealth management firm with high-net-worth clients. When Elizabeth was hired a few years ago, her sister opened an investment account with the firm. Elizabeth has decided to leave the firm to set up her own boutique hedge fund with her colleagues. She asks her sister to close her existing account and put that money in the new hedge fund. Elizabeth’s request is

A.  acceptable since she has no obligation to keep her sister’s account at the wealth management firm.
B.  unacceptable because she should not solicit her employer’s client to join the new fund.
C.  unacceptable if she signed a non-compete agreement with her employer.
D.  unacceptable if her hedge fund strategy is not suitable to her sister.

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 – 7/9/2020]
Welcome back!  Here is the analysis of this case:

The main ethical principle at issue in this case is Duty to Employer. CFA Institute Standard IV(A): Duty to Employers – Loyalty, states that CFA Institute members “must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities” and must not “cause harm to their employer.” In this case, Elizabeth could potentially cause harm to her employer by causing her sister to move her assets away from the wealth management adviser. But this case also highlights a key element of the CFA Institute Ethical Decision-Making Framework — to identify relevant facts before choosing a course of action. Sometimes not all the relevant facts are known.  Is Elizabeth still working for her employer when she asks her sister to leave the firm? The facts are not clear. If so, her actions are unacceptable because she would be causing harm to her employer (choice B). The fact that the client is a close relation is irrelevant, Elizabeth’s sister is still a client of the firm.

If Elizabeth is no longer employed by the firm, soliciting former clients may not pose a problem. But if she has left, does Elizabeth have a non-compete agreement with her employer prohibiting her from soliciting clients of her employer? If so, she would be prohibited from soliciting clients, including her sister, to the new hedge fund. Choice D brings up the issue of suitability of investments. Even if Elizabeth has already left the firm and a non-compete agreement is not in force, she should only be soliciting clients for whom the investment is suitable under Standard III(C): Suitability, which states that members must “determine that an investment is suitable to the client’s financial situation” before making a recommendation or taking action. Is the hedge fund a suitable investment for Elizabeth’s sister? The question does not provide any clues. Even if the hedge fund is a suitable investment, Choice D still does not address the main issue of whether Elizabeth his harming her employer. There may be no “obligation” to keep her sister’s investments at the wealth management firm (Choice A), but depending on the facts, it would be unethical for her to do so. Properly applying the Ethical Decision-Making Framework calls for identifying the relevant facts. All the choices could be correct, depending on facts that are not provided in the question. We need to know more.

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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.